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)
Christopher R. Bohane
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, 2016*
| * | Effective April 29, 2016, MFS Money Market Portfolio, a series of the Registrant, was redesignated as MFS U.S. Government Money Market Portfolio. |
| ITEM 1. | REPORTS TO STOCKHOLDERS. |
ANNUAL REPORT
December 31, 2016
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 • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Blended Research Core Equity Portfolio
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
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 | | | | |
| Amazon.com, Inc. | | | 2.9% | |
| Bank of America Corp. | | | 2.6% | |
| Verizon Communications, Inc. | | | 2.3% | |
| Apple, Inc. | | | 2.3% | |
| Cisco Systems, Inc. | | | 2.2% | |
| Merck & Co., Inc. | | | 2.1% | |
| Procter & Gamble Co. | | | 2.1% | |
| Citigroup, Inc. | | | 2.0% | |
| Celgene Corp. | | | 1.8% | |
| Facebook, Inc., “A” | | | 1.8% | |
| | | | |
| Equity sectors | |
| Financial Services | | | 16.9% | |
| Technology | | | 15.4% | |
| Health Care | | | 13.0% | |
| Retailing | | | 9.3% | |
| Consumer Staples | | | 8.9% | |
| Leisure | | | 7.1% | |
| Energy | | | 6.8% | |
| Utilities & Communications | | | 6.3% | |
| Industrial Goods & Services | | | 5.3% | |
| Special Products & Services | | | 4.1% | |
| Autos & Housing | | | 2.4% | |
| Transportation | | | 2.1% | |
| Basic Materials | | | 1.7% | |
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
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, 2016, Initial Class shares of the MFS Blended Research Core Equity Portfolio (“fund”) provided a total return of 8.45%, while Service Class shares of the fund provided a total return of 8.17%. These compare with a return of 11.96% over the same period for the fund’s benchmark, the Standard & Poor’s 500 Stock Index (“S&P 500 Index”).
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
Stock selection within the retailing, energy and health care sectors was a primary factor that detracted from performance relative to the S&P 500 Index. Within the retailing sector, the fund’s overweight holdings of drugstore CVS Health Corp, branded clothing designer and manufacturer PVH and accessories footwear and apparel manufacturer Michael Kors (h) weighed on relative performance. Shares of CVS traded down after the company lowered full year 2016 and 2017 estimates. CVS indicated that the retail portion of its business faced more significant headwinds than expected from network losses heading into 2017. Within the energy sector, the fund’s overweight holdings of independent petroleum products company Marathon Petroleum (h), and holdings of natural gas exploration and development company Rice Energy (b), hurt relative results. Stocks that held back relative performance within the health care sector included overweight holdings of biotech firm Gilead Sciences and pharmaceutical and medical products maker Abbott Laboratories. The fund’s holdings of non-urban hospital operator Community Health Systems (b)(h) further weighed on relative results.
Elsewhere, the fund’s overweight holdings of cruise line operator Royal Caribbean Cruises (h), and the timing of the fund’s ownership in shares of financial services firm Goldman Sachs (h), dampened relative returns. Shares of Goldman Sachs appreciated after reporting better-than-expected results as its Fixed Income, Currency and Commodities, and Investing and Lending segments posted strong results. In addition, shares of many US banks significantly outperformed the market following the US presidential election as investors appeared to have anticipated a more favorable environment with reduced regulation and higher interest rates going forward.
Contributors to Performance
Stock selection in both the consumer staples and financial services sectors contributed to relative performance. Within the consumer staples sector, the fund’s overweight position in oilseeds, corn, and wheat processor Archer-Daniels-Midland benefited relative results. Stocks that aided relative results in the financial services sector included overweight holdings of financial services firm Bank of America, credit card company Discover Financial Services, financial services provider Charles Schwab (h) and insurance company Prudential Financial. Bank of America posted strong results driven by higher-than-expected fee income, a lower-than-anticipated loan loss provision and solid expense management.
3
MFS Blended Research Core Equity Portfolio
Management Review – continued
Elsewhere, not holding shares of specialty pharmaceutical company Allergan helped boost relative results. Shares of Allergan fell after Pfizer terminated the proposed combination with Allergan following Treasury Department changes to inversion rules. The fund’s overweight positions in energy exploration and production company EOG Resources, utility services provider Exelon and global security company Northrop Grumman further strengthened performance relative to the benchmark. The fund’s holdings of strong-performing cable services provider Charter Communications, which was not a constituent of the S&P 500 Index until late in the reporting period also helped relative returns.
Respectfully,
| | | | | | |
| Jim Fallon | | Matt Krummell | | Jonathan Sage | | Jed Stocks |
| Portfolio Manager | | Portfolio Manager | | 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 Blended Research Core Equity Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/16
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 12/31/16
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class Inception Date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 11/14/86 | | 8.45% | | 14.20% | | 7.13% | | |
| | | Service Class | | 8/24/01 | | 8.17% | | 13.92% | | 6.87% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Standard & Poor’s 500 Stock Index (f) | | 11.96% | | 14.66% | | 6.95% | | |
| (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, 2016 through December 31, 2016
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, 2016 through December 31, 2016.
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
7/01/16 | | | Ending Account Value
12/31/16 | | | Expenses Paid
During Period (p)
7/01/16-12/31/16 | |
| Initial Class | | Actual | | | 0.43% | | | | $1,000.00 | | | | $1,068.61 | | | | $2.24 | |
| | Hypothetical (h) | | | 0.43% | | | | $1,000.00 | | | | $1,022.97 | | | | $2.19 | |
| Service Class | | Actual | | | 0.68% | | | | $1,000.00 | | | | $1,067.16 | | | | $3.53 | |
| | Hypothetical (h) | | | 0.68% | | | | $1,000.00 | | | | $1,021.72 | | | | $3.46 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.02% (See Note 2 of the Notes to Financial Statements).
6
MFS Blended Research Core Equity Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 99.3% | | | | | |
| Aerospace – 3.3% | | | | | | | | |
| Northrop Grumman Corp. | | | 30,096 | | | $ | 6,999,728 | |
| Textron, Inc. | | | 47,728 | | | | 2,317,672 | |
| United Technologies Corp. | | | 59,236 | | | | 6,493,450 | |
| | | | | | | | |
| | | | | | $ | 15,810,850 | |
| | | | | | | | |
| Airlines – 1.2% | | | | | | | | |
| Delta Air Lines, Inc. | | | 50,248 | | | $ | 2,471,699 | |
| United Continental Holdings, Inc. (a) | | | 46,649 | | | | 3,399,779 | |
| | | | | | | | |
| | | | | | $ | 5,871,478 | |
| | | | | | | | |
| Apparel Manufacturers – 1.1% | | | | | | | | |
| PVH Corp. | | | 55,603 | | | $ | 5,017,615 | |
| | | | | | | | |
| Automotive – 0.6% | | | | | | | | |
| General Motors Co. | | | 79,530 | | | $ | 2,770,825 | |
| | | | | | | | |
| Biotechnology – 3.0% | | | | | | | | |
| Celgene Corp. (a) | | | 74,606 | | | $ | 8,635,645 | |
| Gilead Sciences, Inc. | | | 79,768 | | | | 5,712,186 | |
| | | | | | | | |
| | | | | | $ | 14,347,831 | |
| | | | | | | | |
| Business Services – 3.9% | | | | | | | | |
| Accenture PLC, “A” | | | 22,705 | | | $ | 2,659,437 | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 77,989 | | | | 4,369,724 | |
| FleetCor Technologies, Inc. (a) | | | 37,545 | | | | 5,313,368 | |
| Global Payments, Inc. | | | 88,155 | | | | 6,118,839 | |
| | | | | | | | |
| | | | | | $ | 18,461,368 | |
| | | | | | | | |
| Cable TV – 2.8% | | | | | | | | |
| Charter Communications, Inc., “A” (a) | | | 23,712 | | | $ | 6,827,159 | |
| Comcast Corp., “A” | | | 93,768 | | | | 6,474,680 | |
| | | | | | | | |
| | | | | | $ | 13,301,839 | |
| | | | | | | | |
| Chemicals – 0.8% | | | | | | | | |
| Monsanto Co. | | | 34,378 | | | $ | 3,616,909 | |
| | | | | | | | |
| Computer Software – 2.9% | | | | | | | | |
| Intuit, Inc. | | | 58,704 | | | $ | 6,728,065 | |
| Microsoft Corp. | | | 117,317 | | | | 7,290,078 | |
| | | | | | | | |
| | | | | | $ | 14,018,143 | |
| | | | | | | | |
| Computer Software – Systems – 4.1% | | | | | |
| Apple, Inc. | | | 96,244 | | | $ | 11,146,980 | |
| Hewlett Packard Enterprise | | | 290,255 | | | | 6,716,501 | |
| NCR Corp. (a) | | | 41,840 | | | | 1,697,030 | |
| | | | | | | | |
| | | | | | $ | 19,560,511 | |
| | | | | | | | |
| Construction – 1.8% | | | | | | | | |
| Owens Corning | | | 96,231 | | | $ | 4,961,670 | |
| Sherwin-Williams Co. | | | 13,285 | | | | 3,570,211 | |
| | | | | | | | |
| | | | | | $ | 8,531,881 | |
| | | | | | | | |
| Consumer Products – 2.5% | | | | | | | | |
| Estee Lauder Cos., Inc., “A” | | | 29,205 | | | $ | 2,233,890 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Consumer Products – continued | | | | | |
| Procter & Gamble Co. | | | 117,164 | | | $ | 9,851,149 | |
| | | | | | | | |
| | | | | | $ | 12,085,039 | |
| | | | | | | | |
| Consumer Services – 0.3% | | | | | | | | |
| Priceline Group, Inc. (a) | | | 814 | | | $ | 1,193,373 | |
| | | | | | | | |
| Electrical Equipment – 0.5% | | | | | | | | |
| General Electric Co. | | | 81,774 | | | $ | 2,584,058 | |
| | | | | | | | |
| Electronics – 2.3% | | | | | | | | |
| Broadcom Corp. | | | 29,302 | | | $ | 5,179,715 | |
| Intel Corp. | | | 160,434 | | | | 5,818,941 | |
| | | | | | | | |
| | | | | | $ | 10,998,656 | |
| | | | | | | | |
| Energy – Independent – 4.5% | | | | | | | | |
| Anadarko Petroleum Corp. | | | 14,385 | | | $ | 1,003,066 | |
| EOG Resources, Inc. | | | 74,358 | | | | 7,517,594 | |
| Noble Energy, Inc. | | | 28,299 | | | | 1,077,060 | |
| Occidental Petroleum Corp. | | | 24,992 | | | | 1,780,180 | |
| Rice Energy, Inc. (a) | | | 206,084 | | | | 4,399,893 | |
| Valero Energy Corp. | | | 80,251 | | | | 5,482,748 | |
| | | | | | | | |
| | | | | | $ | 21,260,541 | |
| | | | | | | | |
| Energy – Integrated – 1.0% | | | | | | | | |
| Chevron Corp. | | | 4,268 | | | $ | 502,344 | |
| Exxon Mobil Corp. | | | 48,221 | | | | 4,352,427 | |
| | | | | | | | |
| | | | | | $ | 4,854,771 | |
| | | | | | | | |
| Food & Beverages – 4.2% | | | | | | | | |
| Archer Daniels Midland Co. | | | 145,148 | | | $ | 6,626,006 | |
| J.M. Smucker Co. | | | 14,729 | | | | 1,886,196 | |
| Mondelez International, Inc. | | | 167,329 | | | | 7,417,695 | |
| Tyson Foods, Inc., “A” | | | 67,920 | | | | 4,189,306 | |
| | | | | | | | |
| | | | | | $ | 20,119,203 | |
| | | | | | | | |
| Food & Drug Stores – 1.4% | | | | | | | | |
| CVS Health Corp. | | | 82,753 | | | $ | 6,530,039 | |
| | | | | | | | |
| Gaming & Lodging – 0.5% | | | | | | | | |
| Carnival Corp. | | | 45,719 | | | $ | 2,380,131 | |
| | | | | | | | |
| General Merchandise – 0.6% | | | | | | | | |
| Wal-Mart Stores, Inc. | | | 39,628 | | | $ | 2,739,087 | |
| | | | | | | | |
| Health Maintenance Organizations – 0.2% | |
| UnitedHealth Group, Inc. | | | 7,051 | | | $ | 1,128,442 | |
| | | | | | | | |
| Insurance – 5.9% | | | | | | | | |
| Allstate Corp. | | | 27,021 | | | $ | 2,002,797 | |
| Berkshire Hathaway, Inc., “B” (a) | | | 15,027 | | | | 2,449,100 | |
| Chubb Ltd. | | | 12,888 | | | | 1,702,763 | |
| MetLife, Inc. | | | 135,561 | | | | 7,305,382 | |
| Prudential Financial, Inc. | | | 71,526 | | | | 7,442,996 | |
| Travelers Cos., Inc. | | | 8,117 | | | | 993,683 | |
| Validus Holdings Ltd. | | | 62,273 | | | | 3,425,638 | |
| XL Group Ltd. | | | 68,577 | | | | 2,555,179 | |
| | | | | | | | |
| | | | | | $ | 27,877,538 | |
| | | | | | | | |
7
MFS Blended Research Core Equity Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Internet – 3.8% | | | | | | | | |
| Alphabet, Inc., “A” (a) | | | 7,204 | | | $ | 5,708,810 | |
| Alphabet, Inc., “C” (a) | | | 5,086 | | | | 3,925,477 | |
| Facebook, Inc., “A” (a) | | | 74,321 | | | | 8,550,631 | |
| | | | | | | | |
| | | | | | $ | 18,184,918 | |
| | | | | | | | |
| Leisure & Toys – 1.4% | | | | | | | | |
| Electronic Arts, Inc. (a) | | | 84,910 | | | $ | 6,687,512 | |
| | | | | | | | |
| Machinery & Tools – 1.4% | | | | | | | | |
| Illinois Tool Works, Inc. | | | 26,854 | | | $ | 3,288,541 | |
| Ingersoll-Rand Co. Ltd., “A” | | | 16,211 | | | | 1,216,473 | |
| United Rentals, Inc. (a) | | | 21,958 | | | | 2,318,326 | |
| | | | | | | | |
| | | | | | $ | 6,823,340 | |
| | | | | | | | |
| Major Banks – 5.4% | | | | | | | | |
| Bank of America Corp. | | | 570,428 | | | $ | 12,606,459 | |
| JPMorgan Chase & Co. | | | 87,292 | | | | 7,532,427 | |
| Wells Fargo & Co. | | | 99,980 | | | | 5,509,898 | |
| | | | | | | | |
| | | | | | $ | 25,648,784 | |
| | | | | | | | |
| Medical & Health Technology & Services – 1.6% | |
| HCA Holdings, Inc. (a) | | | 83,568 | | | $ | 6,185,703 | |
| McKesson Corp. | | | 9,449 | | | | 1,327,112 | |
| | | | | | | | |
| | | | | | $ | 7,512,815 | |
| | | | | | | | |
| Medical Equipment – 2.6% | | | | | | | | |
| Abbott Laboratories | | | 128,397 | | | $ | 4,931,729 | |
| Medtronic PLC | | | 103,706 | | | | 7,386,978 | |
| | | | | | | | |
| | | | | | $ | 12,318,707 | |
| | | | | | | | |
| Network & Telecom – 2.2% | | | | | | | | |
| Cisco Systems, Inc. | | | 344,823 | | | $ | 10,420,551 | |
| | | | | | | | |
| Oil Services – 1.3% | | | | | | | | |
| Schlumberger Ltd. | | | 72,505 | | | $ | 6,086,795 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 3.6% | |
| Citigroup, Inc. | | | 157,326 | | | $ | 9,349,884 | |
| Discover Financial Services | | | 110,560 | | | | 7,970,270 | |
| | | | | | | | |
| | | | | | $ | 17,320,154 | |
| | | | | | | | |
| Pharmaceuticals – 5.6% | | | | | | | | |
| Eli Lilly & Co. | | | 112,014 | | | $ | 8,238,630 | |
| Johnson & Johnson | | | 66,497 | | | | 7,661,119 | |
| Merck & Co., Inc. | | | 173,044 | | | | 10,187,100 | |
| Pfizer, Inc. | | | 17,840 | | | | 579,443 | |
| | | | | | | | |
| | | | | | $ | 26,666,292 | |
| | | | | | | | |
| Railroad & Shipping – 0.9% | | | | | | | | |
| Union Pacific Corp. | | | 40,679 | | | $ | 4,217,599 | |
| | | | | | | | |
| Real Estate – 2.0% | | | | | | | | |
| Mid-America Apartment Communities, Inc., REIT | | | 24,815 | | | $ | 2,429,885 | |
| Public Storage, Inc., REIT | | | 19,806 | | | | 4,426,641 | |
| Store Capital Corp., REIT | | | 103,951 | | | | 2,568,629 | |
| | | | | | | | |
| | | | | | $ | 9,425,155 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Restaurants – 2.5% | | | | | | | | |
| Domino’s Pizza, Inc. | | | 40,214 | | | $ | 6,403,677 | |
| Starbucks Corp. | | | 63,285 | | | | 3,513,583 | |
| YUM! Brands, Inc. | | | 27,666 | | | | 1,752,088 | |
| | | | | | | | |
| | | | | | $ | 11,669,348 | |
| | | | | | | | |
| Specialty Chemicals – 0.9% | | | | | | | | |
| Air Products & Chemicals, Inc. | | | 30,818 | | | $ | 4,432,245 | |
| | | | | | | | |
| Specialty Stores – 6.3% | | | | | | | | |
| Amazon.com, Inc. (a) | | | 18,638 | | | $ | 13,976,077 | |
| AutoZone, Inc. (a) | | | 9,554 | | | | 7,545,654 | |
| Best Buy Co., Inc. | | | 56,445 | | | | 2,408,508 | |
| Gap, Inc. | | | 93,190 | | | | 2,091,184 | |
| Ross Stores, Inc. | | | 63,008 | | | | 4,133,325 | |
| | | | | | | | |
| | | | | | $ | 30,154,748 | |
| | | | | | | | |
| Telephone Services – 2.7% | | | | | | | | |
| AT&T, Inc. | | | 38,432 | | | $ | 1,634,513 | |
| Verizon Communications, Inc. | | | 209,162 | | | | 11,165,068 | |
| | | | | | | | |
| | | | | | $ | 12,799,581 | |
| | | | | | | | |
| Tobacco – 2.1% | | | | | | | | |
| Altria Group, Inc. | | | 30,124 | | | $ | 2,036,985 | |
| Philip Morris International, Inc. | | | 87,359 | | | | 7,992,475 | |
| | | | | | | | |
| | | | | | $ | 10,029,460 | |
| | | | | | | | |
| Utilities – Electric Power – 3.6% | | | | | | | | |
| AES Corp. | | | 184,981 | | | $ | 2,149,479 | |
| American Electric Power Co., Inc. | | | 19,882 | | | | 1,251,771 | |
| Exelon Corp. | | | 209,874 | | | | 7,448,428 | |
| FirstEnergy Corp. | | | 142,925 | | | | 4,426,387 | |
| PPL Corp. | | | 50,070 | | | | 1,704,884 | |
| | | | | | | | |
| | | | | | $ | 16,980,949 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $390,855,336) | | | | | | $ | 472,439,081 | |
| | | | | | | | |
|
| MONEY MARKET FUNDS – 0.1% | |
| MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $676,951) | | | 676,957 | | | $ | 676,957 | |
| | | | | | | | |
Total Investments
(Identified Cost, $391,532,287) | | | $ | 473,116,038 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.6% | | | | | | | 2,873,616 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 475,989,654 | |
| | | | | | | | |
| (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 12/31/16 | | | | | | | | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $390,855,336) | | | $472,439,081 | | | | | |
Underlying affiliated funds, at value (identified cost, $676,951) | | | 676,957 | | | | | |
Total investments, at value (identified cost, $391,532,287) | | | $473,116,038 | | | | | |
Cash | | | 6,577 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 2,663,269 | | | | | |
Fund shares sold | | | 10,152 | | | | | |
Dividends | | | 557,365 | | | | | |
Other assets | | | 396 | | | | | |
Total assets | | | | | | | $476,353,797 | |
Liabilities | | | | | | | | |
Payable for fund shares reacquired | | | $271,889 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 16,073 | | | | | |
Shareholder servicing costs | | | 114 | | | | | |
Distribution and/or service fees | | | 3,496 | | | | | |
Payable for independent Trustees’ compensation | | | 37 | | | | | |
Accrued expenses and other liabilities | | | 72,534 | | | | | |
Total liabilities | | | | | | | $364,143 | |
Net assets | | | | | | | $475,989,654 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $377,452,359 | | | | | |
Unrealized appreciation (depreciation) on investments | | | 81,583,751 | | | | | |
Accumulated net realized gain (loss) on investments | | | 10,015,006 | | | | | |
Undistributed net investment income | | | 6,938,538 | | | | | |
Net assets | | | | | | | $475,989,654 | |
Shares of beneficial interest outstanding | | | | | | | 10,238,246 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $306,367,898 | | | | 6,571,619 | | | | $46.62 | |
Service Class | | | 169,621,756 | | | | 3,666,627 | | | | 46.26 | |
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 12/31/16 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $9,216,476 | | | | | |
Interest | | | 27,342 | | | | | |
Dividends from underlying affiliated funds | | | 11,859 | | | | | |
Other | | | 7,482 | | | | | |
Total investment income | | | | | | | $9,263,159 | |
Expenses | | | | | | | | |
Management fee | | | $2,077,418 | | | | | |
Distribution and/or service fees | | | 399,498 | | | | | |
Shareholder servicing costs | | | 17,132 | | | | | |
Administrative services fee | | | 82,051 | | | | | |
Independent Trustees’ compensation | | | 11,257 | | | | | |
Custodian fee | | | 28,161 | | | | | |
Reimbursement of custodian expenses | | | (37,887 | ) | | | | |
Shareholder communications | | | 30,884 | | | | | |
Audit and tax fees | | | 52,236 | | | | | |
Legal fees | | | 4,677 | | | | | |
Miscellaneous | | | 16,227 | | | | | |
Total expenses | | | | | | | $2,681,654 | |
Reduction of expenses by investment adviser | | | (250,059 | ) | | | | |
Net expenses | | | | | | | $2,431,595 | |
Net investment income | | | | | | | $6,831,564 | |
Realized and unrealized gain (loss) on investments | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments: | | | | | | | | |
Non-affiliated issuers | | | $10,062,634 | | | | | |
Underlying affiliated funds | | | (55 | ) | | | | |
Net realized gain (loss) on investments | | | | | | | $10,062,579 | |
Change in unrealized appreciation (depreciation) on investments | | | | | | | $20,818,767 | |
Net realized and unrealized gain (loss) on investments | | | | | | | $30,881,346 | |
Change in net assets from operations | | | | | | | $37,712,910 | |
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 | | | 2016 | | | | 2015 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $6,831,564 | | | | $6,401,804 | |
Net realized gain (loss) on investments | | | 10,062,579 | | | | 48,893,831 | |
Net unrealized gain (loss) on investments | | | 20,818,767 | | | | (50,149,576 | ) |
Change in net assets from operations | | | $37,712,910 | | | | $5,146,059 | |
| Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(6,431,285 | ) | | | $(6,967,865 | ) |
From net realized gain on investments | | | (48,845,958 | ) | | | (35,420,962 | ) |
Total distributions declared to shareholders | | | $(55,277,243 | ) | | | $(42,388,827 | ) |
Change in net assets from fund share transactions | | | $30,405,523 | | | | $22,589,488 | |
Total change in net assets | | | $12,841,190 | | | | $(14,653,280 | ) |
| Net assets | | | | | | | | |
At beginning of period | | | 463,148,464 | | | | 477,801,744 | |
At end of period (including undistributed net investment income of $6,938,538 and
$6,538,259, respectively) | | | $475,989,654 | | | | $463,148,464 | |
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 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $48.56 | | | | $53.50 | | | | $48.31 | | | | $36.15 | | | | $31.86 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.74 | (c) | | | $0.76 | | | | $0.77 | | | | $0.71 | | | | $0.72 | |
Net realized and unrealized gain (loss) on investments | | | 3.24 | | | | (0.62 | ) | | | 5.28 | | | | 12.32 | | | | 4.17 | |
Total from investment operations | | | $3.98 | | | | $0.14 | | | | $6.05 | | | | $13.03 | | | | $4.89 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | �� | | | |
From net investment income | | | $(0.72 | ) | | | $(0.87 | ) | | | $(0.86 | ) | | | $(0.87 | ) | | | $(0.60 | ) |
From net realized gain on investments | | | (5.20 | ) | | | (4.21 | ) | | | — | | | | — | | | | — | |
Total distributions declared to shareholders | | | $(5.92 | ) | | | $(5.08 | ) | | | $(0.86 | ) | | | $(0.87 | ) | | | $(0.60 | ) |
Net asset value, end of period (x) | | | $46.62 | | | | $48.56 | | | | $53.50 | | | | $48.31 | | | | $36.15 | |
Total return (%) (k)(r)(s)(x) | | | 8.45 | (c) | | | 1.13 | | | | 12.57 | | | | 36.40 | | | | 15.37 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.49 | (c) | | | 0.60 | | | | 0.60 | | | | 0.60 | | | | 0.61 | |
Expenses after expense reductions (f) | | | 0.44 | (c) | | | 0.45 | | | | 0.45 | | | | 0.50 | | | | 0.60 | |
Net investment income | | | 1.56 | (c) | | | 1.45 | | | | 1.53 | | | | 1.68 | | | | 2.06 | |
Portfolio turnover | | | 49 | | | | 51 | | | | 41 | | | | 43 | | | | 54 | |
Net assets at end of period (000 omitted) | | | $306,368 | | | | $319,721 | | | | $361,501 | | | | $367,674 | | | | $311,265 | |
See Notes to Financial Statements
12
MFS Blended Research Core Equity Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $48.26 | | | | $53.18 | | | | $48.02 | | | | $35.93 | | | | $31.65 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.61 | (c) | | | $0.62 | | | | $0.64 | | | | $0.60 | | | | $0.62 | |
Net realized and unrealized gain (loss) on investments | | | 3.22 | | | | (0.61 | ) | | | 5.23 | | | | 12.24 | | | | 4.15 | |
Total from investment operations | | | $3.83 | | | | $0.01 | | | | $5.87 | | | | $12.84 | | | | $4.77 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.63 | ) | | | $(0.72 | ) | | | $(0.71 | ) | | | $(0.75 | ) | | | $(0.49 | ) |
From net realized gain on investments | | | (5.20 | ) | | | (4.21 | ) | | | — | | | | — | | | | — | |
Total distributions declared to shareholders | | | $(5.83 | ) | | | $(4.93 | ) | | | $(0.71 | ) | | | $(0.75 | ) | | | $(0.49 | ) |
Net asset value, end of period (x) | | | $46.26 | | | | $48.26 | | | | $53.18 | | | | $48.02 | | | | $35.93 | |
Total return (%) (k)(r)(s)(x) | | | 8.17 | (c) | | | 0.87 | | | | 12.28 | | | | 36.05 | | | | 15.10 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.74 | (c) | | | 0.85 | | | | 0.85 | | | | 0.85 | | | | 0.86 | |
Expenses after expense reductions (f) | | | 0.69 | (c) | | | 0.70 | | | | 0.70 | | | | 0.75 | | | | 0.85 | |
Net investment income | | | 1.30 | (c) | | | 1.20 | | | | 1.28 | | | | 1.44 | | | | 1.80 | |
Portfolio turnover | | | 49 | | | | 51 | | | | 41 | | | | 43 | | | | 54 | |
Net assets at end of period (000 omitted) | | | $169,622 | | | | $143,427 | | | | $116,301 | | | | $134,107 | | | | $134,379 | |
| (c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
| (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 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 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 October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
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 on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange 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 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
14
MFS Blended Research Core Equity Portfolio
Notes to Financial Statements – continued
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, 2016 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities | | | $472,439,081 | | | | $— | | | | $— | | | | $472,439,081 | |
| Mutual Funds | | | 676,957 | | | | — | | | | — | | | | 676,957 | |
| Total Investments | | | $473,116,038 | | | | $— | | | | $— | | | | $473,116,038 | |
For further information regarding security characteristics, see the Portfolio of Investments.
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. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. 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, 2016, 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. 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.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian expenses” in the Statement of Operations.
15
MFS Blended Research Core Equity Portfolio
Notes to Financial Statements – continued
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:
| | | | | | | | |
| | | 12/31/16 | | | 12/31/15 | |
| Ordinary income (including any short-term capital gains) | | | $6,431,285 | | | | $6,967,865 | |
| Long-term capital gains | | | 48,845,958 | | | | 35,420,962 | |
| Total distributions | | | $55,277,243 | | | | $42,388,827 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/16 | | | | |
| Cost of investments | | | $391,811,180 | |
| Gross appreciation | | | 89,920,383 | |
| Gross depreciation | | | (8,615,525 | ) |
| Net unrealized appreciation (depreciation) | | | $81,304,858 | |
| Undistributed ordinary income | | | 6,938,538 | |
| Undistributed long-term capital gain | | | 10,293,899 | |
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
12/31/16 | | | Year ended
12/31/15 | | | Year ended
12/31/16 | | | Year ended
12/31/15 | |
| Initial Class | | | $4,331,384 | | | | $5,389,089 | | | | $31,449,575 | | | | $26,219,824 | |
| Service Class | | | 2,099,901 | | | | 1,578,776 | | | | 17,396,383 | | | | 9,201,138 | |
| Total | | | $6,431,285 | | | | $6,967,865 | | | | $48,845,958 | | | | $35,420,962 | |
| (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. For the period January 1, 2016 through April 28, 2016, the management fee was computed daily and paid monthly at an annual rate of 0.55% of the fund’s average daily net assets.
The investment adviser had agreed in writing to reduce its management fee to 0.40% of average daily net assets. This written agreement terminated on April 28, 2016. For the period January 1, 2016 through April 28, 2016, this management fee reduction amounted to $217,055, which is included in the reduction of total expenses in the Statement of Operations.
Effective April 29, 2016, the management fee is computed daily and paid monthly at the following annual rates:
| | | | |
| First $1 billion of average daily net assets | | | 0.40% | |
| Next $1.5 billion of average daily net assets | | | 0.375% | |
| Average daily net assets in excess of $2.5 billion | | | 0.35% | |
16
MFS Blended Research Core Equity Portfolio
Notes to Financial Statements – continued
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, 2016, this management fee reduction amounted to $33,004, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.39% 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, 2016, the fee was $14,887, which equated to 0.0032% 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, 2016, these costs amounted to $2,245.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund 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, 2016 was equivalent to an annual effective rate of 0.0177% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – 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. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $932 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the 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. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase transactions pursuant to this policy, which amounted to $279,810.
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, aggregated $225,918,857 and $237,911,281, 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 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 197,629 | | | | $9,164,031 | | | | 43,291 | | | | $2,227,278 | |
Service Class | | | 777,422 | | | | 36,935,471 | | | | 989,722 | | | | 49,579,379 | |
| | | 975,051 | | | | $46,099,502 | | | | 1,033,013 | | | | $51,806,657 | |
17
MFS Blended Research Core Equity Portfolio
Notes to Financial Statements – continued
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 783,467 | | | | $35,780,959 | | | | 710,313 | | | | $31,608,913 | |
Service Class | | | 429,812 | | | | 19,496,284 | | | | 243,559 | | | | 10,779,914 | |
| | | 1,213,279 | | | | $55,277,243 | | | | 953,872 | | | | $42,388,827 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (993,359 | ) | | | $(46,872,280 | ) | | | (926,626 | ) | | | $(48,236,182 | ) |
Service Class | | | (512,413 | ) | | | (24,098,942 | ) | | | (448,375 | ) | | | (23,369,814 | ) |
| | | (1,505,772 | ) | | | $(70,971,222 | ) | | | (1,375,001 | ) | | | $(71,605,996 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (12,263 | ) | | | $(1,927,290 | ) | | | (173,022 | ) | | | $(14,399,991 | ) |
Service Class | | | 694,821 | | | | 32,332,813 | | | | 784,906 | | | | 36,989,479 | |
| | | 682,558 | | | | $30,405,523 | | | | 611,884 | | | | $22,589,488 | |
The fund and certain other funds managed by MFS participate in a $1.25 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 Overnight Federal Reserve funds rate or daily 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 Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $2,884 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 | | | 1,216,382 | | | | 57,029,314 | | | | (57,568,739 | ) | | | 676,957 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $(55 | ) | | | $— | | | | $11,859 | | | | $676,957 | |
18
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, 2016, 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, 2016, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 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, 2016, 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 15, 2017
19
MFS Blended Research Core Equity Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, 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 53) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 55) | | Trustee | | January 2014 | | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 74) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 65) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council (until 2015); 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 |
| | | | |
Maureen R. Goldfarb (age 61) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Michael Hegarty (age 72) | | Trustee | | December 2004 | | Private investor | | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) |
| | | | |
John P. Kavanaugh (age 62) | | Trustee and Vice Chair of Trustees | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 60) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 59) | | Trustee | | March 2005 | | Private investor | | The Travelers Companies, Director; Dycom Industries, Inc., Director |
| | | |
| OFFICERS | | | | | | |
Christopher R. Bohane (k) (age 43) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 48) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 57) | | 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 |
| | | | |
Ethan D. Corey (k) (age 53) | | 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 48) | | President | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 43) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
20
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) |
Susan A. Pereira (k) (age 46) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 46) | | 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 64) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 72) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 46) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Martin J. Wolin (k) (age 49) | | Chief Compliance Officer | | July 2015 | | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | | N/A |
| | | | |
James O. Yost (k) (age 56) | | 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. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
| (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. Buller and Kavanaugh and Ms. 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, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
21
MFS Blended Research Core Equity Portfolio
Trustees and Officers – continued
The Statement of Additional Information for a 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 Jim Fallon Matt Krummell Jonathan Sage Jed Stocks | | |
22
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, 2016 (“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 Senior Officer, a 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 Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of 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 Broadridge 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 Broadridge 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, 2015, 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, 2015 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.
23
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 Broadridge. The Trustees considered that, according to the data provided by Broadridge (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 Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. 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, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate 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 MFS had amended its contractual advisory fee rate schedule effective April 29, 2016 and that such advisory fee rate schedule is subject to contractual breakpoints that reduce the Fund’s advisory fee rate on the Fund’s average daily net assets over $1 billion and $2.5 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, 2016.
24
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 mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios”, then “VIT II” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $53,731,000 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.
25
rev. 3/16
| | | | |
| 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., and MFS Heritage Trust Company. |
| | |
| 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, or 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, 2016
MFS® CORPORATE BOND PORTFOLIO
MFS® Variable Insurance Trust II
BDS-ANN
MFS® CORPORATE 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 • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Corporate Bond Portfolio
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
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 Corporate Bond Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | | | |
| Fixed income sectors (i) | | | | |
| Investment Grade Corporates | | | 80.2% | |
| High Yield Corporates | | | 14.8% | |
| U.S. Treasury Securities | | | 0.8% | |
| Commercial Mortgage-Backed Securities | | | 0.5% | |
| Emerging Markets Bonds | | | 0.5% | |
| Asset-Backed Securities | | | 0.1% | |
| | | | |
| Composition including fixed income credit quality (a)(i) | |
| AA | | | 2.2% | |
| A | | | 20.2% | |
| BBB | | | 58.7% | |
| BB | | | 13.6% | |
| B | | | 1.3% | |
| CCC (o) | | | 0.0% | |
| C | | | 0.1% | |
| D (o) | | | 0.0% | |
| U.S. Government | | | 0.8% | |
| Not Rated (o) | | | 0.0% | |
| Cash & Cash Equivalents | | | 3.1% | |
| |
| Portfolio facts (i) | | | | |
| Average Duration (d) | | | 6.6 | |
| Average Effective Maturity (m) | | | 10.9 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. Not Rated includes fixed income securities, including fixed income futures contracts, which have not been rated by any rating agency. The fund may or may not have held all of these instruments on this date. 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 & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
The portfolio is actively managed and current holdings may be different.
2
MFS Corporate Bond Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2016, Initial Class shares of the MFS Corporate Bond Portfolio (“fund”) provided a total return of 6.28%, while Service Class shares of the fund provided a total return of 5.98%. These compare with a return of 5.63% over the same period for the fund’s benchmark, the Bloomberg Barclays U.S. Credit Bond Index (formerly “Barclays U.S. Credit Bond Index”).
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Contributors to Performance
The fund’s overweight exposure to “BB” and “BBB” rated (r) securities, and an underweight exposure to “AA” rated securities, contributed to returns relative to the Bloomberg Barclays U.S. Credit Bond Index, as lower-quality bonds outperformed the benchmark during the reporting period. An overweight exposure to both the basic industry and energy sectors also buoyed relative returns, along with the fund’s underweight exposure to bonds within the sovereign sector. Additionally, the fund’s shorter relative duration (d) stance was a positive factor for relative performance as interest rates increased during the period.
Detractors from Performance
The fund’s overweight allocation to technology, consumer non-cyclicals and consumer cyclicals weakened relative returns, as all three sectors underperformed the benchmark. Security selection within “BBB” rated securities also held back relative results. The fund’s cash and/or cash equivalents position during the period was another detractor 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 fixed income markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Respectfully,
| | |
| Richard Hawkins | | Robert Persons |
| Portfolio Manager | | Portfolio Manager |
| (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. |
| (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. |
3
MFS Corporate Bond 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.
4
MFS Corporate Bond Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/16
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 12/31/16
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class Inception Date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 5/06/98 | | 6.28% | | 4.47% | | 5.71% | | |
| | | Service Class | | 8/24/01 | | 5.98% | | 4.21% | | 5.45% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Bloomberg Barclays U.S. Credit Bond Index (f) | | 5.63% | | 3.85% | | 5.31% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Bloomberg Barclays U.S. Credit Bond Index (formerly 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.
5
MFS Corporate Bond Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders during the Period,
July 1, 2016 through December 31, 2016
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, 2016 through December 31, 2016.
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
7/01/16 | | | Ending
Account Value
12/31/16 | | | Expenses Paid
During Period (p)
7/01/16-12/31/16 | |
| Initial Class | | Actual | | | 0.58% | | | | $1,000.00 | | | | $989.27 | | | | $2.90 | |
| | Hypothetical (h) | | | 0.58% | | | | $1,000.00 | | | | $1,022.22 | | | | $2.95 | |
| Service Class | | Actual | | | 0.83% | | | | $1,000.00 | | | | $988.16 | | | | $4.15 | |
| | Hypothetical (h) | | | 0.83% | | | | $1,000.00 | | | | $1,020.96 | | | | $4.22 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.05% (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
6
MFS Corporate Bond Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – 95.7% | |
| Aerospace – 0.4% | |
| Lockheed Martin Corp., 3.55%, 1/15/2026 | | $ | 964,000 | | | $ | 983,580 | |
| | | | | | | | |
| Asset-Backed & Securitized – 0.6% | | | | | |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 2.134%, 12/28/2040 (z) | | $ | 214,267 | | | $ | 163,452 | |
| Greenwich Capital Commercial Funding Corp., FRN, 5.758%, 7/10/2038 | | | 150,737 | | | | 150,691 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., “A4”, FRN, 5.753%, 6/15/2049 | | | 977,447 | | | | 983,334 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.66%, 7/15/2042 (n)(q) | | | 396,330 | | | | 101,840 | |
| Lehman Brothers Commercial Conduit Mortgage Trust, FRN, 1.086%, 2/18/2030 (i) | | | 109,561 | | | | 3 | |
| Morgan Stanley Capital I, Inc., FRN, 1.023%, 11/15/2030 (i)(n) | | | 666,496 | | | | 6,173 | |
| | | | | | | | |
| | | | | | $ | 1,405,493 | |
| | | | | | | | |
| Automotive – 2.3% | |
| General Motors Co., 6.25%, 10/02/2043 | | $ | 1,257,000 | | | $ | 1,387,247 | |
| General Motors Financial Co., Inc., 3.45%, 4/10/2022 | | | 1,222,000 | | | | 1,207,246 | |
| Lear Corp., 4.75%, 1/15/2023 | | | 787,000 | | | | 802,740 | |
| Nissan Motor Acceptance Corp., 1.95%, 9/12/2017 (n) | | | 908,000 | | | | 910,572 | |
| ZF North America Capital, Inc., 4.75%, 4/29/2025 (n) | | | 1,426,000 | | | | 1,450,955 | |
| | | | | | | | |
| | | | | | $ | 5,758,760 | |
| | | | | | | | |
| Biotechnology – 0.9% | |
| Life Technologies Corp., 6%, 3/01/2020 | | $ | 2,172,000 | | | $ | 2,364,680 | |
| | | | | | | | |
| Broadcasting – 2.0% | | | | | |
| Omnicom Group, Inc., 3.625%, 5/01/2022 | | $ | 1,283,000 | | | $ | 1,316,295 | |
| Omnicom Group, Inc., 3.6%, 4/15/2026 | | | 1,030,000 | | | | 1,017,907 | |
| SES Global Americas Holdings GP, 2.5%, 3/25/2019 (n) | | | 578,000 | | | | 574,440 | |
| SES S.A., 3.6%, 4/04/2023 (n) | | | 346,000 | | | | 337,488 | |
| Time Warner, Inc., 3.8%, 2/15/2027 | | | 1,204,000 | | | | 1,193,426 | |
| Time Warner, Inc., 5.35%, 12/15/2043 | | | 685,000 | | | | 723,161 | |
| | | | | | | | |
| | | | | | $ | 5,162,717 | |
| | | | | | | | |
| Brokerage & Asset Managers – 1.0% | |
| CME Group, Inc., 3%, 3/15/2025 | | $ | 891,000 | | | $ | 889,375 | |
| Intercontinental Exchange, Inc., 2.75%, 12/01/2020 | | | 652,000 | | | | 658,637 | |
| Intercontinental Exchange, Inc., 3.75%, 12/01/2025 | | | 1,070,000 | | | | 1,091,949 | |
| | | | | | | | |
| | | | | | $ | 2,639,961 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | |
| Building – 1.3% | | | | | |
| Martin Marietta Materials, Inc., 4.25%, 7/02/2024 | | $ | 850,000 | | | $ | 862,633 | |
| Masco Corp., 4.45%, 4/01/2025 | | | 560,000 | | | | 568,400 | |
| Masco Corp., 4.375%, 4/01/2026 | | | 476,000 | | | | 484,125 | |
| Mohawk Industries, Inc., 3.85%, 2/01/2023 | | | 999,000 | | | | 1,019,820 | |
| Owens Corning, 4.2%, 12/15/2022 | | | 460,000 | | | | 477,210 | |
| | | | | | | | |
| | | | | | $ | 3,412,188 | |
| | | | | | | | |
| Business Services – 2.6% | |
| Cisco Systems, Inc., 2.2%, 2/28/2021 | | $ | 1,428,000 | | | $ | 1,423,403 | |
| Equinix, Inc., 5.75%, 1/01/2025 | | | 969,000 | | | | 1,012,605 | |
| Fidelity National Information Services, Inc., 2%, 4/15/2018 | | | 135,000 | | | | 135,393 | |
| Fidelity National Information Services, Inc., 5%, 3/15/2022 | | | 1,270,000 | | | | 1,305,014 | |
| Fidelity National Information Services, Inc., 3.5%, 4/15/2023 | | | 416,000 | | | | 420,920 | |
| Fidelity National Information Services, Inc., 5%, 10/15/2025 | | | 775,000 | | | | 843,835 | |
| MSCI, Inc., 5.75%, 8/15/2025 (n) | | | 1,464,000 | | | | 1,551,840 | |
| | | | | | | | |
| | | | | | $ | 6,693,010 | |
| | | | | | | | |
| Cable TV – 3.7% | |
| Charter Communications Operating LLC, 6.384%, 10/23/2035 | | $ | 886,000 | | | $ | 1,010,251 | |
| Comcast Corp., 4.65%, 7/15/2042 | | | 628,000 | | | | 652,600 | |
| Comcast Corp., 4.75%, 3/01/2044 | | | 720,000 | | | | 770,723 | |
| Cox Communications, Inc., 6.25%, 6/01/2018 (n) | | | 261,000 | | | | 275,346 | |
| NBCUniversal Enterprise, Inc., 1.974%, 4/15/2019 (n) | | | 578,000 | | | | 579,858 | |
| Sirius XM Radio, Inc., 5.75%, 8/01/2021 (n) | | | 1,375,000 | | | | 1,431,719 | |
Sirius XM Radio, Inc., 5.375%, 4/15/2025 (n) | | | 170,000 | | | | 169,150 | |
Sirius XM Radio, Inc., 5.375%, 7/15/2026 (n) | | | 353,000 | | | | 345,058 | |
| Time Warner Cable, Inc., 8.25%, 4/01/2019 | | | 850,000 | | | | 954,792 | |
| Time Warner Cable, Inc., 5%, 2/01/2020 | | | 354,000 | | | | 375,481 | |
| Time Warner Cable, Inc., 4.5%, 9/15/2042 | | | 955,000 | | | | 863,340 | |
| Time Warner Entertainment Co. LP, 8.375%, 7/15/2033 | | | 266,000 | | | | 348,088 | |
| Videotron Ltd., 5%, 7/15/2022 | | | 1,555,000 | | | | 1,593,875 | |
| | | | | | | | |
| | | | | | $ | 9,370,281 | |
| | | | | | | | |
| Chemicals – 0.9% | |
| LyondellBasell Industries N.V., 5%, 4/15/2019 | | $ | 939,000 | | | $ | 991,330 | |
| LyondellBasell Industries N.V., 6%, 11/15/2021 | | | 1,256,000 | | | | 1,423,150 | |
| | | | | | | | |
| | | | | | $ | 2,414,480 | |
| | | | | | | | |
7
MFS Corporate Bond Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | |
| Computer Software – 0.7% | |
| Oracle Corp., 3.4%, 7/08/2024 | | $ | 1,107,000 | | | $ | 1,126,611 | |
| VeriSign, Inc., 4.625%, 5/01/2023 | | | 763,000 | | | | 774,445 | |
| | | | | | | | |
| | | | | | $ | 1,901,056 | |
| | | | | | | | |
| Computer Software – Systems – 0.2% | |
| Apple, Inc., 4.375%, 5/13/2045 | | $ | 383,000 | | | $ | 392,668 | |
| | | | | | | | |
| Conglomerates – 0.8% | | | | | |
| General Electric Capital Corp., 5.5%, 1/08/2020 | | $ | 421,000 | | | $ | 461,012 | |
Johnson Controls International PLC, 0% to 1/02/2017, 4.95% to 7/02/2064 | | | 294,000 | | | | 273,582 | |
| Roper Industries, Inc., 1.85%, 11/15/2017 | | | 1,171,000 | | | | 1,174,552 | |
| | | | | | | | |
| | | | | | $ | 1,909,146 | |
| | | | | | | | |
| Consumer Products – 1.6% | |
| Hasbro, Inc., 5.1%, 5/15/2044 | | $ | 1,138,000 | | | $ | 1,148,797 | |
| Mattel, Inc., 1.7%, 3/15/2018 | | | 393,000 | | | | 392,067 | |
| Mattel, Inc., 5.45%, 11/01/2041 | | | 460,000 | | | | 460,902 | |
| Newell Rubbermaid, Inc., 2.05%, 12/01/2017 | | | 589,000 | | | | 590,914 | |
| Newell Rubbermaid, Inc., 3.85%, 4/01/2023 | | | 945,000 | | | | 979,238 | |
| Newell Rubbermaid, Inc., 5.375%, 4/01/2036 | | | 378,000 | | | | 425,399 | |
| | | | | | | | |
| | | | | | $ | 3,997,317 | |
| | | | | | | | |
| Consumer Services – 2.4% | |
| Priceline Group, Inc., 3.65%, 3/15/2025 | | $ | 769,000 | | | $ | 765,879 | |
| Priceline Group, Inc., 3.6%, 6/01/2026 | | | 1,761,000 | | | | 1,739,123 | |
| Service Corp. International, 5.375%, 1/15/2022 | | | 170,000 | | | | 176,800 | |
| Service Corp. International, 5.375%, 5/15/2024 | | | 2,004,000 | | | | 2,089,170 | |
| Visa, Inc., 4.15%, 12/14/2035 | | | 1,413,000 | | | | 1,477,010 | |
| | | | | | | | |
| | | | | | $ | 6,247,982 | |
| | | | | | | | |
| Containers – 2.2% | |
| Ball Corp., 5%, 3/15/2022 | | $ | 682,000 | | | $ | 714,395 | |
| Ball Corp., 4%, 11/15/2023 | | | 691,000 | | | | 677,180 | |
| Ball Corp., 5.25%, 7/01/2025 | | | 1,030,000 | | | | 1,076,350 | |
| Crown American LLC, 4.5%, 1/15/2023 | | | 1,853,000 | | | | 1,890,060 | |
| Sealed Air Corp., 5.5%, 9/15/2025 (n) | | | 1,150,000 | | | | 1,187,375 | |
| | | | | | | | |
| | | | | | $ | 5,545,360 | |
| | | | | | | | |
| Defense Electronics – 0.6% | |
| BAE Systems Holdings, Inc., 6.375%, 6/01/2019 (n) | | $ | 1,358,000 | | | $ | 1,480,887 | |
| | | | | | | | |
| Electrical Equipment – 0.4% | |
| Arrow Electronics, Inc., 3.5%, 4/01/2022 | | $ | 478,000 | | | $ | 472,760 | |
| Molex Electronic Technologies LLC, 3.9%, 4/15/2025 (n) | | | 642,000 | | | | 630,730 | |
| | | | | | | | |
| | | | | | $ | 1,103,490 | |
| | | | | | | | |
| Electronics – 1.9% | |
| Flextronics International Ltd., 4.625%, 2/15/2020 | | $ | 2,018,000 | | | $ | 2,121,427 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | |
| Electronics – continued | |
| Jabil Circuit, Inc., 4.7%, 9/15/2022 | | $ | 399,000 | | | $ | 406,980 | |
| NXP B.V./NXP Funding LLC, 4.125%, 6/15/2020 (n) | | | 695,000 | | | | 719,325 | |
| NXP B.V./NXP Funding LLC, 4.625%, 6/01/2023 (n) | | | 702,000 | | | | 737,100 | |
| Tyco Electronics Group S.A., 6.55%, 10/01/2017 | | | 360,000 | | | | 373,410 | |
| Tyco Electronics Group S.A., 2.375%, 12/17/2018 | | | 229,000 | | | | 231,162 | |
| Tyco Electronics Group S.A., 3.5%, 2/03/2022 | | | 252,000 | | | | 259,063 | |
| | | | | | | | |
| | | | | | $ | 4,848,467 | |
| | | | | | | | |
| Emerging Market Quasi-Sovereign – 0.3% | |
| Comision Federal de Electricidad, 5.75%, 2/14/2042 | | $ | 465,000 | | | $ | 431,288 | |
| Comision Federal de Electricidad, 5.75%, 2/14/2042 (n) | | | 285,000 | | | | 264,338 | |
| | | | | | | | |
| | | | | | $ | 695,626 | |
| | | | | | | | |
| Energy – Independent – 0.7% | |
| Concho Resources, Inc., 4.375%, 1/15/2025 | | $ | 840,000 | | | $ | 838,328 | |
| Pioneer Natural Resources Co., 7.5%, 1/15/2020 | | | 930,000 | | | | 1,056,576 | |
| | | | | | | | |
| | | | | | $ | 1,894,904 | |
| | | | | | | | |
| Energy – Integrated – 0.5% | |
| Shell International Finance B.V., 3.75%, 9/12/2046 | | $ | 1,300,000 | | | $ | 1,193,629 | |
| | | | | | | | |
| Financial Institutions – 2.5% | | | | | |
| AerCap Ireland Capital Ltd., 4.625%, 10/30/2020 | | $ | 227,000 | | | $ | 236,080 | |
| CIT Group, Inc., 6.625%, 4/01/2018 (n) | | | 1,900,000 | | | | 2,002,125 | |
| GE Capital International Funding Co., 2.342%, 11/15/2020 | | | 1,217,000 | | | | 1,214,207 | |
| International Lease Finance Corp., 7.125%, 9/01/2018 (n) | | | 570,000 | | | | 614,175 | |
| International Lease Finance Corp., 5.875%, 8/15/2022 | | | 1,000,000 | | | | 1,085,000 | |
| Navient Corp., 7.25%, 9/25/2023 | | | 1,221,000 | | | | 1,254,578 | |
| | | | | | | | |
| | | | | | $ | 6,406,165 | |
| | | | | | | | |
| Food & Beverages – 5.8% | |
| Anheuser-Busch InBev Worldwide, Inc., 3.75%, 1/15/2022 | | $ | 1,855,000 | | | $ | 1,934,311 | |
| Anheuser-Busch InBev Worldwide, Inc., 3.3%, 2/01/2023 | | | 1,511,000 | | | | 1,536,217 | |
| Anheuser-Busch InBev Worldwide, Inc., 4.7%, 2/01/2036 | | | 1,977,000 | | | | 2,078,863 | |
| Constellation Brands, Inc., 4.25%, 5/01/2023 | | | 1,605,000 | | | | 1,664,208 | |
| J.M. Smucker Co., 2.5%, 3/15/2020 | | | 303,000 | | | | 304,273 | |
| J.M. Smucker Co., 3.5%, 10/15/2021 | | | 880,000 | | | | 913,918 | |
| J.M. Smucker Co., 4.375%, 3/15/2045 | | | 324,000 | | | | 320,832 | |
| Kraft Heinz Foods Co., 5%, 7/15/2035 | | | 415,000 | | | | 434,730 | |
8
MFS Corporate Bond Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | |
| Food & Beverages – continued | |
| Kraft Heinz Foods Co., 6.5%, 2/09/2040 | | $ | 1,459,000 | | | $ | 1,774,849 | |
| Molson Coors Brewing Co., 2.1%, 7/15/2021 | | | 589,000 | | | | 573,109 | |
| Molson Coors Brewing Co., 4.2%, 7/15/2046 | | | 501,000 | | | | 466,148 | |
| Pernod Ricard S.A., 4.45%, 1/15/2022 (n) | | | 831,000 | | | | 880,820 | |
| SYSCO Corp., 2.5%, 7/15/2021 | | | 445,000 | | | | 439,851 | |
| Tyson Foods, Inc., 4.5%, 6/15/2022 | | | 598,000 | | | | 635,716 | |
| Tyson Foods, Inc., 5.15%, 8/15/2044 | | | 368,000 | | | | 380,872 | |
| Wm. Wrigley Jr. Co., 2.9%, 10/21/2019 (n) | | | 505,000 | | | | 513,580 | |
| | | | | | | | |
| | | | | | $ | 14,852,297 | |
| | | | | | | | |
| Food & Drug Stores – 1.4% | |
| CVS Health Corp., 2.75%, 12/01/2022 | | $ | 500,000 | | | $ | 491,993 | |
| Walgreens Boots Alliance, Inc., 2.7%, 11/18/2019 | | | 1,433,000 | | | | 1,451,317 | |
| Walgreens Boots Alliance, Inc., 3.45%, 6/01/2026 | | | 1,321,000 | | | | 1,294,814 | |
| Walgreens Boots Alliance, Inc., 4.5%, 11/18/2034 | | | 446,000 | | | | 448,121 | |
| | | | | | | | |
| | | | | | $ | 3,686,245 | |
| | | | | | | | |
| Forest & Paper Products – 0.8% | |
| Georgia-Pacific LLC, 5.4%, 11/01/2020 (n) | | $ | 806,000 | | | $ | 885,440 | |
| International Paper Co., 6%, 11/15/2041 | | | 860,000 | | | | 964,186 | |
| Packaging Corp. of America, 3.9%, 6/15/2022 | | | 133,000 | | | | 137,031 | |
| | | | | | | | |
| | | | | | $ | 1,986,657 | |
| | | | | | | | |
| Gaming & Lodging – 0.5% | |
| Wyndham Worldwide Corp., 2.5%, 3/01/2018 | | $ | 811,000 | | | $ | 817,732 | |
| Wyndham Worldwide Corp., 5.1%, 10/01/2025 | | | 463,000 | | | | 487,273 | |
| | | | | | | | |
| | | | | | $ | 1,305,005 | |
| | | | | | | | |
| Insurance – 1.0% | |
| American International Group, Inc., 4.7%, 7/10/2035 | | $ | 1,010,000 | | | $ | 1,045,203 | |
| American International Group, Inc., 4.5%, 7/16/2044 | | | 917,000 | | | | 902,481 | |
| Unum Group, 4%, 3/15/2024 | | | 637,000 | | | | 638,866 | |
| | | | | | | | |
| | | | | | $ | 2,586,550 | |
| | | | | | | | |
| Insurance – Health – 1.6% | |
| Aetna, Inc., 2.8%, 6/15/2023 | | $ | 508,000 | | | $ | 499,823 | |
| Anthem, Inc., 1.875%, 1/15/2018 | | | 618,000 | | | | 618,228 | |
| Humana, Inc., 7.2%, 6/15/2018 | | | 1,157,000 | | | | 1,243,508 | |
| UnitedHealth Group, Inc., 4.625%, 7/15/2035 | | | 1,690,000 | | | | 1,839,271 | |
| | | | | | | | |
| | | | | | $ | 4,200,830 | |
| | | | | | | | |
| Insurance – Property & Casualty – 3.8% | |
| Aon PLC, 4.6%, 6/14/2044 | | $ | 237,000 | | | $ | 233,691 | |
| AXIS Capital Holdings Ltd., 5.875%, 6/01/2020 | | | 190,000 | | | | 208,125 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | |
| Insurance – Property & Casualty – continued | |
| Berkshire Hathaway, Inc., 2.75%, 3/15/2023 | | $ | 828,000 | | | $ | 824,040 | |
| Chubb Corp., 6.375% to 4/15/2017, FRN to 3/29/2067 | | | 279,000 | | | | 262,260 | |
| Chubb INA Holdings, Inc., 2.3%, 11/03/2020 | | | 343,000 | | | | 342,654 | |
| CNA Financial Corp., 5.875%, 8/15/2020 | | | 1,570,000 | | | | 1,733,148 | |
| Liberty Mutual Group, Inc., 4.85%, 8/01/2044 (n) | | | 951,000 | | | | 939,283 | |
| Marsh & McLennan Cos., Inc., 2.55%, 10/15/2018 | | | 678,000 | | | | 684,250 | |
| Marsh & McLennan Cos., Inc., 4.8%, 7/15/2021 | | | 900,000 | | | | 977,475 | |
| Marsh & McLennan Cos., Inc., 3.5%, 6/03/2024 | | | 779,000 | | | | 791,780 | |
| Swiss Re Ltd., 4.25%, 12/06/2042 (n) | | | 468,000 | | | | 456,152 | |
| XL Group Ltd., 5.75%, 10/01/2021 | | | 1,110,000 | | | | 1,232,474 | |
| ZFS Finance USA Trust V, 6.5% to 5/09/2017, FRN to 5/09/2067 (n) | | | 896,000 | | | | 898,374 | |
| | | | | | | | |
| | | | | | $ | 9,583,706 | |
| | | | | | | | |
| Major Banks – 8.0% | |
| Bank of America Corp., 7.625%, 6/01/2019 | | $ | 500,000 | | | $ | 561,635 | |
| Bank of America Corp., 5.625%, 7/01/2020 | | | 185,000 | | | | 203,279 | |
| Bank of America Corp., 4.125%, 1/22/2024 | | | 1,917,000 | | | | 1,990,024 | |
| Bank of America Corp., FRN, 6.1%, 12/29/2049 | | | 1,420,000 | | | | 1,427,810 | |
| Goldman Sachs Group, Inc., 4.8%, 7/08/2044 | | | 904,000 | | | | 947,238 | |
| HSBC Holdings PLC, 4.375%, 11/23/2026 | | | 941,000 | | | | 946,607 | |
| JPMorgan Chase & Co., 4.25%, 10/15/2020 | | | 442,000 | | | | 467,391 | |
| JPMorgan Chase & Co., 4.5%, 1/24/2022 | | | 790,000 | | | | 851,134 | |
| JPMorgan Chase & Co., 3.25%, 9/23/2022 | | | 904,000 | | | | 913,192 | |
| JPMorgan Chase & Co., 3.125%, 1/23/2025 | | | 688,000 | | | | 671,693 | |
| JPMorgan Chase & Co., 2.95%, 10/01/2026 | | | 1,192,000 | | | | 1,136,014 | |
| JPMorgan Chase & Co., 6.75% to 2/01/2024, FRN to 1/29/2049 | | | 1,221,000 | | | | 1,315,628 | |
| Morgan Stanley, 5.5%, 7/28/2021 | | | 1,245,000 | | | | 1,378,430 | |
| Morgan Stanley, 3.125%, 7/27/2026 | | | 2,972,000 | | | | 2,835,154 | |
| PNC Bank N.A., 2.6%, 7/21/2020 | | | 1,158,000 | | | | 1,167,140 | |
| Wachovia Corp., 6.605%, 10/01/2025 | | | 1,270,000 | | | | 1,481,385 | |
| Wells Fargo & Co., 4.1%, 6/03/2026 | | | 1,000,000 | | | | 1,011,754 | |
| Wells Fargo & Co., 5.9% to 6/15/2024, FRN to 12/29/2049 | | | 1,106,000 | | | | 1,111,530 | |
| | | | | | | | |
| | | | | | $ | 20,417,038 | |
| | | | | | | | |
| Medical & Health Technology & Services – 2.8% | |
| Becton, Dickinson and Co., 3.734%, 12/15/2024 | | $ | 161,000 | | | $ | 164,499 | |
| Becton, Dickinson and Co., 4.685%, 12/15/2044 | | | 1,083,000 | | | | 1,121,973 | |
9
MFS Corporate Bond Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | |
| Medical & Health Technology & Services – continued | |
| Fresenius U.S. Finance II, Inc., 6.5%, 9/15/2018 (n) | | $ | 734,000 | | | $ | 776,205 | |
| Fresenius U.S. Finance II, Inc., 4.25%, 2/01/2021 (n) | | | 189,000 | | | | 195,615 | |
| HCA, Inc., 4.75%, 5/01/2023 | | | 910,000 | | | | 931,613 | |
| HCA, Inc., 5.25%, 6/15/2026 | | | 963,000 | | | | 995,501 | |
| Laboratory Corp. of America Holdings, 4.7%, 2/01/2045 | | | 900,000 | | | | 887,269 | |
| Thermo Fisher Scientific, Inc., 2.95%, 9/19/2026 | | | 555,000 | | | | 522,653 | |
| Universal Health Services, Inc., 4.75%, 8/01/2022 (n) | | | 1,260,000 | | | | 1,275,750 | |
| Universal Health Services, Inc., 5%, 6/01/2026 (n) | | | 334,000 | | | | 325,650 | |
| | | | | | | | |
| | | | | | $ | 7,196,728 | |
| | | | | | | | |
| Medical Equipment – 2.1% | |
| Abbott Laboratories, 2.9%, 11/30/2021 | | $ | 2,291,000 | | | $ | 2,285,561 | |
| Abbott Laboratories, 4.75%, 11/30/2036 | | | 1,636,000 | | | | 1,660,583 | |
| Medtronic, Inc., 3.5%, 3/15/2025 | | | 1,061,000 | | | | 1,091,110 | |
| Medtronic, Inc., 4.375%, 3/15/2035 | | | 381,000 | | | | 402,438 | |
| | | | | | | | |
| | | | | | $ | 5,439,692 | |
| | | | | | | | |
| Metals & Mining – 1.4% | |
| Barrick Gold Corp., 3.85%, 4/01/2022 | | $ | 297,000 | | | $ | 301,006 | |
| Barrick Gold Corp., 4.1%, 5/01/2023 | | | 561,000 | | | | 574,914 | |
| Barrick North America Finance LLC, 4.4%, 5/30/2021 | | | 93,000 | | | | 97,646 | |
| Barrick North America Finance LLC, 5.7%, 5/30/2041 | | | 65,000 | | | | 66,231 | |
| Glencore Funding LLC, 4.125%, 5/30/2023 (z) | | | 841,000 | | | | 846,332 | |
| Glencore Funding LLC, 4%, 4/16/2025 (z) | | | 536,000 | | | | 525,280 | |
| Kinross Gold Corp., 5.95%, 3/15/2024 | | | 667,000 | | | | 675,338 | |
| Southern Copper Corp., 6.75%, 4/16/2040 | | | 415,000 | | | | 447,075 | |
| | | | | | | | |
| | | | | | $ | 3,533,822 | |
| | | | | | | | |
| Midstream – 5.8% | |
| APT Pipelines Ltd., 5%, 3/23/2035 (n) | | $ | 1,375,000 | | | $ | 1,335,712 | |
| Dominion Gas Holdings LLC, 2.8%, 11/15/2020 | | | 975,000 | | | | 983,122 | |
| Enbridge, Inc., 5.5%, 12/01/2046 | | | 799,000 | | | | 857,172 | |
| Enbridge, Inc., 6% to 1/15/2027, FRN to 1/15/2077 | | | 1,967,000 | | | | 1,962,083 | |
| Energy Transfer Partners LP, 9.7%, 3/15/2019 | | | 213,000 | | | | 244,390 | |
| Enterprise Products Operating LLC, 3.9%, 2/15/2024 | | | 406,000 | | | | 418,280 | |
| Enterprise Products Operating LLC, 4.45%, 2/15/2043 | | | 473,000 | | | | 447,482 | |
| Enterprise Products Operating LLC, 4.85%, 3/15/2044 | | | 362,000 | | | | 364,799 | |
| Enterprise Products Partners LP, 6.3%, 9/15/2017 | | | 540,000 | | | | 556,907 | |
| Enterprise Products Partners LP, 7.034% to 1/15/2018, FRN to 1/15/2068 | | | 267,000 | | | | 272,563 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | |
| Midstream – continued | |
| Kinder Morgan (Delaware), Inc., 7.75%, 1/15/2032 | | $ | 465,000 | | | $ | 569,167 | |
| Kinder Morgan Energy Partners LP, 6.85%, 2/15/2020 | | | 370,000 | | | | 412,214 | |
| Kinder Morgan Energy Partners LP, 6.5%, 4/01/2020 | | | 306,000 | | | | 338,492 | |
| Kinder Morgan Energy Partners LP, 7.4%, 3/15/2031 | | | 581,000 | | | | 686,271 | |
| Kinder Morgan Energy Partners LP, 5.4%, 9/01/2044 | | | 670,000 | | | | 666,636 | |
| ONEOK Partners LP, 2%, 10/01/2017 | | | 447,000 | | | | 448,215 | |
| Phillips 66 Partners LP, 4.9%, 10/01/2046 | | | 697,000 | | | | 668,052 | |
| Sabine Pass Liquefaction LLC, 5.625%, 4/15/2023 | | | 1,467,000 | | | | 1,558,688 | |
| Sabine Pass Liquefaction LLC, 5.625%, 3/01/2025 | | | 133,000 | | | | 142,310 | |
| Sabine Pass Liquefaction LLC, 5.875%, 6/30/2026 (n) | | | 289,000 | | | | 311,398 | |
| Sabine Pass Liquefaction LLC, 5%, 3/15/2027 (n) | | | 542,000 | | | | 546,743 | |
| Spectra Energy Capital LLC, 8%, 10/01/2019 | | | 942,000 | | | | 1,070,949 | |
| | | | | | | | |
| | | | | | $ | 14,861,645 | |
| | | | | | | | |
| Natural Gas – Distribution – 0.8% | |
| NiSource Finance Corp., 3.85%, 2/15/2023 | | $ | 1,106,000 | | | $ | 1,141,549 | |
| NiSource Finance Corp., 4.8%, 2/15/2044 | | | 761,000 | | | | 799,661 | |
| | | | | | | | |
| | | | | | $ | 1,941,210 | |
| | | | | | | | |
| Network & Telecom – 2.3% | |
| AT&T, Inc., 2.45%, 6/30/2020 | | $ | 619,000 | | | $ | 614,251 | |
| AT&T, Inc., 4.75%, 5/15/2046 | | | 1,136,000 | | | | 1,074,218 | |
| AT&T, Inc., 5.65%, 2/15/2047 | | | 669,000 | | | | 716,181 | |
| Verizon Communications, Inc., 4.5%, 9/15/2020 | | | 1,471,000 | | | | 1,572,987 | |
| Verizon Communications, Inc., 5.05%, 3/15/2034 | | | 929,000 | | | | 976,879 | |
| Verizon Communications, Inc., 6%, 4/01/2041 | | | 690,000 | | | | 791,193 | |
| | | | | | | | |
| | | | | | $ | 5,745,709 | |
| | | | | | | | |
| Oils – 2.1% | |
| Marathon Petroleum Corp., 3.4%, 12/15/2020 | | $ | 1,105,000 | | | $ | 1,129,239 | |
| Marathon Petroleum Corp., 4.75%, 9/15/2044 | | | 910,000 | | | | 805,270 | |
| Valero Energy Corp., 3.4%, 9/15/2026 | | | 1,601,000 | | | | 1,531,501 | |
| Valero Energy Corp., 4.9%, 3/15/2045 | | | 1,783,000 | | | | 1,773,493 | |
| | | | | | | | |
| | | | | | $ | 5,239,503 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 3.3% | |
| BPCE S.A., 4.5%, 3/15/2025 (n) | | $ | 760,000 | | | $ | 739,532 | |
| Capital One Financial Corp., 3.75%, 4/24/2024 | | | 796,000 | | | | 805,438 | |
| Citigroup, Inc., 4.4%, 6/10/2025 | | | 646,000 | | | | 660,045 | |
| Citigroup, Inc., 3.2%, 10/21/2026 | | | 2,633,000 | | | | 2,513,923 | |
10
MFS Corporate Bond Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | |
| Other Banks & Diversified Financials – continued | |
| Citizens Financial Group, Inc., 4.3%, 12/03/2025 | | $ | 918,000 | | | $ | 931,278 | |
| Discover Bank, 7%, 4/15/2020 | | | 1,097,000 | | | | 1,217,315 | |
| Discover Bank, 3.45%, 7/27/2026 | | | 1,389,000 | | | | 1,339,265 | |
| Macquarie Group Ltd., 3%, 12/03/2018 (n) | | | 273,000 | | | | 277,007 | |
| | | | | | | | |
| | | | | | $ | 8,483,803 | |
| | | | | | | | |
| Personal Computers & Peripherals – 0.5% | |
| Equifax, Inc., 2.3%, 6/01/2021 | | $ | 539,000 | | | $ | 527,340 | |
| Equifax, Inc., 3.3%, 12/15/2022 | | | 849,000 | | | | 862,213 | |
| | | | | | | | |
| | | | | | $ | 1,389,553 | |
| | | | | | | | |
| Pharmaceuticals – 3.6% | |
| Actavis, Inc., 1.875%, 10/01/2017 | | $ | 320,000 | | | $ | 320,595 | |
| Actavis, Inc., 3.25%, 10/01/2022 | | | 414,000 | | | | 411,852 | |
| Biogen, Inc., 3.625%, 9/15/2022 | | | 562,000 | | | | 576,241 | |
| Celgene Corp., 2.875%, 8/15/2020 | | | 1,908,000 | | | | 1,928,446 | |
| Forest Laboratories, Inc., 4.375%, 2/01/2019 (n) | | | 3,159,000 | | | | 3,281,478 | |
| Gilead Sciences, Inc., 3.65%, 3/01/2026 | | | 900,000 | | | | 911,283 | |
| Gilead Sciences, Inc., 4.5%, 2/01/2045 | | | 488,000 | | | | 486,632 | |
| Shire Acquisitions Investments Ireland, 2.4%, 9/23/2021 | | | 1,225,000 | | | | 1,182,217 | |
| | | | | | | | |
| | | | | | $ | 9,098,744 | |
| | | | | | | | |
| Pollution Control – 0.5% | |
| Republic Services, Inc., 5.25%, 11/15/2021 | | $ | 1,160,000 | | | $ | 1,288,512 | |
| | | | | | | | |
| Precious Metals & Minerals – 0.5% | | | | | |
| Teck Resources Ltd., 4.5%, 1/15/2021 | | $ | 1,273,000 | | | $ | 1,279,365 | |
| | | | | | | | |
| Railroad & Shipping – 0.4% | | | | | |
| Canadian Pacific Railway Co., 7.25%, 5/15/2019 | | $ | 424,000 | | | $ | 474,308 | |
| Canadian Pacific Railway Co., 4.5%, 1/15/2022 | | | 400,000 | | | | 429,326 | |
| | | | | | | | |
| | | | | | $ | 903,634 | |
| | | | | | | | |
| Real Estate – Healthcare – 0.3% | |
| HCP, Inc., REIT, 3.875%, 8/15/2024 | | $ | 707,000 | | | $ | 705,804 | |
| | | | | | | | |
| Real Estate – Office – 0.6% | | | | | |
| Boston Properties LP, REIT, 3.7%, 11/15/2018 | | $ | 411,000 | | | $ | 423,273 | |
| Boston Properties LP, REIT, 3.85%, 2/01/2023 | | | 1,131,000 | | | | 1,159,375 | |
| | | | | | | | |
| | | | | | $ | 1,582,648 | |
| | | | | | | | |
| Real Estate – Other – 0.2% | |
| Host Hotels & Resorts, Inc., REIT, 4.75%, 3/01/2023 | | $ | 157,000 | | | $ | 163,373 | |
| Host Hotels & Resorts, Inc., REIT, 4%, 6/15/2025 | | | 401,000 | | | | 394,442 | |
| | | | | | | | |
| | | | | | $ | 557,815 | |
| | | | | | | | |
| Real Estate – Retail – 0.5% | |
| DDR Corp., REIT, 3.625%, 2/01/2025 | | $ | 748,000 | | | $ | 722,672 | |
| Simon Property Group, Inc., REIT, 1.5%, 2/01/2018 (n) | | | 503,000 | | | | 502,712 | |
| | | | | | | | |
| | | | | | $ | 1,225,384 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | |
| Retailers – 2.6% | |
| Bed Bath & Beyond, Inc., 5.165%, 8/01/2044 | | $ | 1,042,000 | | | $ | 946,663 | |
| Best Buy Co., Inc., 5%, 8/01/2018 | | | 935,000 | | | | 977,907 | |
| Best Buy Co., Inc., 5.5%, 3/15/2021 | | | 31,000 | | | | 33,991 | |
| Hanesbrands, Inc., 4.875%, 5/15/2026 (n) | | | 1,312,000 | | | | 1,282,480 | |
| Home Depot, Inc., 4.875%, 2/15/2044 | | | 1,260,000 | | | | 1,412,989 | |
| L Brands, Inc., 6.875%, 11/01/2035 | | | 383,000 | | | | 390,660 | |
| Limited Brands, Inc., 7%, 5/01/2020 | | | 1,441,000 | | | | 1,621,125 | |
| | | | | | | | |
| | | | | | $ | 6,665,815 | |
| | | | | | | | |
| Specialty Chemicals – 0.3% | |
| Ecolab, Inc., 4.35%, 12/08/2021 | | $ | 804,000 | | | $ | 868,022 | |
| | | | | | | | |
| Telecommunications – Wireless – 2.6% | | | | | |
| American Tower Corp., REIT, 4.5%, 1/15/2018 | | $ | 1,150,000 | | | $ | 1,180,221 | |
| American Tower Corp., REIT, 3.5%, 1/31/2023 | | | 371,000 | | | | 371,734 | |
| American Tower Corp., REIT, 4%, 6/01/2025 | | | 1,000,000 | | | | 1,001,287 | |
| Crown Castle International Corp., 5.25%, 1/15/2023 | | | 470,000 | | | | 505,838 | |
| Crown Castle International Corp., 4.45%, 2/15/2026 | | | 338,000 | | | | 349,226 | |
| Crown Castle International Corp., 3.7%, 6/15/2026 | | | 533,000 | | | | 522,403 | |
| SBA Tower Trust, 2.898%, 10/15/2044 (n) | | | 1,081,000 | | | | 1,088,670 | |
| T-Mobile USA, Inc., 6%, 4/15/2024 | | | 1,640,000 | | | | 1,728,150 | |
| | | | | | | | |
| | | | | | $ | 6,747,529 | |
| | | | | | | | |
| Tobacco – 2.9% | |
| Altria Group, Inc., 2.95%, 5/02/2023 | | $ | 1,400,000 | | | $ | 1,397,612 | |
| Altria Group, Inc., 4%, 1/31/2024 | | | 231,000 | | | | 243,804 | |
| Imperial Tobacco Finance PLC, 4.25%, 7/21/2025 (n) | | | 1,819,000 | | | | 1,875,231 | |
| Philip Morris International, Inc., 4.875%, 11/15/2043 | | | 892,000 | | | | 957,635 | |
| Reynolds American, Inc., 2.3%, 8/21/2017 | | | 945,000 | | | | 949,622 | |
| Reynolds American, Inc., 8.125%, 6/23/2019 | | | 733,000 | | | | 835,894 | |
| Reynolds American, Inc., 3.25%, 6/12/2020 | | | 165,000 | | | | 168,972 | |
| Reynolds American, Inc., 4.45%, 6/12/2025 | | | 418,000 | | | | 440,776 | |
| Reynolds American, Inc., 5.7%, 8/15/2035 | | | 483,000 | | | | 553,825 | |
| | | | | | | | |
| | | | | | $ | 7,423,371 | |
| | | | | | | | |
| Transportation – Services – 0.5% | |
| ERAC USA Finance LLC, 6.375%, 10/15/2017 (n) | | $ | 200,000 | | | $ | 207,218 | |
| ERAC USA Finance LLC, 3.85%, 11/15/2024 (n) | | | 272,000 | | | | 276,092 | |
| ERAC USA Finance LLC, 7%, 10/15/2037 (n) | | | 421,000 | | | | 532,635 | |
| ERAC USA Finance LLC, 4.5%, 2/15/2045 (n) | | | 201,000 | | | | 191,300 | |
| | | | | | | | |
| | | | | | $ | 1,207,245 | |
| | | | | | | | |
11
MFS Corporate Bond Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | |
| U.S. Treasury Obligations – 0.8% | |
| U.S. Treasury Bonds, 3.5%, 2/15/2039 | | $ | 1,910,000 | | | $ | 2,084,891 | |
| | | | | | | | |
| Utilities – Electric Power – 4.9% | | | | | |
| Alabama Power Co., 4.15%, 8/15/2044 | | $ | 479,000 | | | $ | 480,413 | |
| Berkshire Hathaway Energy, 4.5%, 2/01/2045 | | | 597,000 | | | | 618,115 | |
| CMS Energy Corp., 6.25%, 2/01/2020 | | | 1,010,000 | | | | 1,116,537 | |
| CMS Energy Corp., 5.05%, 3/15/2022 | | | 209,000 | | | | 228,740 | |
| DTE Electric Co., 3.7%, 3/15/2045 | | | 223,000 | | | | 212,759 | |
| Duke Energy Corp., 3.75%, 9/01/2046 | | | 1,059,000 | | | | 951,298 | |
| EDP Finance B.V., 4.9%, 10/01/2019 (n) | | | 347,000 | | | | 363,616 | |
| EDP Finance B.V., 5.25%, 1/14/2021 (n) | | | 728,000 | | | | 769,569 | |
| Emera U.S. Finance LP, 2.7%, 6/15/2021 (n) | | | 330,000 | | | | 326,358 | |
| Emera U.S. Finance LP, 3.55%, 6/15/2026 (n) | | | 378,000 | | | | 371,047 | |
| PPL Capital Funding, Inc., 3.1%, 5/15/2026 | | | 1,290,000 | | | | 1,232,309 | |
| PPL Capital Funding, Inc., 5%, 3/15/2044 | | | 590,000 | | | | 622,771 | |
| PPL WEM Holdings PLC, 5.375%, 5/01/2021 (n) | | | 1,057,000 | | | | 1,139,627 | |
| PSEG Power LLC, 3%, 6/15/2021 | | | 1,000,000 | | | | 1,002,201 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Utilities – Electric Power – continued | | | | | |
| Public Service Enterprise Group, 2%, 11/15/2021 | | $ | 1,555,000 | | | $ | 1,504,198 | |
| Southern Co., 2.95%, 7/01/2023 | | | 440,000 | | | | 433,719 | |
| Southern Co., 4.4%, 7/01/2046 | | | 829,000 | | | | 818,314 | |
| Waterford 3 Funding Corp., 8.09%, 1/02/2017 | | | 293,785 | | | | 293,785 | |
| | | | | | | | |
| | | | | | $ | 12,485,376 | |
| | | | | | | | |
Total Bonds
(Identified Cost, $239,691,027) | | | | | | $ | 244,395,995 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 3.4% | | | | | |
| MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $8,547,616) | | | 8,548,103 | | | $ | 8,548,103 | |
| | | | | | | | |
Total Investments
(Identified Cost, $248,238,643) | | | | | | $ | 252,944,098 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.9% | | | | | | | 2,354,492 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 255,298,590 | |
| | | | | | | | |
| (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 $37,935,788 representing 14.9% 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, 2.134%, 12/28/2040 | | 3/01/06 | | | $214,267 | | | | $163,452 | |
| Glencore Funding LLC, 4.125%, 5/30/2023 | | 12/01/16-12/19/16 | | | 840,169 | | | | 846,332 | |
| Glencore Funding LLC, 4%, 4/16/2025 | | 12/01/16-12/16/16 | | | 527,072 | | | | 525,280 | |
| Total Restricted Securities | | | | | | | | | $1,535,064 | |
| % of Net assets | | | | | | | | | 0.6% | |
The following abbreviations are used in this report and are defined:
| FRN | | Floating Rate Note. Interest rate resets periodically and the current rate may not be the rate reported at period end. |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
See Notes to Financial Statements
12
MFS Corporate 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 12/31/16 | | | | | | | | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $239,691,027) | | | $244,395,995 | | | | | |
Underlying affiliated funds, at value (identified cost, $8,547,616) | | | 8,548,103 | | | | | |
Total investments, at value (identified cost, $248,238,643) | | | $252,944,098 | | | | | |
Receivables for | | | | | | | | |
Fund shares sold | | | 53,310 | | | | | |
Interest | | | 2,912,066 | | | | | |
Other assets | | | 222 | | | | | |
Total assets | | | | | | | $255,909,696 | |
Liabilities | | | | | | | | |
Payable for fund shares reacquired | | | $534,537 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 5,463 | | | | | |
Shareholder servicing costs | | | 65 | | | | | |
Distribution and/or service fees | | | 3,858 | | | | | |
Payable for independent Trustees’ compensation | | | 17 | | | | | |
Accrued expenses and other liabilities | | | 67,166 | | | | | |
Total liabilities | | | | | | | $611,106 | |
Net assets | | | | | | | $255,298,590 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $243,600,513 | | | | | |
Unrealized appreciation (depreciation) on investments | | | 4,705,455 | | | | | |
Accumulated distributions in excess of net realized gain on investments | | | (2,200,755 | ) | | | | |
Undistributed net investment income | | | 9,193,377 | | | | | |
Net assets | | | | | | | $255,298,590 | |
Shares of beneficial interest outstanding | | | | | | | 22,673,342 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $66,858,490 | | | | 5,883,234 | | | | $11.36 | |
Service Class | | | 188,440,100 | | | | 16,790,108 | | | | 11.22 | |
See Notes to Financial Statements
13
MFS Corporate 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 12/31/16 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Interest | | | $10,757,221 | | | | | |
Dividends from underlying affiliated funds | | | 38,484 | | | | | |
Other | | | 4,409 | | | | | |
Total investment income | | | | | | | $10,800,114 | |
Expenses | | | | | | | | |
Management fee | | | $1,571,745 | | | | | |
Distribution and/or service fees | | | 478,437 | | | | | |
Shareholder servicing costs | | | 10,507 | | | | | |
Administrative services fee | | | 50,498 | | | | | |
Independent Trustees’ compensation | | | 10,629 | | | | | |
Custodian fee | | | 20,760 | | | | | |
Reimbursement of custodian expenses | | | (70,612 | ) | | | | |
Shareholder communications | | | 17,529 | | | | | |
Audit and tax fees | | | 72,033 | | | | | |
Legal fees | | | 2,647 | | | | | |
Miscellaneous | | | 17,903 | | | | | |
Total expenses | | | | | | | $2,182,076 | |
Reduction of expenses by investment adviser | | | (121,767 | ) | | | | |
Net expenses | | | | | | | $2,060,309 | |
Net investment income | | | | | | | $8,739,805 | |
Realized and unrealized gain (loss) on investments | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments: | | | | | | | | |
Non-affiliated issuers | | | $(11,019 | ) | | | | |
Underlying affiliated funds | | | 290 | | | | | |
Net realized gain (loss) on investments | | | | | | | $(10,729 | ) |
Change in unrealized appreciation (depreciation) on investments | | | | | | | $6,944,788 | |
Net realized and unrealized gain (loss) on investments | | | | | | | $6,934,059 | |
Change in net assets from operations | | | | | | | $15,673,864 | |
See Notes to Financial Statements
14
MFS Corporate 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 | | | 2016 | | | | 2015 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $8,739,805 | | | | $9,810,739 | |
Net realized gain (loss) on investments | | | (10,729 | ) | | | 1,377,526 | |
Net unrealized gain (loss) on investments | | | 6,944,788 | | | | (12,330,634 | ) |
Change in net assets from operations | | | $15,673,864 | | | | $(1,142,369 | ) |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(10,397,774 | ) | | | $(11,046,073 | ) |
From net realized gain on investments | | | (463,879 | ) | | | (2,041,877 | ) |
Total distributions declared to shareholders | | | $(10,861,653 | ) | | | $(13,087,950 | ) |
Change in net assets from fund share transactions | | | $(10,440,350 | ) | | | $(15,217,385 | ) |
Total change in net assets | | | $(5,628,139 | ) | | | $(29,447,704 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 260,926,729 | | | | 290,374,433 | |
At end of period (including undistributed net investment income of $9,193,377 and
$10,389,051, respectively) | | | $255,298,590 | | | | $260,926,729 | |
See Notes to Financial Statements
15
MFS Corporate 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 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $11.16 | | | | $11.76 | | | | $11.58 | | | | $12.36 | | | | $11.67 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.41 | (c) | | | $0.42 | | | | $0.43 | | | | $0.43 | | | | $0.50 | |
Net realized and unrealized gain (loss) on investments | | | 0.31 | | | | (0.46 | ) | | | 0.24 | | | | (0.48 | ) | | | 0.80 | |
Total from investment operations | | | $0.72 | | | | $(0.04 | ) | | | $0.67 | | | | $(0.05 | ) | | | $1.30 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.50 | ) | | | $(0.48 | ) | | | $(0.46 | ) | | | $(0.52 | ) | | | $(0.61 | ) |
From net realized gain on investments | | | (0.02 | ) | | | (0.08 | ) | | | (0.03 | ) | | | (0.21 | ) | | | — | |
Total distributions declared to shareholders | | | $(0.52 | ) | | | $(0.56 | ) | | | $(0.49 | ) | | | $(0.73 | ) | | | $(0.61 | ) |
Net asset value, end of period (x) | | | $11.36 | | | | $11.16 | | | | $11.76 | | | | $11.58 | | | | $12.36 | |
Total return (%) (k)(r)(s)(x) | | | 6.28 | (c) | | | (0.31 | ) | | | 5.78 | | | | (0.27 | ) | | | 11.31 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.65 | (c) | | | 0.68 | | | | 0.67 | | | | 0.67 | | | | 0.68 | |
Expenses after expense reductions (f) | | | 0.60 | (c) | | | 0.63 | | | | 0.65 | | | | 0.67 | | | | 0.68 | |
Net investment income | | | 3.52 | (c) | | | 3.64 | | | | 3.59 | | | | 3.54 | | | | 4.13 | |
Portfolio turnover | | | 31 | | | | 26 | | | | 36 | | | | 38 | | | | 57 | |
Net assets at end of period (000 omitted) | | | $66,858 | | | | $70,980 | | | | $79,042 | | | | $81,921 | | | | $95,361 | |
See Notes to Financial Statements
16
MFS Corporate Bond Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $11.03 | | | | $11.63 | | | | $11.45 | | | | $12.23 | | | | $11.56 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.37 | (c) | | | $0.39 | | | | $0.39 | | | | $0.39 | | | | $0.47 | |
Net realized and unrealized gain (loss) on investments | | | 0.30 | | | | (0.46 | ) | | | 0.25 | | | | (0.47 | ) | | | 0.78 | |
Total from investment operations | | | $0.67 | | | | $(0.07 | ) | | | $0.64 | | | | $(0.08 | ) | | | $1.25 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.46 | ) | | | $(0.45 | ) | | | $(0.43 | ) | | | $(0.49 | ) | | | $(0.58 | ) |
From net realized gain on investments | | | (0.02 | ) | | | (0.08 | ) | | | (0.03 | ) | | | (0.21 | ) | | | — | |
Total distributions declared to shareholders | | | $(0.48 | ) | | | $(0.53 | ) | | | $(0.46 | ) | | | $(0.70 | ) | | | $(0.58 | ) |
Net asset value, end of period (x) | | | $11.22 | | | | $11.03 | | | | $11.63 | | | | $11.45 | | | | $12.23 | |
Total return (%) (k)(r)(s)(x) | | | 5.98 | (c) | | | (0.58 | ) | | | 5.59 | | | | (0.51 | ) | | | 11.00 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.90 | (c) | | | 0.93 | | | | 0.92 | | | | 0.92 | | | | 0.93 | |
Expenses after expense reductions (f) | | | 0.85 | (c) | | | 0.88 | | | | 0.90 | | | | 0.92 | | | | 0.93 | |
Net investment income | | | 3.27 | (c) | | | 3.39 | | | | 3.34 | | | | 3.29 | | | | 3.86 | |
Portfolio turnover | | | 31 | | | | 26 | | | | 36 | | | | 38 | | | | 57 | |
Net assets at end of period (000 omitted) | | | $188,440 | | | | $189,946 | | | | $211,332 | | | | $211,303 | | | | $195,781 | |
| (c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
| (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 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
17
MFS Corporate Bond Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Corporate 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 October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
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 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
18
MFS Corporate Bond 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, 2016 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 | | | $— | | | | $2,084,891 | | | | $— | | | | $2,084,891 | |
| Non-U.S. Sovereign Debt | | | — | | | | 695,626 | | | | — | | | | 695,626 | |
| U.S. Corporate Bonds | | | — | | | | 212,683,865 | | | | — | | | | 212,683,865 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 1,242,041 | | | | — | | | | 1,242,041 | |
| Asset-Backed Securities (including CDOs) | | | — | | | | 163,452 | | | | — | | | | 163,452 | |
| Foreign Bonds | | | — | | | | 27,526,120 | | | | — | | | | 27,526,120 | |
| Mutual Funds | | | 8,548,103 | | | | — | | | | — | | | | 8,548,103 | |
| Total Investments | | | $8,548,103 | | | | $244,395,995 | | | | $— | | | | $252,944,098 | |
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.
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.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian 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 Corporate Bond Portfolio
Notes to Financial Statements – continued
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:
| | | | | | | | |
| | | 12/31/16 | | | 12/31/15 | |
| Ordinary income (including any short-term capital gains) | | | $10,397,985 | | | | $11,493,724 | |
| Long-term capital gains | | | 463,668 | | | | 1,594,226 | |
| Total distributions | | | $10,861,653 | | | | $13,087,950 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/16 | | | | |
| Cost of investments | | | $249,619,599 | |
| Gross appreciation | | | 6,157,004 | |
| Gross depreciation | | | (2,832,505 | ) |
| Net unrealized appreciation (depreciation) | | | $3,324,499 | |
| Undistributed ordinary income | | | 9,217,124 | |
| Capital loss carryforwards | | | (819,799 | ) |
| Other temporary differences | | | (23,747 | ) |
As of December 31, 2016, the fund had capital loss carryforwards available to offset future realized gains. These net capital losses may be carried forward indefinitely and their character is retained as short-term and/or long-term losses. Such losses are characterized 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
12/31/16 | | | Year ended
12/31/15 | | | Year ended
12/31/16 | | | Year ended
12/31/15 | |
| Initial Class | | | $2,886,412 | | | | $3,012,402 | | | | $122,638 | | | | $530,754 | |
| Service Class | | | 7,511,362 | | | | 8,033,671 | | | | 341,241 | | | | 1,511,123 | |
| Total | | | $10,397,774 | | | | $11,046,073 | | | | $463,879 | | | | $2,041,877 | |
| (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, 2016, this management fee reduction amounted to $18,601, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.59% 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 0.63% 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, 2018. For the year ended December 31, 2016, this reduction amounted to $103,166, 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.
20
MFS Corporate 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, 2016, the fee was $8,981, which equated to 0.0034% 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, 2016, these costs amounted to $1,526.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund 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, 2016 was equivalent to an annual effective rate of 0.0193% 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 – 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. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $513 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the 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. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, were as follows:
| | | | | | | | |
| | | Purchases | | | Sales | |
| U.S. Government securities | | | $2,062,203 | | | | $— | |
| Investments (non-U.S. Government securities) | | | $75,398,736 | | | | $89,585,694 | |
| (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 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 395,065 | | | | $4,557,470 | | | | 243,152 | | | | $2,846,365 | |
Service Class | | | 2,128,133 | | | | 24,250,549 | | | | 1,566,630 | | | | 18,139,482 | |
| | | 2,523,198 | | | | $28,808,019 | | | | 1,809,782 | | | | $20,985,847 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 256,964 | | | | $3,009,050 | | | | 317,203 | | | | $3,543,156 | |
Service Class | | | 678,704 | | | | 7,852,603 | | | | 863,782 | | | | 9,544,794 | |
| | | 935,668 | | | | $10,861,653 | | | | 1,180,985 | | | | $13,087,950 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (1,126,561 | ) | | | $(13,113,880 | ) | | | (922,534 | ) | | | $(10,769,671 | ) |
Service Class | | | (3,238,146 | ) | | | (36,996,142 | ) | | | (3,387,719 | ) | | | (38,521,511 | ) |
| | | (4,364,707 | ) | | | $(50,110,022 | ) | | | (4,310,253 | ) | | | $(49,291,182 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (474,532 | ) | | | $(5,547,360 | ) | | | (362,179 | ) | | | $(4,380,150 | ) |
Service Class | | | (431,309 | ) | | | (4,892,990 | ) | | | (957,307 | ) | | | (10,837,235 | ) |
| | | (905,841 | ) | | | $(10,440,350 | ) | | | (1,319,486 | ) | | | $(15,217,385 | ) |
21
MFS Corporate Bond Portfolio
Notes to Financial Statements – continued
The fund and certain other funds managed by MFS participate in a $1.25 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 Overnight Federal Reserve funds rate or daily 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 Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $1,614 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 | | | 8,193,985 | | | | 83,943,330 | | | | (83,589,212 | ) | | | 8,548,103 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $290 | | | | $— | | | | $38,484 | | | | $8,548,103 | |
22
MFS Corporate 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 Corporate Bond Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Corporate Bond Portfolio (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2016, 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, 2016, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Corporate Bond Portfolio as of December 31, 2016, 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 15, 2017
23
MFS Corporate Bond Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, 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 53) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 55) | | Trustee | | January 2014 | | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 74) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 65) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council (until 2015); 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 |
| | | | |
Maureen R. Goldfarb (age 61) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Michael Hegarty (age 72) | | Trustee | | December 2004 | | Private investor | | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) |
| | | | |
John P. Kavanaugh (age 62) | | Trustee and Vice Chair of Trustees | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 60) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 59) | | Trustee | | March 2005 | | Private investor | | The Travelers Companies, Director; Dycom Industries, Inc., Director |
| | | |
| OFFICERS | | | | | | |
Christopher R. Bohane (k) (age 43) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 48) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 57) | | 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 |
| | | | |
Ethan D. Corey (k) (age 53) | | 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 48) | | President | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 43) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
24
MFS Corporate 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) |
Susan A. Pereira (k) (age 46) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 46) | | 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 64) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 72) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 46) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Martin J. Wolin (k) (age 49) | | Chief Compliance Officer | | July 2015 | | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | | N/A |
| | | | |
James O. Yost (k) (age 56) | | 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. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
| (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. Buller and Kavanaugh and Ms. 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, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a 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 Corporate 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, 2016 (“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 Senior Officer, a 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 Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of 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 Broadridge 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 Broadridge 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, 2015, 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 3rd quintile for the one-year period and the 2nd quintile for the five-year period ended December 31, 2015 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 Corporate 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 Broadridge. 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 data provided by Broadridge (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 Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. 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, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate 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, 2016.
27
MFS Corporate 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 mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios”, then “VIT II” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $511,000 as capital gain dividends paid during the fiscal year.
28
rev. 3/16
| | | | |
| 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., and MFS Heritage Trust Company. |
| | |
| 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, or 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, 2016
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 • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Core Equity Portfolio
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
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 | | | | |
| Citigroup, Inc. | | | 2.6% | |
| Chevron Corp. | | | 2.4% | |
| Alphabet, Inc., “A” | | | 2.2% | |
| Broadcom Corp. | | | 2.1% | |
| Aon PLC | | | 1.7% | |
| Texas Instruments, Inc. | | | 1.7% | |
| Merck & Co., Inc. | | | 1.5% | |
| Facebook, Inc., “A” | | | 1.5% | |
| U.S. Bancorp | | | 1.4% | |
| Celgene Corp. | | | 1.3% | |
| | | | |
| Equity sectors | | | | |
| Financial Services | | | 19.1% | |
| Technology | | | 16.8% | |
| Health Care | | | 13.1% | |
| Industrial Goods & Services | | | 8.1% | |
| Consumer Staples | | | 6.8% | |
| Retailing | | | 6.6% | |
| Energy | | | 6.4% | |
| Utilities & Communications (s) | | | 6.3% | |
| Leisure | | | 5.4% | |
| Special Products & Services | | | 3.9% | |
| Basic Materials | | | 3.5% | |
| Autos & Housing | | | 1.7% | |
| Transportation | | | 1.5% | |
| (s) | Includes securities sold short. |
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
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, 2016, 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 12.74% over the same period for the fund’s benchmark, the Russell 3000® Index.
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
Security selection in the health care sector detracted from performance relative to the Russell 3000® Index. The fund’s holdings of pharmaceutical company Valeant Pharmaceuticals (b)(h) (Canada), and overweight positions in medical drug maker Endo International (h), biopharmaceutical company Alexion Pharmaceuticals, eye and skin care products company Allergan, health services and information technology company McKesson and pharmaceutical company Eli Lilly, held back relative returns. Shares of Valeant Pharmaceuticals depreciated following the fallout from political pressure on the company’s drug pricing strategy and accusations of financial fraud through the company’s unusual and undisclosed arrangement with online pharmacy Philidor.
Stock selection in the industrial goods & services sector was another area of relative weakness. However, there were no individual stocks within this sector that were among the top relative detractors for the reporting period.
Elsewhere, the timing of the fund’s ownership in shares of strong-performing global financial services firm JPMorgan Chase (h), and overweight positions in oil refiner Valero Energy (h), customer information software manager Salesforce.com and apparel retailer Hanesbrands, hurt relative results. Shares of Valero Energy struggled to find direction throughout the reporting period as the company delivered mixed earnings results as global energy markets recovered from previous lows.
Contributors to Performance
Strong security selection in both the leisure and financial services sectors benefited relative performance. Within the leisure sector, the fund’s overweight position in media firm Time Warner lifted relative returns. Shares of Time Warner advanced on solid earnings results driven by strong content sales and news that AT&T would acquire the firm, pending regulatory approval. Within the financial services sector, overweight positions in diversified financial services firms Citigroup, Discover Financial Services, PNC Financial Services and Goldman Sachs (h) aided relative results. The timing of ownership in shares of banking firm Bank of America also helped relative returns. The financial services sector, as a whole, benefited from the U.S. election of Donald Trump, as prospects for less stringent regulation and higher interest rates appeared to have buoyed investor sentiment.
3
MFS Core Equity Portfolio
Management Review – continued
Stocks in other sectors that strengthened relative performance included not owning shares of poor-performing biotech firm Gilead Sciences and overweight positions in integrated energy company Chevron, semiconductor company Texas Instruments and specialty chemical and materials company Ingevity.
Respectfully,
Joseph MacDougall
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 Core Equity Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/16
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 12/31/16
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class Inception Date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 5/12/97 | | 11.38% | | 14.18% | | 7.16% | | |
| | | Service Class | | 8/24/01 | | 11.07% | | 13.91% | | 6.88% | | |
| | | | |
Comparative benchmark | | | | | | | | |
| | | Russell 3000® Index (f) | | 12.74% | | 14.67% | | 7.07% | | |
| (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. The Russell 3000® Index is a trademark/service mark of the Frank Russell Company. Russell® is a trademark of the Frank Russell Company.
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, 2016 through December 31, 2016
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, 2016 through December 31, 2016.
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 7/01/16 | | | Ending Account Value 12/31/16 | | | Expenses Paid During Period (p) 7/01/16-12/31/16 | |
| Initial Class | | Actual | | | 0.78% | | | | $1,000.00 | | | | $1,078.29 | | | | $4.07 | |
| | Hypothetical (h) | | | 0.78% | | | | $1,000.00 | | | | $1,021.22 | | | | $3.96 | |
| Service Class | | Actual | | | 1.03% | | | | $1,000.00 | | | | $1,076.99 | | | | $5.38 | |
| | Hypothetical (h) | | | 1.03% | | | | $1,000.00 | | | | $1,019.96 | | | | $5.23 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios include 0.01% of investment related expenses from short sales (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.08% (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
6
MFS Core Equity Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 99.1% | | | | | | | | |
| Aerospace – 3.8% | | | | | | | | |
| Honeywell International, Inc. | | | 22,663 | | | $ | 2,625,507 | |
| L3 Technologies, Inc. | | | 3,716 | | | | 565,241 | |
| Leidos Holdings, Inc. | | | 13,297 | | | | 680,009 | |
| Northrop Grumman Corp. | | | 8,303 | | | | 1,931,112 | |
| Orbital ATK, Inc. | | | 5,084 | | | | 446,019 | |
| Textron, Inc. | | | 7,586 | | | | 368,376 | |
| United Technologies Corp. | | | 8,437 | | | | 924,864 | |
| | | | | | | | |
| | | | | | $ | 7,541,128 | |
| | | | | | | | |
| Alcoholic Beverages – 0.5% | | | | | | | | |
| Constellation Brands, Inc., “A” | | | 5,212 | | | $ | 799,050 | |
| Molson Coors Brewing Co. | | | 1,808 | | | | 175,936 | |
| | | | | | | | |
| | | | | | $ | 974,986 | |
| | | | | | | | |
| Apparel Manufacturers – 1.5% | | | | | | | | |
| Hanesbrands, Inc. | | | 38,784 | | | $ | 836,571 | |
| NIKE, Inc., “B” | | | 30,611 | | | | 1,555,957 | |
| PVH Corp. | | | 6,753 | | | | 609,391 | |
| | | | | | | | |
| | | | | | $ | 3,001,919 | |
| | | | | | | | |
| Automotive – 0.9% | | | | | | | | |
| Delphi Automotive PLC | | | 12,774 | | | $ | 860,327 | |
| Harman International Industries, Inc. | | | 8,601 | | | | 956,087 | |
| | | | | | | | |
| | | | | | $ | 1,816,414 | |
| | | | | | | | |
| Biotechnology – 1.4% | | | | | | | | |
| Alexion Pharmaceuticals, Inc. (a) | | | 1,456 | | | $ | 178,142 | |
| Celgene Corp. (a) | | | 23,166 | | | | 2,681,465 | |
| | | | | | | | |
| | | | | | $ | 2,859,607 | |
| | | | | | | | |
| Broadcasting – 2.2% | | | | | | | | |
| Interpublic Group of Companies, Inc. | | | 36,566 | | | $ | 856,010 | |
| Time Warner, Inc. | | | 22,772 | | | | 2,198,181 | |
| Twenty-First Century Fox, Inc. | | | 47,383 | | | | 1,328,619 | |
| | | | | | | | |
| | | | | | $ | 4,382,810 | |
| | | | | | | | |
| Brokerage & Asset Managers – 1.1% | | | | | |
| Blackstone Group LP | | | 51,369 | | | $ | 1,388,504 | |
| NASDAQ, Inc. | | | 12,271 | | | | 823,630 | |
| | | | | | | | |
| | | | | | $ | 2,212,134 | |
| | | | | | | | |
| Business Services – 2.4% | | | | | | | | |
| Amdocs Ltd. | | | 7,786 | | | $ | 453,535 | |
| Bright Horizons Family Solutions, Inc. (a) | | | 4,286 | | | | 300,106 | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 19,218 | | | | 1,076,785 | |
| Fidelity National Information Services, Inc. | | | 14,243 | | | | 1,077,341 | |
| Gartner, Inc. (a) | | | 5,128 | | | | 518,287 | |
| Global Payments, Inc. | | | 10,926 | | | | 758,374 | |
| Total System Services, Inc. | | | 5,909 | | | | 289,718 | |
| Travelport Worldwide Ltd. | | | 28,663 | | | | 404,148 | |
| | | | | | | | |
| | | | | | $ | 4,878,294 | |
| | | | | | | | |
| Cable TV – 1.1% | | | | | | | | |
| Charter Communications, Inc., “A” (a) | | | 7,758 | | | $ | 2,233,683 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Chemicals – 2.2% | | | | | | | | |
| Agrium, Inc. | | | 5,639 | | | $ | 566,819 | |
| E.I. du Pont de Nemours & Co. | | | 9,257 | | | | 679,464 | |
| FMC Corp. | | | 10,056 | | | | 568,767 | |
| Ingevity Corp. (a) | | | 10,411 | | | | 571,147 | |
| Monsanto Co. | | | 9,338 | | | | 982,451 | |
| PPG Industries, Inc. | | | 10,843 | | | | 1,027,483 | |
| | | | | | | | |
| | | | | | $ | 4,396,131 | |
| | | | | | | | |
| Computer Software – 3.2% | | | | | | | | |
| Adobe Systems, Inc. (a) | | | 17,505 | | | $ | 1,802,140 | |
| Microsoft Corp. | | | 25,546 | | | | 1,587,428 | |
| Sabre Corp. | | | 15,621 | | | | 389,744 | |
| Salesforce.com, Inc. (a) | | | 37,112 | | | | 2,540,688 | |
| | | | | | | | |
| | | | | | $ | 6,320,000 | |
| | | | | | | | |
| Computer Software – Systems – 2.2% | | | | | |
| Apple, Inc. | | | 18,511 | | | $ | 2,143,944 | |
| Hewlett Packard Enterprise | | | 30,934 | | | | 715,813 | |
| NCR Corp. (a) | | | 13,017 | | | | 527,970 | |
| SS&C Technologies Holdings, Inc. | | | 32,509 | | | | 929,757 | |
| Versum Materials, Inc. (a) | | | 1,303 | | | | 36,575 | |
| | | | | | | | |
| | | | | | $ | 4,354,059 | |
| | | | | | | | |
| Construction – 0.8% | | | | | | | | |
| Sherwin-Williams Co. | | | 5,830 | | | $ | 1,566,754 | |
| | | | | | | | |
| Consumer Products – 1.8% | | | | | | | | |
| Coty, Inc., “A” | | | 12,748 | | | $ | 233,416 | |
| Estee Lauder Cos., Inc., “A” | | | 7,799 | | | | 596,546 | |
| Newell Brands, Inc. | | | 10,236 | | | | 457,037 | |
| Procter & Gamble Co. | | | 26,946 | | | | 2,265,620 | |
| | | | | | | | |
| | | | | | $ | 3,552,619 | |
| | | | | | | | |
| Consumer Services – 1.4% | | | | | | | | |
| Nord Anglia Education, Inc. (a)(l) | | | 27,410 | | | $ | 638,653 | |
| Priceline Group, Inc. (a) | | | 988 | | | | 1,448,467 | |
| ServiceMaster Global Holdings, Inc. (a) | | | 16,707 | | | | 629,353 | |
| | | | | | | | |
| | | | | | $ | 2,716,473 | |
| | | | | | | | |
| Containers – 0.7% | | | | | | | | |
| Berry Plastics Group, Inc. (a) | | | 12,824 | | | $ | 624,914 | |
| CCL Industries, Inc. | | | 2,346 | | | | 460,935 | |
| Graphic Packaging Holding Co. | | | 31,538 | | | | 393,594 | |
| | | | | | | | |
| | | | | | $ | 1,479,443 | |
| | | | | | | | |
| Electrical Equipment – 1.2% | | | | | | | | |
| AMETEK, Inc. | | | 24,886 | | | $ | 1,209,460 | |
| Johnson Controls International PLC | | | 18,411 | | | | 758,349 | |
| W.W. Grainger, Inc. | | | 1,754 | | | | 407,367 | |
| | | | | | | | |
| | | | | | $ | 2,375,176 | |
| | | | | | | | |
| Electronics – 5.3% | | | | | | | | |
| Broadcom Corp. | | | 23,223 | | | $ | 4,105,130 | |
| KLA-Tencor Corp. | | | 8,400 | | | | 660,912 | |
7
MFS Core Equity Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Electronics – continued | | | | | | | | |
| Mellanox Technologies Ltd. (a) | | | 22,788 | | | $ | 932,029 | |
| NVIDIA Corp. | | | 13,596 | | | | 1,451,237 | |
| Texas Instruments, Inc. | | | 45,497 | | | | 3,319,916 | |
| | | | | | | | |
| | | | | | $ | 10,469,224 | |
| | | | | | | | |
| Energy – Independent – 2.7% | | | | | | | | |
| Concho Resources, Inc. (a) | | | 4,463 | | | $ | 591,794 | |
| Energen Corp. (a) | | | 2,682 | | | | 154,671 | |
| EOG Resources, Inc. | | | 9,213 | | | | 931,434 | |
| EQT Corp. | | | 2,052 | | | | 134,201 | |
| Hess Corp. | | | 19,304 | | | | 1,202,446 | |
| Noble Energy, Inc. | | | 7,832 | | | | 298,086 | |
| Oasis Petroleum LLC (a) | | | 9,207 | | | | 139,394 | |
| PDC Energy, Inc. (a) | | | 2,174 | | | | 157,789 | |
| Phillips 66 | | | 10,666 | | | | 921,649 | |
| Pioneer Natural Resources Co. | | | 4,368 | | | | 786,546 | |
| | | | | | | | |
| | | | | | $ | 5,318,010 | |
| | | | | | | | |
| Energy – Integrated – 2.4% | | | | | | | | |
| Chevron Corp. (s) | | | 40,244 | | | $ | 4,736,719 | |
| | | | | | | | |
| Engineering – Construction – 0.1% | | | | | | | | |
| KBR, Inc. | | | 11,245 | | | $ | 187,679 | |
| | | | | | | | |
| Food & Beverages – 3.4% | | | | | | | | |
| Archer Daniels Midland Co. | | | 15,942 | | | $ | 727,752 | |
| Mead Johnson Nutrition Co., “A” | | | 10,332 | | | | 731,092 | |
| Mondelez International, Inc. | | | 28,735 | | | | 1,273,823 | |
| Monster Beverage Corp. (a) | | | 19,455 | | | | 862,635 | |
| PepsiCo, Inc. | | | 20,010 | | | | 2,093,646 | |
| Snyders-Lance, Inc. | | | 5,379 | | | | 206,231 | |
| TreeHouse Foods, Inc. (a) | | | 12,451 | | | | 898,838 | |
| | | | | | | | |
| | | | | | $ | 6,794,017 | |
| | | | | | | | |
| Food & Drug Stores – 0.9% | | | | | | | | |
| CVS Health Corp. | | | 22,203 | | | $ | 1,752,039 | |
| | | | | | | | |
| Gaming & Lodging – 0.4% | | | | | | | | |
| Marriott International, Inc., “A” | | | 8,816 | | | $ | 728,907 | |
| | | | | | | | |
| General Merchandise – 1.6% | | | | | | | | |
| Costco Wholesale Corp. | | | 9,963 | | | $ | 1,595,176 | |
| Dollar Tree, Inc. (a) | | | 10,746 | | | | 829,376 | |
| Five Below, Inc. (a) | | | 21,325 | | | | 852,147 | |
| | | | | | | | |
| | | | | | $ | 3,276,699 | |
| | | | | | | | |
| Health Maintenance Organizations – 1.4% | | | | | |
| Cigna Corp. | | | 5,576 | | | $ | 743,783 | |
| UnitedHealth Group, Inc. | | | 13,181 | | | | 2,109,487 | |
| | | | | | | | |
| | | | | | $ | 2,853,270 | |
| | | | | | | | |
| Insurance – 3.3% | | | | | | | | |
| American International Group, Inc. | | | 17,735 | | | $ | 1,158,273 | |
| Aon PLC | | | 30,815 | | | | 3,436,797 | |
| Chubb Ltd. | | | 15,142 | | | | 2,000,561 | |
| | | | | | | | |
| | | | | | $ | 6,595,631 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Internet – 4.9% | | | | | | | | |
| Alphabet, Inc., “A” (a)(s) | | | 5,596 | | | $ | 4,434,550 | |
| Alphabet, Inc., “C” (a) | | | 1,850 | | | | 1,427,867 | |
| Facebook, Inc., “A” (a) | | | 25,630 | | | | 2,948,732 | |
| LogMeIn, Inc. | | | 10,067 | | | | 971,969 | |
| | | | | | | | |
| | | | | | $ | 9,783,118 | |
| | | | | | | | |
| Machinery & Tools – 2.4% | | | | | | | | |
| Illinois Tool Works, Inc. | | | 8,464 | | | $ | 1,036,501 | |
| IPG Photonics Corp. (a) | | | 8,465 | | | | 835,580 | |
| ITT, Inc. | | | 13,057 | | | | 503,608 | |
| Roper Technologies, Inc. | | | 9,598 | | | | 1,757,202 | |
| SPX FLOW, Inc. (a) | | | 23,758 | | | | 761,681 | |
| | | | | | | | |
| | | | | | $ | 4,894,572 | |
| | | | | | | | |
| Major Banks – 2.8% | | | | | | | | |
| Bank of America Corp. | | | 94,075 | | | $ | 2,079,058 | |
| Morgan Stanley | | | 41,641 | | | | 1,759,332 | |
| PNC Financial Services Group, Inc. | | | 15,426 | | | | 1,804,225 | |
| | | | | | | | |
| | | | | | $ | 5,642,615 | |
| | | | | | | | |
| Medical & Health Technology & Services – 1.4% | | | | | |
| athenahealth, Inc. (a) | | | 3,047 | | | $ | 320,453 | |
| Healthcare Services Group, Inc. | | | 4,229 | | | | 165,650 | |
| LifePoint Hospitals, Inc. (a) | | | 6,669 | | | | 378,799 | |
| McKesson Corp. | | | 6,737 | | | | 946,212 | |
| MEDNAX, Inc. (a) | | | 6,849 | | | | 456,554 | |
| VCA, Inc. (a) | | | 7,078 | | | | 485,905 | |
| | | | | | | | |
| | | | | | $ | 2,753,573 | |
| | | | | | | | |
| Medical Equipment – 4.0% | | | | | | | | |
| CONMED Corp. | | | 4,427 | | | $ | 195,541 | |
| Danaher Corp. | | | 8,793 | | | | 684,447 | |
| DexCom, Inc. (a) | | | 2,937 | | | | 175,339 | |
| Edwards Lifesciences Corp. (a) | | | 10,784 | | | | 1,010,461 | |
| Medtronic PLC | | | 27,424 | | | | 1,953,412 | |
| NxStage Medical, Inc. (a) | | | 7,148 | | | | 187,349 | |
| Obalon Therapeutics, Inc. (a) | | | 8,161 | | | | 72,225 | |
| PerkinElmer, Inc. | | | 10,705 | | | | 558,266 | |
| Steris PLC | | | 6,933 | | | | 467,215 | |
| Stryker Corp. | | | 13,336 | | | | 1,597,786 | |
| Zimmer Biomet Holdings, Inc. | | | 9,877 | | | | 1,019,306 | |
| | | | | | | | |
| | | | | | $ | 7,921,347 | |
| | | | | | | | |
| Metals & Mining – 0.3% | | | | | | | | |
| First Quantum Minerals Ltd. | | | 18,124 | | | $ | 180,207 | |
| Lundin Mining Corp. (a) | | | 73,173 | | | | 348,793 | |
| | | | | | | | |
| | | | | | $ | 529,000 | |
| | | | | | | | |
| Natural Gas – Distribution – 0.3% | | | | | | | | |
| New Jersey Resources Corp. | | | 13,376 | | | $ | 474,848 | |
| Sempra Energy | | | 993 | | | | 99,936 | |
| | | | | | | | |
| | | | | | $ | 574,784 | |
| | | | | | | | |
| Natural Gas – Pipeline – 0.7% | | | | | | | | |
| Cheniere Energy, Inc. (a) | | | 24,843 | | | $ | 1,029,245 | |
| Enterprise Products Partners LP | | | 11,364 | | | | 307,283 | |
| | | | | | | | |
| | | | | | $ | 1,336,528 | |
| | | | | | | | |
8
MFS Core Equity Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Network & Telecom – 1.3% | | | | | | | | |
| Cisco Systems, Inc. | | | 57,932 | | | $ | 1,750,705 | |
| Ixia (a) | | | 47,267 | | | | 760,999 | |
| | | | | | | | |
| | | | | | $ | 2,511,704 | |
| | | | | | | | |
| Oil Services – 1.4% | | | | | | | | |
| Forum Energy Technologies, Inc. (a) | | | 13,018 | | | $ | 286,396 | |
| Halliburton Co. | | | 21,691 | | | | 1,173,266 | |
| Oil States International, Inc. (a) | | | 4,726 | | | | 184,314 | |
| Schlumberger Ltd. | | | 11,397 | | | | 956,778 | |
| Superior Energy Services, Inc. | | | 9,371 | | | | 158,182 | |
| | | | | | | | |
| | | | | | $ | 2,758,936 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 8.5% | | | | | |
| Bank of The Ozarks, Inc. | | | 16,277 | | | $ | 856,007 | |
| Citigroup, Inc. (s) | | | 88,262 | | | | 5,245,411 | |
| Discover Financial Services | | | 30,792 | | | | 2,219,795 | |
| EuroDekania Ltd. | | | 151,350 | | | | 24,495 | |
| First Republic Bank | | | 7,141 | | | | 657,972 | |
| Signature Bank (a) | | | 3,831 | | | | 575,416 | |
| Texas Capital Bancshares, Inc. (a) | | | 8,157 | | | | 639,509 | |
| U.S. Bancorp | | | 53,349 | | | | 2,740,538 | |
| Visa, Inc., “A” | | | 28,745 | | | | 2,242,685 | |
| Wintrust Financial Corp. | | | 14,124 | | | | 1,024,979 | |
| Zions Bancorporation | | | 15,008 | | | | 645,944 | |
| | | | | | | | |
| | | | | | $ | 16,872,751 | |
| | | | | | | | |
| Pharmaceuticals – 4.8% | | | | | | | | |
| Allergan PLC (a) | | | 10,607 | | | $ | 2,227,576 | |
| Eli Lilly & Co. | | | 28,636 | | | | 2,106,178 | |
| Merck & Co., Inc. | | | 50,898 | | | | 2,996,365 | |
| Zoetis, Inc. | | | 42,245 | | | | 2,261,375 | |
| | | | | | | | |
| | | | | | $ | 9,591,494 | |
| | | | | | | | |
| Pollution Control – 0.6% | | | | | | | | |
| Clean Harbors, Inc. (a) | | | 11,088 | | | $ | 617,047 | |
| Waste Connections, Inc. | | | 6,424 | | | | 504,862 | |
| | | | | | | | |
| | | | | | $ | 1,121,909 | |
| | | | | | | | |
| Railroad & Shipping – 1.3% | | | | | | | | |
| Canadian Pacific Railway Ltd. | | | 6,701 | | | $ | 956,702 | |
| Union Pacific Corp. | | | 14,984 | | | | 1,553,541 | |
| | | | | | | | |
| | | | | | $ | 2,510,243 | |
| | | | | | | | |
| Real Estate – 3.3% | | | | | | | | |
| Gramercy Property Trust, Inc., REIT | | | 106,384 | | | $ | 976,605 | |
| Life Storage, Inc., REIT | | | 8,873 | | | | 756,512 | |
| Medical Properties Trust, Inc., REIT | | | 166,565 | | | | 2,048,750 | |
| Store Capital Corp., REIT | | | 30,420 | | | | 751,678 | |
| Sun Communities, Inc., REIT | | | 7,913 | | | | 606,215 | |
| Tanger Factory Outlet Centers, Inc., REIT | | | 26,282 | | | | 940,370 | |
| Washington Prime Group, Inc., REIT | | | 46,841 | | | | 487,615 | |
| | | | | | | | |
| | | | | | $ | 6,567,745 | |
| | | | | | | | |
| Restaurants – 1.7% | | | | | | | | |
| Aramark | | | 36,096 | | | $ | 1,289,349 | |
| Starbucks Corp. | | | 31,344 | | | | 1,740,219 | |
| YUM! Brands, Inc. | | | 6,204 | | | | 392,899 | |
| | | | | | | | |
| | | | | | $ | 3,422,467 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Special Products & Services – 0.1% | | | | | | | | |
| Hostess Brands, Inc. (a) | | | 15,816 | | | $ | 205,608 | |
| | | | | |
| Specialty Chemicals – 0.3% | | | | | | | | |
| Univar, Inc. (a) | | | 20,050 | | | $ | 568,819 | |
| | | | | | | | |
| Specialty Stores – 2.6% | | | | | | | | |
| Amazon.com, Inc. (a) | | | 2,307 | | | $ | 1,729,950 | |
| Express, Inc. (a) | | | 56,716 | | | | 610,264 | |
| Lululemon Athletica, Inc. (a) | | | 5,483 | | | | 356,340 | |
| Michaels Co., Inc. (a) | | | 18,051 | | | | 369,143 | |
| Ross Stores, Inc. | | | 10,025 | | | | 657,640 | |
| Tractor Supply Co. | | | 8,651 | | | | 655,832 | |
| Urban Outfitters, Inc. (a) | | | 26,255 | | | | 747,742 | |
| | | | | | | | |
| | | | | | $ | 5,126,911 | |
| | | | | | | | |
| Telecommunications – Wireless – 1.5% | | | | | |
| American Tower Corp., REIT | | | 7,423 | | | $ | 784,463 | |
| SBA Communications Corp. (a) | | | 22,263 | | | | 2,298,877 | |
| | | | | | | | |
| | | | | | $ | 3,083,340 | |
| | | | | | | | |
| Telephone Services – 1.0% | | | | | | | | |
| Verizon Communications, Inc. | | | 37,270 | | | $ | 1,989,473 | |
| | | | | | | | |
| Tobacco – 1.1% | | | | | | | | |
| Philip Morris International, Inc. | | | 14,402 | | | $ | 1,317,639 | |
| Reynolds American, Inc. | | | 15,776 | | | | 884,087 | |
| | | | | | | | |
| | | | | | $ | 2,201,726 | |
| | | | | | | | |
| Trucking – 0.2% | | | | | | | | |
| Swift Transportation Co. (a) | | | 19,194 | | | $ | 467,566 | |
| | | | | | | | |
| Utilities – Electric Power – 2.7% | | | | | | | | |
| Alliant Energy Corp. | | | 10,793 | | | $ | 408,947 | |
| American Electric Power Co., Inc. | | | 5,957 | | | | 375,053 | |
| Calpine Corp. (a) | | | 25,582 | | | | 292,402 | |
| CMS Energy Corp. | | | 11,882 | | | | 494,529 | |
| Dominion Resources, Inc. | | | 9,968 | | | | 763,449 | |
| Exelon Corp. | | | 19,021 | | | | 675,055 | |
| FirstEnergy Corp. | | | 6,072 | | | | 188,050 | |
| NextEra Energy, Inc. | | | 6,623 | | | | 791,184 | |
| PNM Resources, Inc. | | | 12,751 | | | | 437,359 | |
| Xcel Energy, Inc. | | | 21,828 | | | | 888,400 | |
| | | | | | | | |
| | | | | | $ | 5,314,428 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $159,833,692) | | | | | | $ | 197,124,482 | |
| | | | | | | | |
|
| CONVERTIBLE PREFERRED STOCKS – 0.4% | |
| Telephone Services – 0.4% | | | | | | | | |
| Frontier Communications Corp., (Identified Cost, $992,339) | | | 10,432 | | | $ | 741,507 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 0.7% | | | | | |
| MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $1,415,056) | | | 1,415,143 | | | $ | 1,415,143 | |
| | | | | | | | |
9
MFS Core Equity Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COLLATERAL FOR SECURITIES LOANED – 0.0% | |
| State Street Navigator Securities Lending Government Money Market Portfolio, 0.50% (j) (Identified Cost, $33,179) | | | 33,179 | | | $ | 33,179 | |
| | | | | | | | |
Total Investments
(Identified Cost, $162,274,266) | | | | | | $ | 199,314,311 | |
| | | | | | | | |
| SECURITIES SOLD SHORT – (0.3)% | |
| Telecommunications – Wireless – (0.3)% | |
| Crown Castle International Corp., REIT (Proceeds Received, $578,273) | | | (6,970 | ) | | $ | (604,787 | ) |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.1% | | | | | | | 214,177 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 198,923,701 | |
| | | | | | | | |
| (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, 2016, the fund had cash collateral of $11,533 and other liquid securities with an aggregate value of $1,166,954 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 12/31/16 | | | | | | | | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $160,859,210) | | | $197,899,168 | | | | | |
Underlying affiliated funds, at value (identified cost, $1,415,056) | | | 1,415,143 | | | | | |
Total investments, at value, including $32,550 of securities on loan (identified cost, $162,274,266) | | | $199,314,311 | | | | | |
Deposits with brokers | | | 11,533 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 1,310,388 | | | | | |
Fund shares sold | | | 5,267 | | | | | |
Interest and dividends | | | 239,425 | | | | | |
Other assets | | | 165 | | | | | |
Total assets | | | | | | | $200,881,089 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Securities sold short, at value (proceeds received, $578,273) | | | $604,787 | | | | | |
Investments purchased | | | 1,131,475 | | | | | |
Fund shares reacquired | | | 111,648 | | | | | |
Collateral for securities loaned, at value | | | 33,179 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 12,085 | | | | | |
Shareholder servicing costs | | | 134 | | | | | |
Distribution and/or service fees | | | 883 | | | | | |
Payable for independent Trustees’ compensation | | | 36 | | | | | |
Accrued expenses and other liabilities | | | 63,161 | | | | | |
Total liabilities | | | | | | | $1,957,388 | |
Net assets | | | | | | | $198,923,701 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $148,437,305 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 37,013,554 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | 11,566,908 | | | | | |
Undistributed net investment income | | | ,1,905,934 | | | | | |
Net assets | | | | | | | $198,923,701 | |
Shares of beneficial interest outstanding | | | | | | | 9,199,294 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $156,040,324 | | | | 7,201,815 | | | | $21.67 | |
Service Class | | | 42,883,377 | | | | 1,997,479 | | | | 21.47 | |
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 12/31/16 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $3,564,100 | | | | | |
Other | | | 14,216 | | | | | |
Interest | | | 10,683 | | | | | |
Dividends from underlying affiliated funds | | | 5,516 | | | | | |
Foreign taxes withheld | | | (4,866 | ) | | | | |
Total investment income | | | | | | | $3,589,649 | |
Expenses | | | | | | | | |
Management fee | | | $1,478,462 | | | | | |
Distribution and/or service fees | | | 110,468 | | | | | |
Shareholder servicing costs | | | 20,151 | | | | | |
Administrative services fee | | | 40,398 | | | | | |
Independent Trustees’ compensation | | | 10,376 | | | | | |
Custodian fee | | | 13,714 | | | | | |
Reimbursement of custodian expenses | | | (76,099 | ) | | | | |
Shareholder communications | | | 50,282 | | | | | |
Audit and tax fees | | | 64,131 | | | | | |
Legal fees | | | 1,411 | | | | | |
Dividend and interest expense on securities sold short | | | 29,609 | | | | | |
Miscellaneous | | | 18,600 | | | | | |
Total expenses | | | | | | | $1,761,503 | |
Reduction of expenses by investment adviser | | | (40,202 | ) | | | | |
Net expenses | | | | | | | $1,721,301 | |
Net investment income | | | | | | | $1,868,348 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments: | | | | | | | | |
Non-affiliated issuers | | | $12,060,897 | | | | | |
Underlying affiliated funds | | | (154 | ) | | | | |
Securities sold short | | | (41,438 | ) | | | | |
Foreign currency | | | (278 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $12,019,027 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $7,203,318 | | | | | |
Securities sold short | | | (9,378 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | 23 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $7,193,963 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $19,212,990 | |
Change in net assets from operations | | | | | | | $21,081,338 | |
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 | | | 2016 | | | | 2015 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $1,868,348 | | | | $1,422,632 | |
Net realized gain (loss) on investments and foreign currency | | | 12,019,027 | | | | 15,767,197 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 7,193,963 | | | | (18,804,885 | ) |
Change in net assets from operations | | | $21,081,338 | | | | $(1,615,056 | ) |
| Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(1,370,672 | ) | | | $(1,082,329 | ) |
From net realized gain on investments | | | (16,033,866 | ) | | | (16,601,001 | ) |
Total distributions declared to shareholders | | | $(17,404,538 | ) | | | $(17,683,330 | ) |
Change in net assets from fund share transactions | | | $(8,285,325 | ) | | | $58,191,548 | |
Total change in net assets | | | $(4,608,525 | ) | | | $38,893,162 | |
| Net assets | | | | | | | | |
At beginning of period | | | 203,532,226 | | | | 164,639,064 | |
At end of period (including undistributed net investment income of $1,905,934 and
$1,440,472, respectively) | | | $198,923,701 | | | | $203,532,226 | |
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 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $21.28 | | | | $23.40 | | | | $21.49 | | | | $16.12 | | | | $13.95 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.21 | (c) | | | $0.17 | | | | $0.16 | | | | $0.16 | | | | $0.17 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | 2.16 | | | | (0.35 | ) | | | 2.27 | | | | 5.40 | | | | 2.12 | |
Total from investment operations | | | $2.37 | | | | $(0.18 | ) | | | $2.43 | | | | $5.56 | | | | $2.29 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.17 | ) | | | $(0.13 | ) | | | $(0.18 | ) | | | $(0.19 | ) | | | $(0.12 | ) |
From net realized gain on investments | | | (1.81 | ) | | | (1.81 | ) | | | (0.34 | ) | | | — | | | | — | |
Total distributions declared to shareholders | | | $(1.98 | ) | | | $(1.94 | ) | | | $(0.52 | ) | | | $(0.19 | ) | | | $(0.12 | ) |
Net asset value, end of period (x) | | | $21.67 | | | | $21.28 | | | | $23.40 | | | | $21.49 | | | | $16.12 | |
Total return (%) (k)(r)(s)(x) | | | 11.38 | (c) | | | (0.21 | ) | | | 11.38 | | | | 34.62 | | | | 16.46 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.84 | (c) | | | 0.86 | | | | 0.85 | | | | 0.85 | | | | 0.85 | |
Expenses after expense reductions (f) | | | 0.82 | (c) | | | 0.85 | | | | 0.84 | | | | 0.85 | | | | 0.85 | |
Net investment income | | | 1.00 | (c) | | | 0.75 | | | | 0.74 | | | | 0.85 | | | | 1.10 | |
Portfolio turnover | | | 60 | | | | 50 | | | | 48 | | | | 55 | | | | 63 | |
Net assets at end of period (000 omitted) | | | $156,040 | | | | $156,450 | | | | $115,826 | | | | $117,044 | | | | $97,349 | |
| Supplemental Ratios (%): | | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets after expense reductions excluding short sale expenses (f) | | | 0.80 | (c) | | | 0.84 | | | | 0.84 | | | | 0.84 | | | | 0.85 | |
See Notes to Financial Statements
14
MFS Core Equity Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $21.10 | | | | $23.20 | | | | $21.32 | | | | $16.00 | | | | $13.84 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.16 | (c) | | | $0.11 | | | | $0.11 | | | | $0.11 | | | | $0.13 | |
Net realized and unrealized gain (loss) on investments and
foreign currency | | | 2.13 | | | | (0.33 | ) | | | 2.24 | | | | 5.36 | | | | 2.11 | |
Total from investment operations | | | $2.29 | | | | $(0.22 | ) | | | $2.35 | | | | $5.47 | | | | $2.24 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.11 | ) | | | $(0.07 | ) | | | $(0.13 | ) | | | $(0.15 | ) | | | $(0.08 | ) |
From net realized gain on investments | | | (1.81 | ) | | | (1.81 | ) | | | (0.34 | ) | | | — | | | | — | |
Total distributions declared to shareholders | | | $(1.92 | ) | | | $(1.88 | ) | | | $(0.47 | ) | | | $(0.15 | ) | | | $(0.08 | ) |
Net asset value, end of period (x) | | | $21.47 | | | | $21.10 | | | | $23.20 | | | | $21.32 | | | | $16.00 | |
Total return (%) (k)(r)(s)(x) | | | 11.07 | (c) | | | (0.40 | ) | | | 11.07 | | | | 34.28 | | | | 16.24 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.09 | (c) | | | 1.11 | | | | 1.10 | | | | 1.10 | | | | 1.10 | |
Expenses after expense reductions (f) | | | 1.07 | (c) | | | 1.10 | | | | 1.09 | | | | 1.10 | | | | 1.10 | |
Net investment income | | | 0.75 | (c) | | | 0.50 | | | | 0.49 | | | | 0.60 | | | | 0.85 | |
Portfolio turnover | | | 60 | | | | 50 | | | | 48 | | | | 55 | | | | 63 | |
Net assets at end of period (000 omitted) | | | $42,883 | | | | $47,083 | | | | $48,813 | | | | $50,394 | | | | $41,707 | |
| Supplemental Ratios (%): | | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets after expense reductions excluding short sale expenses (f) | | | 1.06 | (c) | | | 1.09 | | | | 1.09 | | | | 1.09 | | | | 1.10 | |
| (c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
| (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 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 October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
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 on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange as provided by a third-party pricing service. Equity securities held short, for which there were no sales reported for that day, are generally valued at the last quoted daily ask quotation on their primary market or exchange 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. 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
16
MFS Core Equity 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, 2016 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $194,184,522 | | | | $— | | | | $— | | | | $194,184,522 | |
Canada | | | 3,018,319 | | | | — | | | | — | | | | 3,018,319 | |
Hong Kong | | | 638,653 | | | | — | | | | — | | | | 638,653 | |
Cayman Islands | | | — | | | | — | | | | 24,495 | | | | 24,495 | |
| Mutual Funds | | | 1,448,322 | | | | — | | | | — | | | | 1,448,322 | |
| Total Investments | | | $199,289,816 | | | | $— | | | | $24,495 | | | | $199,314,311 | |
| Short Sales | | | $(604,787 | ) | | | $— | | | | $— | | | | $(604,787 | ) |
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 12/31/15 | | | $54,895 | |
Change in unrealized appreciation (depreciation) | | | (30,400 | ) |
| Balance as of 12/31/16 | | | $24,495 | |
The net change in unrealized appreciation (depreciation) from investments still held as level 3 at December 31, 2016 is $(30,400). At December 31, 2016, the fund held one level 3 security.
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.
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, 2016, this expense amounted to $29,609. 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.
17
MFS Core Equity 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. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. 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, all of which were classified as equity securities in the fund’s Portfolio of Investments, with a fair value of $32,550. The fair value of the fund’s investment securities on loan and a related liability of $33,179 for cash collateral received on securities loaned are both presented gross in the Statement of Assets and Liabilities. The collateral received on securities loaned exceeded the value of securities on loan at period end. 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.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian 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.
18
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:
| | | | | | | | |
| | | 12/31/16 | | | 12/31/15 | |
| Ordinary income (including any short-term capital gains) | | | $4,326,226 | | | | $4,876,102 | |
| Long-term capital gains | | | 13,078,312 | | | | 12,807,228 | |
| Total distributions | | | $17,404,538 | | | | $17,683,330 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/16 | | | | |
| Cost of investments | | | $162,695,167 | |
| Gross appreciation | | | 41,851,964 | |
| Gross depreciation | | | (5,232,820 | ) |
| Net unrealized appreciation (depreciation) | | | $36,619,144 | |
| Undistributed ordinary income | | | 1,905,934 | |
| Undistributed long-term capital gain | | | 12,021,388 | |
| Other temporary differences | | | (60,070 | ) |
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
12/31/16 | | | Year ended
12/31/15 | | | Year ended
12/31/16 | | | Year ended
12/31/15 | |
| Initial Class | | | $1,161,596 | | | | $931,205 | | | | $12,468,326 | | | | $12,815,505 | |
| Service Class | | | 209,076 | | | | 151,124 | | | | 3,565,540 | | | | 3,785,496 | |
| Total | | | $1,370,672 | | | | $1,082,329 | | | | $16,033,866 | | | | $16,601,001 | |
| (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 | | | 0.75% | |
| 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 terminate on April 27, 2017. For the year ended December 31, 2016, 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, 2016, this management fee reduction amounted to $13,997, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.74% of the fund’s average daily net assets.
Effective April 28, 2017, the management fee will be computed daily and paid monthly at the following annual rates:
| | | | |
| First $1 billion of average daily net assets | | | 0.75% | |
| Next $1.5 billion of average daily net assets | | | 0.65% | |
| Average daily net assets in excess of $2.5 billion | | | 0.60% | |
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 0.84% of average daily net assets for the Initial Class shares and 1.09% 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, 2018. For the year ended December 31, 2016, this reduction amounted to $26,205, which is included in the reduction of total expenses in the Statement of Operations.
19
MFS Core Equity 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, 2016, the fee was $18,328, which equated to 0.0093% 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, 2016, these costs amounted to $1,823.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund 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, 2016 was equivalent to an annual effective rate of 0.0205% 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 – 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. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $388 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the 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. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $778,837 and $1,102,193, respectively. The sales transactions resulted in net realized gains (losses) of $152,428.
For the year ended December 31, 2016, purchases and sales of investments, other than short sales, and short-term obligations, aggregated $118,810,451 and $140,957,262, 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 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 312,480 | | | | $6,600,278 | | | | 245,402 | | | | $5,750,122 | |
Service Class | | | 197,324 | | | | 4,152,675 | | | | 259,861 | | | | 5,882,518 | |
| | | 509,804 | | | | $10,752,953 | | | | 505,263 | | | | $11,632,640 | |
| Shares issued in connection with acquisition of MFS Core Equity Series | | | | | | | | | | | | | | | | |
Initial Class | | | | | | | | | | | 2,543,983 | | | | $60,953,837 | |
Service Class | | | | | | | | | | | 168,899 | | | | 4,011,358 | |
| | | | | | | | | | | 2,712,882 | | | | $64,965,195 | |
20
MFS Core Equity Portfolio
Notes to Financial Statements – continued
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 644,136 | | | | $13,629,922 | | | | 689,059 | | | | $13,746,710 | |
Service Class | | | 179,915 | | | | 3,774,616 | | | | 198,819 | | | | 3,936,620 | |
| | | 824,051 | | | | $17,404,538 | | | | 887,878 | | | | $17,683,330 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (1,106,238 | ) | | | $(23,517,430 | ) | | | (1,077,372 | ) | | | $(24,650,760 | ) |
Service Class | | | (611,420 | ) | | | (12,925,386 | ) | | | (499,870 | ) | | | (11,438,857 | ) |
| | | (1,717,658 | ) | | | $(36,442,816 | ) | | | (1,577,242 | ) | | | $(36,089,617 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (149,622 | ) | | | $(3,287,230 | ) | | | 2,401,072 | | | | $55,799,909 | |
Service Class | | | (234,181 | ) | | | (4,998,095 | ) | | | 127,709 | | | | 2,391,639 | |
| | | (383,803 | ) | | | $(8,285,325 | ) | | | 2,528,781 | | | | $58,191,548 | |
The fund and certain other funds managed by MFS participate in a $1.25 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 Overnight Federal Reserve funds rate or daily 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 Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $1,207 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 | | | 455,874 | | | | 41,183,363 | | | | (40,224,094 | ) | | | 1,415,143 | |
| | | | |
| Underlying Affiliated Fund | | Realized Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $(154 | ) | | | $— | | | | $5,516 | | | | $1,415,143 | |
At close of business on March 27, 2015, the fund with net assets of approximately $164,864,316, acquired all of the assets and liabilities of MFS Core Equity Series, a series of MFS Variable Insurance Trust. The purpose of the transaction was to provide shareholders of MFS Core Equity Series the opportunity to participate in a larger combined portfolio with an identical investment objective, investment policies and strategies. The acquisition was accomplished by a tax-free exchange of approximately 2,712,882 shares of the fund (valued at approximately $64,965,195) for all of the assets and liabilities of MFS Core Equity Series. MFS Core Equity Series then distributed the shares of the fund that MFS Core Equity Series received from the fund to its shareholders. MFS Core Equity Series’ investments on that date were valued at approximately $67,331,560 with a cost basis of approximately $56,001,514. 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 Core Equity 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.
21
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, 2016, 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, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Core Equity Portfolio as of December 31, 2016, 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 15, 2017
22
MFS Core Equity Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, 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 53) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 55) | | Trustee | | January 2014 | | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 74) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 65) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council (until 2015); 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 |
| | | | |
Maureen R. Goldfarb (age 61) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Michael Hegarty (age 72) | | Trustee | | December 2004 | | Private investor | | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) |
| | | | |
John P. Kavanaugh (age 62) | | Trustee and Vice Chair of Trustees | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 60) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 59) | | Trustee | | March 2005 | | Private investor | | The Travelers Companies, Director; Dycom Industries, Inc., Director |
| | | |
| OFFICERS | | | | | | |
Christopher R. Bohane (k) (age 43) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 48) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 57) | | 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 |
| | | | |
Ethan D. Corey (k) (age 53) | | 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 48) | | President | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 43) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
23
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) |
Susan A. Pereira (k) (age 46) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 46) | | 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 64) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 72) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 46) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Martin J. Wolin (k) (age 49) | | Chief Compliance Officer | | July 2015 | | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | | N/A |
| | | | |
James O. Yost (k) (age 56) | | 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. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
| (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. Buller and Kavanaugh and Ms. 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, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a 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 MacDougall | | |
24
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, 2016 (“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 Senior Officer, a 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 Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of 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 Broadridge 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 Broadridge 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, 2015, 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 each of the one- and five-year periods ended December 31, 2015 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 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 Broadridge. 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 data provided by Broadridge (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 Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. 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, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate 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 further 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 “management fee waiver rate”). They also noted that MFS has agreed to amend its contractual advisory fee rate schedule to reflect the existing management fee wavier rate effective as of April 28, 2017. 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, 2016.
26
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 mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios”, then “VIT II” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $14,387,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 59.59% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
27
rev. 3/16
| | | | |
| 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., and MFS Heritage Trust Company. |
| | |
| 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, or 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, 2016
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 • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Emerging Markets Equity Portfolio
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
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 | | | | |
| Samsung Electronics Co. Ltd. | | | 5.4% | |
| Taiwan Semiconductor Manufacturing Co. Ltd. | | | 5.1% | |
| Alibaba Group Holding Ltd., ADR | | | 3.6% | |
| LUKOIL PJSC, ADR | | | 2.9% | |
| Housing Development Finance Corp. Ltd. | | | 2.8% | |
| China Construction Bank | | | 2.4% | |
| Tencent Holdings Ltd. | | | 2.1% | |
| Dufry AG | | | 2.0% | |
| Yum China Holdings, Inc. | | | 1.9% | |
| Cognizant Technology Solutions Corp., “A” | | | 1.9% | |
| |
| Equity sectors | | | | |
| Financial Services | | | 24.2% | |
| Technology | | | 23.1% | |
| Consumer Staples | | | 10.5% | |
| Special Products & Services | | | 7.9% | |
| Retailing | | | 7.4% | |
| Energy | | | 5.1% | |
| Basic Materials | | | 4.4% | |
| Autos & Housing | | | 4.2% | |
| Leisure | | | 4.1% | |
| Utilities & Communications | | | 3.4% | |
| Health Care | | | 2.6% | |
| Transportation | | | 1.6% | |
| Industrial Goods & Services | | | 0.4% | |
| | | | |
| Issuer country weightings (x) | | | | |
| China | | | 19.9% | |
| India | | | 10.2% | |
| Hong Kong | | | 9.4% | |
| South Korea | | | 9.1% | |
| Brazil | | | 9.1% | |
| Taiwan | | | 6.3% | |
| South Africa | | | 4.7% | |
| Mexico | | | 4.6% | |
| United States | | | 4.1% | |
| Other Countries | | | 22.6% | |
| |
| Currency exposure weightings (y) | | | | |
| Hong Kong Dollar | | | 19.9% | |
| Indian Rupee | | | 9.4% | |
| South Korean Won | | | 9.1% | |
| Brazilian Real | | | 9.1% | |
| United States Dollar | | | 9.0% | |
| Chinese Renminbi | | | 6.9% | |
| Taiwan Dollar | | | 6.3% | |
| South African Rand | | | 4.7% | |
| Mexican Peso | | | 4.6% | |
| Other Currencies | | | 21.0% | |
| (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 & Cash Equivalents. |
| (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 & Cash Equivalents. |
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
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, 2016, Initial Class shares of the MFS Emerging Markets Equity Portfolio (“fund”) provided a total return of 9.37%, while Service Class shares provided a total return of 9.04%. These compare with a return of 11.60% over the same period for the fund’s benchmark, the MSCI Emerging Markets Index.
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
Security selection in both the retailing and autos & housing sectors weighed on performance relative to the MSCI Emerging Markets Index. Within the retailing sector, the fund’s holdings of weak-performing footwear retailer Stella International Holdings (b) (China) and apparel retailer Global Brands Group Holding (b) (China) hindered relative returns. Shares of Stella International Holdings fell mid-period after the company issued a profit warning due to soft shoe demand and increased pricing competition from other footwear retailers. Within the autos & housing sector, holding shares of electrical and electronic products manufacturer Techtronic Industries (b) (China) held back relative results. Weak fiscal first-half results, notably from the floor care division, and over-valuation concerns appeared to have weighed on investor sentiment and hurt share performance of Techtronic Industries in the second half of the reporting period.
Stocks in other sectors that weakened relative performance included not owning shares of Brazilian oil and gas exploration and production company Petroleo Brasileiro, mining company Vale (Brazil) and Brazilian bank Itau Unibanco, an overweight position in personal hygiene products maker Hengan International Group (China), underweight positions in banking firms Banco Bradesco (Brazil) and Sberbank of Russia, and holding shares of weak-performing IT company Cognizant Technology Solutions (b).
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 funds to have different currency exposure than the benchmark.
Contributors to Performance
Strong security selection and an overweight position in the technology sector lifted relative performance during the reporting period. Overweight positions in Taiwanese semiconductor manufacturer Taiwan Semiconductor Manufacturing and optoelectronic components manufacturer Largan Precision (h) (Taiwan), and holding shares of semiconductor equipment manufacturer ASM Pacific Technology (b) (China), supported relative returns. Shares of Taiwan Semiconductor benefited from strong demand and a healthy outlook for high-end gaming graphic processor units and automotive applications.
3
MFS Emerging Markets Equity Portfolio
Management Review – continued
Stock selection in the health care sector also contributed positively to relative results led by the fund’s overweight position in insurance and healthcare provider Qualicorp (Brazil). Shares of Qualicorp outpaced the benchmark as higher-than-expected growth in a challenging operating environment supported resilient earnings results.
Elsewhere, overweight positions in vertically integrated oil company LUKOIL PJSC (Russia) and vehicle distributor and financing company Imperial Holdings (South Africa), and the timing of the fund’s ownership in shares of commercial vehicle financial services provider Shriram Transport Finance (India), supported relative returns. Holdings of consumer products retailer AVI (b) (South Africa) and retail-led healthcare company Clicks Group (b) (South Africa), and not holding shares of weak-performing mobile telecommunications provider China Mobile HK (China) also helped relative results.
Performance for the reporting period includes a 0.33% positive impact due to reimbursement to the fund by a third-party service provider.
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 12/31/16
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 12/31/16
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class Inception Date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 6/05/96 | | 9.37% | | 0.04% | | 0.37% | | |
| | | Service Class | | 8/24/01 | | 9.04% | | (0.22)% | | 0.11% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | MSCI Emerging Markets Index (f) | | 11.60% | | 1.64% | | 2.17% | | |
The 2016 performance includes a 0.33% positive impact due to reimbursement to the fund by the custodian.
| (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, 2016 through December 31, 2016
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, 2016 through December 31, 2016.
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
7/01/16 | | | Ending
Account Value
12/31/16 | | | Expenses Paid
During Period (p)
7/01/16-12/31/16 | |
| Initial Class | | Actual | | | 0.85% | | | | $1,000.00 | | | | $1,039.82 | | | | $4.36 | |
| | Hypothetical (h) | | | 0.85% | | | | $1,000.00 | | | | $1,020.86 | | | | $4.32 | |
| Service Class | | Actual | | | 1.11% | | | | $1,000.00 | | | | $1,038.60 | | | | $5.69 | |
| | Hypothetical (h) | | | 1.11% | | | | $1,000.00 | | | | $1,019.56 | | | | $5.63 | |
| (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 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian during the six month period. Had this one-time Reimbursement of Expenses by Custodian not occurred during the 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 1.40%, $7.18 and $7.10 for Initial Class and 1.65%, $8.46 and $8.36 for Service Class, respectively. See Note 2 in the Notes to Financial Statements for additional information.
6
MFS Emerging Markets Equity Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 98.1% | | | | | |
| Airlines – 0.4% | | | | | | | | |
| Grupo Aeroportuario del Sureste S.A. de C.V., ADR | | | 1,246 | | | $ | 179,287 | |
| | | | | | | | |
| Alcoholic Beverages – 2.7% | | | | | | | | |
| AmBev S.A., ADR | | | 147,677 | | | $ | 725,094 | |
| China Resources Enterprise Ltd. (a) | | | 274,000 | | | | 541,325 | |
| | | | | | | | |
| | | | | | $ | 1,266,419 | |
| | | | | | | | |
| Apparel Manufacturers – 2.5% | | | | | | | | |
| Global Brands Group Holding Ltd. (a) | | | 3,906,000 | | | $ | 514,172 | |
| Stella International Holdings | | | 260,000 | | | | 418,199 | |
| Titan Co. Ltd. | | | 54,823 | | | | 262,990 | |
| | | | | | | | |
| | | | | | $ | 1,195,361 | |
| | | | | | | | |
| Automotive – 1.3% | | | | | | | | |
| Ford Otomotiv Sanayi A.S. | | | 28,302 | | | $ | 245,393 | |
| Kia Motors Corp. (a) | | | 10,889 | | | | 353,320 | |
| | | | | | | | |
| | | | | | $ | 598,713 | |
| | | | | | | | |
| Business Services – 2.7% | | | | | | | | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 15,626 | | | $ | 875,525 | |
| Eurocash S.A. | | | 39,404 | | | | 370,438 | |
| | | | | | | | |
| | | $ | 1,245,963 | |
| | | | | | | | |
| Cable TV – 1.4% | | | | | | | | |
| Naspers Ltd. | | | 4,530 | | | $ | 660,045 | |
| | | | | | | | |
| Computer Software – Systems – 2.5% | | | | | |
| EPAM Systems, Inc. (a) | | | 7,091 | | | $ | 456,022 | |
| Globant S.A. (a) | | | 14,208 | | | | 473,837 | |
| Linx S.A. | | | 49,800 | | | | 265,471 | |
| | | | | | | | |
| | | | | | $ | 1,195,330 | |
| | | | | | | | |
| Construction – 1.6% | | | | | | | | |
| Techtronic Industries Co. Ltd. | | | 214,000 | | | $ | 767,193 | |
| | | | | | | | |
| Consumer Products – 2.5% | | | | | | | | |
| Dabur India Ltd. | | | 108,425 | | | $ | 444,356 | |
| Hengan International Group Co. Ltd. | | | 97,000 | | | | 711,199 | |
| | | | | | | | |
| | | | | | $ | 1,155,555 | |
| | | | | | | | |
| Consumer Services – 5.2% | | | | | | | | |
| 51job, Inc., ADR (a) | | | 16,622 | | | $ | 561,824 | |
| China Maple Leaf Educational Systems | | | 412,000 | | | | 272,039 | |
| Ctrip.com International Ltd., ADR (a) | | | 12,607 | | | | 504,280 | |
| Kroton Educacional S.A. | | | 88,600 | | | | 362,872 | |
| MakeMyTrip Ltd. (a) | | | 15,507 | | | | 344,255 | |
| SEEK Ltd. | | | 38,149 | | | | 408,521 | |
| | | | | | | | |
| | | | | | $ | 2,453,791 | |
| | | | | | | | |
| Electronics – 11.9% | | | | | | | | |
| ASM Pacific Technology Ltd. | | | 61,300 | | | $ | 649,403 | |
| Samsung Electronics Co. Ltd. | | | 1,719 | | | | 2,539,922 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Electronics – continued | | | | | | | | |
| Taiwan Semiconductor Manufacturing Co. Ltd. | | | 430,258 | | | $ | 2,409,461 | |
| | | | | | | | |
| | | | | | $ | 5,598,786 | |
| | | | | | | | |
| Energy – Independent – 1.5% | | | | | | | | |
| Gran Tierra Energy, Inc. (a) | | | 149,166 | | | $ | 451,059 | |
| Ultrapar Participacoes S.A. | | | 11,503 | | | | 241,921 | |
| | | | | | | | |
| | | | | | $ | 692,980 | |
| | | | | | | | |
| Energy – Integrated – 2.9% | | | | | | | | |
| LUKOIL PJSC, ADR | | | 24,006 | | | $ | 1,344,369 | |
| | | | | | | | |
| Engineering – Construction – 0.4% | | | | | | | | |
| Mills Estruturas e Servicos de Engenharia S.A. (a) | | | 138,839 | | | $ | 166,793 | |
| | | | | | | | |
| Food & Beverages – 3.2% | | | | | | | | |
| AVI Ltd. | | | 100,893 | | | $ | 671,163 | |
| BRF S.A. | | | 29,054 | | | | 430,717 | |
| Tingyi (Cayman Islands) Holding Corp. | | | 328,000 | | | | 397,037 | |
| | | | | | | | |
| | | | | | $ | 1,498,917 | |
| | | | | | | | |
| Food & Drug Stores – 1.9% | | | | | | | | |
| Clicks Group Ltd. | | | 40,507 | | | $ | 340,661 | |
| Dairy Farm International Holdings Ltd. | | | 42,300 | | | | 303,518 | |
| Lenta Ltd., GDR (a)(n) | | | 30,612 | | | | 251,018 | |
| | | | | | | | |
| | | | | | $ | 895,197 | |
| | | | | | | | |
| Forest & Paper Products – 0.6% | | | | | | | | |
| Fibria Celulose S.A. | | | 26,336 | | | $ | 258,044 | |
| | | | | | | | |
| Furniture & Appliances – 1.3% | | | | | | | | |
| Coway Co. Ltd. (a) | | | 8,232 | | | $ | 601,826 | |
| | | | | | | | |
| General Merchandise – 1.0% | | | | | | | | |
| PriceSmart, Inc. | | | 977 | | | $ | 81,580 | |
| S.A.C.I. Falabella | | | 50,774 | | | | 401,730 | |
| | | | | | | | |
| | | | | | $ | 483,310 | |
| | | | | | | | |
| Health Maintenance Organizations – 1.4% | | | | | |
| OdontoPrev S.A. | | | 73,206 | | | $ | 283,404 | |
| Qualicorp S.A. | | | 64,494 | | | | 381,451 | |
| | | | | | | | |
| | | | | | $ | 664,855 | |
| | | | | | | | |
| Insurance – 2.9% | | | | | | | | |
| AIA Group Ltd. | | | 143,000 | | | $ | 800,266 | |
| BB Seguridade Participacoes S.A. | | | 34,156 | | | | 296,990 | |
| Brasil Insurance Participacoes e Administracao S.A. (a) | | | 3,285 | | | | 20,338 | |
| Samsung Fire & Marine Insurance Co. Ltd. (a) | | | 1,181 | | | | 262,542 | |
| | | | | | | | |
| | | | | | $ | 1,380,136 | |
| | | | | | | | |
| Internet – 7.8% | | | | | | | | |
| Alibaba Group Holding Ltd., ADR (a) | | | 19,392 | | | $ | 1,702,812 | |
| Baidu, Inc., ADR (a) | | | 2,812 | | | | 462,321 | |
| NAVER Corp. (a) | | | 780 | | | | 499,568 | |
7
MFS Emerging Markets Equity Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Internet – continued | | | | | | | | |
| Tencent Holdings Ltd. | | | 40,100 | | | $ | 973,234 | |
| | | | | | | | |
| | | | | | $ | 3,637,935 | |
| | | | | | | | |
| Major Banks – 1.3% | | | | | | | | |
| Industrial & Commercial Bank of China, “H” | | | 1,041,000 | | | $ | 620,880 | |
| | | | | | | | |
| Metals & Mining – 1.4% | | | | | | | | |
| Grupo Mexico S.A.B. de C.V., “B” | | | 77,995 | | | $ | 212,317 | |
| Iluka Resources Ltd. | | | 87,134 | | | | 455,449 | |
| | | | | | | | |
| | | | | | $ | 667,766 | |
| | | | | | | | |
| Natural Gas – Distribution – 1.4% | | | | | | | | |
| China Resources Gas Group Ltd. | | | 196,000 | | | $ | 549,324 | |
| Infraestructura Energetica Nova, S.A. de C.V. | | | 29,719 | | | | 129,501 | |
| | | | | | | | |
| | | | | | $ | 678,825 | |
| | | | | | | | |
| Network & Telecom – 0.9% | | | | | | | | |
| VTech Holdings Ltd. | | | 31,400 | | | $ | 419,292 | |
| | | | | | | | |
| Oil Services – 0.7% | | | | | | | | |
| Lamprell PLC (a) | | | 310,290 | | | $ | 351,809 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 17.7% | | | | | |
| Banco Bradesco S.A., ADR | | | 48,292 | | | $ | 420,623 | |
| Banco Santander Chile, ADR | | | 8,577 | | | | 187,579 | |
| Bancolombia S.A., ADR | | | 9,166 | | | | 336,209 | |
| China Construction Bank | | | 1,499,670 | | | | 1,148,918 | |
| Credicorp Ltd. | | | 1,668 | | | | 263,310 | |
| E.Sun Financial Holding Co. Ltd. | | | 945,156 | | | | 538,137 | |
| Grupo Financiero Banorte S.A. de C.V. | | | 50,723 | | | | 250,316 | |
| Grupo Financiero Inbursa S.A. de C.V. | | | 313,805 | | | | 474,878 | |
| Housing Development Finance Corp. Ltd. | | | 71,887 | | | | 1,337,329 | |
| Kasikornbank Co. Ltd. | | | 99,000 | | | | 489,063 | |
| Komercni Banka A.S. | | | 5,056 | | | | 174,119 | |
| Kotak Mahindra Bank Ltd. | | | 74,781 | | | | 792,985 | |
| PT Bank Central Asia Tbk | | | 243,000 | | | | 278,309 | |
| Public Bank Berhad | | | 99,300 | | | | 436,513 | |
| Sberbank of Russia | | | 104,825 | | | | 296,046 | |
| Shriram Transport Finance Co. Ltd. | | | 27,856 | | | | 348,300 | |
| Turkiye Sinai Kalkinma Bankasi A.S. | | | 543,722 | | | | 217,372 | |
| Union National Bank | | | 236,657 | | | | 292,527 | |
| | | | | | | | |
| | | | | | $ | 8,282,533 | |
| | | | | | | | |
| Pharmaceuticals – 1.2% | | | | | | | | |
| Genomma Lab Internacional S.A., “B” (a) | | | 528,719 | | | $ | 548,877 | |
| | | | | | | | |
| Real Estate – 2.3% | | | | | | | | |
| Aldar Properties PJSC | | | 440,222 | | | $ | 315,223 | |
| Concentradora Fibra Hotelera Mexicana S.A. de C.V., REIT | | | 276,570 | | | | 187,185 | |
| Hang Lung Properties Ltd. | | | 268,000 | | | | 561,148 | |
| | | | | | | | |
| | | | | | $ | 1,063,556 | |
| | | | | | | | |
| Restaurants – 2.7% | | | | | | | | |
| Alsea S.A.B. de C.V. | | | 63,069 | | | $ | 180,509 | |
| Jollibee Foods Corp. | | | 51,770 | | | | 201,592 | |
| Yum China Holdings, Inc. (a) | | | 33,940 | | | | 886,513 | |
| | | | | | | | |
| | | | | | $ | 1,268,614 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Specialty Chemicals – 1.6% | | | | | | | | |
| Astra Argo Lestari | | | 316,500 | | | $ | 394,083 | |
| PTT Global Chemical PLC | | | 201,200 | | | | 353,963 | |
| | | | | | | | |
| | | | | | $ | 748,046 | |
| | | | | | | | |
| Specialty Stores – 2.0% | | | | | | | | |
| Dufry AG (a) | | | 7,358 | | | $ | 917,673 | |
| | | | | | | | |
| Telephone Services – 0.8% | | | | | | | | |
| Hellenic Telecommunications Organization S.A. | | | 15,496 | | | $ | 145,665 | |
| PT XL Axiata Tbk (a) | | | 1,416,000 | | | | 242,786 | |
| | | | | | | | |
| | | | | | $ | 388,451 | |
| | | | | | | | |
| Tobacco – 2.1% | | | | | | | | |
| ITC Ltd. | | | 198,201 | | | $ | 704,080 | |
| PT Hanjaya Mandala Sampoerna Tbk | | | 1,040,250 | | | | 295,725 | |
| | | | | | | | |
| | | | | | $ | 999,805 | |
| | | | | | | | |
| Trucking – 1.2% | | | | | | | | |
Imperial Holdings Ltd. | | | 42,595 | | | $ | 562,741 | |
| | | | | | | | |
| Utilities – Electric Power – 1.2% | | | | | | | | |
| CESC Ltd. | | | 57,750 | | | $ | 541,990 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $40,439,598) | | | | | | $ | 46,001,663 | |
| | | | | | | | |
| | |
| PREFERRED STOCKS – 0.8% | | | | | | | | |
| Forest & Paper Products – 0.8% | | | | | | | | |
Suzano Papel e Celulose S.A.
(Identified Cost, $336,958) | | | 92,100 | | | $ | 401,825 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 0.7% | | | | | |
MFS Institutional Money Market Portfolio,
0.51% (v) (Identified Cost, $335,561) | | | 335,595 | | | $ | 335,595 | |
| | | | | | | | |
Total Investments
(Identified Cost, $41,112,117) | | | | | | $ | 46,739,083 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.4% | | | | | | | 172,933 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 46,912,016 | |
| | | | | | | | |
| (a) | | Non-income producing 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 $251,018, representing 0.5% 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. |
The following abbreviations are used in this report and are defined:
| ADR | | American Depositary Receipt |
| GDR | | Global Depositary Receipt |
| PJSC | | Public Joint Stock Company |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
See Notes to Financial Statements
8
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 12/31/16 | | | | | | | | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $40,776,556) | | | $46,403,488 | | | | | |
Underlying affiliated funds, at value (identified cost, $335,561) | | | 335,595 | | | | | |
Total investments, at value (identified cost, $41,112,117) | | | $46,739,083 | | | | | |
Foreign currency, at value (identified cost, $2,390) | | | 2,392 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 4,532 | | | | | |
Fund shares sold | | | 328,766 | | | | | |
Interest and dividends | | | 43,405 | | | | | |
Other assets | | | 40 | | | | | |
Total assets | | | | | | | $47,118,218 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | $25,557 | | | | | |
Fund shares reacquired | | | 19,122 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 5,581 | | | | | |
Shareholder servicing costs | | | 51 | | | | | |
Distribution and/or service fees | | | 490 | | | | | |
Payable for independent Trustees’ compensation | | | 34 | | | | | |
Deferred country tax expense payable | | | 16,416 | | | | | |
Accrued expenses and other liabilities | | | 138,951 | | | | | |
Total liabilities | | | | | | | $206,202 | |
Net assets | | | | | | | $46,912,016 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $45,817,180 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies
(net of $7,845 deferred country tax) | | | 5,619,136 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (5,033,027 | ) | | | | |
Undistributed net investment income | | | 508,727 | | | | | |
Net assets | | | | | | | $46,912,016 | |
Shares of beneficial interest outstanding | | | | | | | 3,753,676 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares outstanding | | | Net asset value per share | |
Initial Class | | | $22,604,744 | | | | 1,794,975 | | | | $12.59 | |
Service Class | | | 24,307,272 | | | | 1,958,701 | | | | 12.41 | |
See Notes to Financial Statements
9
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 12/31/16 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $1,269,874 | | | | | |
Other | | | 20,361 | | | | | |
Dividends from underlying affiliated funds | | | 2,476 | | | | | |
Interest | | | 2,005 | | | | | |
Foreign taxes withheld | | | (118,813 | ) | | | | |
Total investment income | | | | | | | $1,175,903 | |
Expenses | | | | | | | | |
Management fee | | | $513,765 | | | | | |
Distribution and/or service fees | | | 62,400 | | | | | |
Shareholder servicing costs | | | 9,009 | | | | | |
Administrative services fee | | | 17,543 | | | | | |
Independent Trustees’ compensation | | | 3,131 | | | | | |
Custodian fee | | | 145,365 | | | | | |
Reimbursement of custodian expenses | | | (134,824 | ) | | | | |
Shareholder communications | | | 11,646 | | | | | |
Audit and tax fees | | | 71,242 | | | | | |
Legal fees | | | 558 | | | | | |
Miscellaneous | | | 15,796 | | | | | |
Total expenses | | | | | | | $715,631 | |
Reduction of expenses by investment adviser | | | (102,430 | ) | | | | |
Net expenses | | | | | | | $613,201 | |
Net investment income | | | | | | | $562,702 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments: | | | | | | | | |
Non-affiliated issuers (net of $32,089 country tax) | | | $(1,436,794 | ) | | | | |
Underlying affiliated funds | | | (25 | ) | | | | |
Foreign currency | | | (28,825 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $(1,465,644 | ) |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments (net of $7,845 increase in deferred country tax) | | | $5,285,739 | | | | | |
Translation of assets and liabilities in foreign currencies | | | 170 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $5,285,909 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $3,820,265 | |
Change in net assets from operations | | | | | | | $4,382,967 | |
See Notes to Financial Statements
10
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 | | | 2016 | | | | 2015 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
| Net investment income | | | $562,702 | | | | $355,112 | |
| Net realized gain (loss) on investments and foreign currency | | | (1,465,644 | ) | | | (1,363,961 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | | 5,285,909 | | | | (6,612,400 | ) |
Change in net assets from operations | | | $4,382,967 | | | | $(7,621,249 | ) |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(238,033 | ) | | | $(465,694 | ) |
Change in net assets from fund share transactions | | | $(8,575,574 | ) | | | $(5,741,667 | ) |
Total change in net assets | | | $(4,430,640 | ) | | | $(13,828,610 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 51,342,656 | | | | 65,171,266 | |
At end of period (including undistributed net investment income of $508,727 and
$237,511, respectively) | | | $46,912,016 | | | | $51,342,656 | |
See Notes to Financial Statements
11
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 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $11.59 | | | | $13.46 | | | | $14.51 | | | | $15.56 | | | | $13.84 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.15 | (c) | | | $0.10 | | | | $0.13 | | | | $0.12 | | | | $0.18 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.93 | | | | (1.84 | ) | | | (1.08 | ) | | | (0.93 | ) | | | 2.35 | |
Total from investment operations | | | $1.08 | | | | $(1.74 | ) | | | $(0.95 | ) | | | $(0.81 | ) | | | $2.53 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.08 | ) | | | $(0.13 | ) | | | $(0.10 | ) | | | $(0.24 | ) | | | $(0.17 | ) |
From net realized gain on investments | | | — | | | | — | | | | — | | | | — | | | | (0.64 | ) |
Total distributions declared to shareholders | | | $(0.08 | ) | | | $(0.13 | ) | | | $(0.10 | ) | | | $(0.24 | ) | | | $(0.81 | ) |
Net asset value, end of period (x) | | | $12.59 | | | | $11.59 | | | | $13.46 | | | | $14.51 | | | | $15.56 | |
Total return (%) (k)(r)(s)(x) | | | 9.28 | (c) | | | (12.89 | ) | | | (6.66 | ) | | | (5.09 | ) | | | 18.76 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.34 | (c) | | | 1.65 | | | | 1.48 | | | | 1.46 | | | | 1.35 | |
Expenses after expense reductions (f) | | | 1.13 | (c) | | | 1.40 | | | | 1.40 | | | | 1.40 | | | | 1.35 | |
Net investment income | | | 1.29 | (c) | | | 0.74 | | | | 0.89 | | | | 0.78 | | | | 1.23 | |
Portfolio turnover | | | 47 | | | | 51 | | | | 49 | | | | 36 | | | | 33 | |
Net assets at end of period (000 omitted) | | | $22,605 | | | | $25,665 | | | | $33,752 | | | | $45,293 | | | | $48,803 | |
See Notes to Financial Statements
12
MFS Emerging Markets Equity Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $11.42 | | | | $13.24 | | | | $14.29 | | | | $15.32 | | | | $13.64 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.12 | (c) | | | $0.06 | | | | $0.10 | | | | $0.08 | | | | $0.13 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.91 | | | | (1.80 | ) | | | (1.09 | ) | | | (0.90 | ) | | | 2.32 | |
Total from investment operations | | | $1.03 | | | | $(1.74 | ) | | | $(0.99 | ) | | | $(0.82 | ) | | | $2.45 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.04 | ) | | | $(0.08 | ) | | | $(0.06 | ) | | | $(0.21 | ) | | | $(0.13 | ) |
From net realized gain on investments | | | — | | | | — | | | | — | | | | — | | | | (0.64 | ) |
Total distributions declared to shareholders | | | $(0.04 | ) | | | $(0.08 | ) | | | $(0.06 | ) | | | $(0.21 | ) | | | $(0.77 | ) |
Net asset value, end of period (x) | | | $12.41 | | | | $11.42 | | | | $13.24 | | | | $14.29 | | | | $15.32 | |
Total return (%) (k)(r)(s)(x) | | | 9.04 | (c) | | | (13.08 | ) | | | (6.99 | ) | | | (5.28 | ) | | | 18.45 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.58 | (c) | | | 1.90 | | | | 1.73 | | | | 1.71 | | | | 1.60 | |
Expenses after expense reductions (f) | | | 1.37 | (c) | | | 1.65 | | | | 1.65 | | | | 1.65 | | | | 1.60 | |
Net investment income | | | 1.02 | (c) | | | 0.46 | | | | 0.70 | | | | 0.56 | | | | 0.90 | |
Portfolio turnover | | | 47 | | | | 51 | | | | 49 | | | | 36 | | | | 33 | |
Net assets at end of period (000 omitted) | | | $24,307 | | | | $25,678 | | | | $31,419 | | | | $39,617 | | | | $40,863 | |
| (c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
| (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 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 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 October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
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 on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange 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. 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
14
MFS Emerging Markets Equity Portfolio
Notes to Financial Statements – continued
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, 2016 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
China | | | $4,117,749 | | | | $5,213,957 | | | | $— | | | | $9,331,706 | |
India | | | 2,918,925 | | | | 1,857,359 | | | | — | | | | 4,776,284 | |
Hong Kong | | | 1,416,596 | | | | 3,016,595 | | | | — | | | | 4,433,191 | |
South Korea | | | 864,368 | | | | 3,392,810 | | | | — | | | | 4,257,178 | |
Brazil | | | 4,255,544 | | | | — | | | | — | | | | 4,255,544 | |
Taiwan | | | 538,137 | | | | 2,409,461 | | | | — | | | | 2,947,598 | |
South Africa | | | 1,011,824 | | | | 1,222,785 | | | | — | | | | 2,234,609 | |
Mexico | | | 2,162,871 | | | | — | | | | — | | | | 2,162,871 | |
Russia | | | — | | | | 1,891,433 | | | | — | | | | 1,891,433 | |
Other Countries | | | 7,752,059 | | | | 2,361,015 | | | | — | | | | 10,113,074 | |
| Mutual Funds | | | 335,595 | | | | — | | | | — | | | | 335,595 | |
| Total Investments | | | $25,373,668 | | | | $21,365,415 | | | | $— | | | | $46,739,083 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $201,592 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $6,385,310 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.
Zero Strike Warrants – The fund invested in low exercise price call warrants (zero strike warrants). Zero strike warrants are issued by banks or broker-dealers and allow the fund to gain exposure to common stocks in markets that place restrictions on direct investments by foreign investors and may or may not be traded on an exchange. Income received from zero strike warrants is recorded as dividend income in the Statement of Operations. To the extent the fund invests in zero strike warrants whose returns correspond to the performance of a foreign stock, investing in zero strike warrants will involve risks similar to the risks of investing in foreign securities. Additional risks associated with zero strike warrants include the potential inability of the counterparty to fulfill their obligations under the warrant, inability to transfer or liquidate the warrants and potential delays or an inability to redeem before expiration under certain market conditions.
15
MFS Emerging Markets Equity 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. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. 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, 2016, 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.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian 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.
16
MFS Emerging Markets Equity Portfolio
Notes to Financial Statements – continued
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/16 | | | 12/31/15 | |
| Ordinary income (including any short-term capital gains) | | | $238,033 | | | | $465,694 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/16 | | | | |
| Cost of investments | | | $42,533,218 | |
| Gross appreciation | | | 7,136,966 | |
| Gross depreciation | | | (2,931,101 | ) |
| Net unrealized appreciation (depreciation) | | | $4,205,865 | |
| Undistributed ordinary income | | | 513,080 | |
| Capital loss carryforwards | | | (3,603,355 | ) |
| Other temporary differences | | | (20,754 | ) |
As of December 31, 2016, the fund had capital loss carryforwards available to offset future realized gains. These net capital losses may be carried forward indefinitely and their character is retained as short-term and/or long-term losses. Such losses are characterized as follows:
| | | | |
| Short-Term | | | $(1,348,895 | ) |
| Long-Term | | | (2,254,460 | ) |
| Total | | | $(3,603,355 | ) |
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
12/31/16 | | | Year ended
12/31/15 | |
| Initial Class | | | $144,716 | | | | $289,454 | |
| Service Class | | | 93,317 | | | | 176,240 | |
| Total | | | $238,033 | | | | $465,694 | |
| (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, 2016, this management fee reduction amounted to $3,472, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 1.04% 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, 2018. For the year ended December 31, 2016, this reduction amounted to $98,958 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.
17
MFS Emerging Markets Equity 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, 2016, the fee was $7,469, which equated to 0.0153% 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, 2016, these costs amounted to $1,540.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund 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, 2016 was equivalent to an annual effective rate of 0.0358% 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 – 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. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $101 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the 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. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $56,522 and $349,288, respectively. The sales transactions resulted in net realized gains (losses) of $(144,815).
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, aggregated $23,056,222 and $31,470,434, 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 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 82,859 | | | | $1,001,097 | | | | 164,288 | | | | $2,083,565 | |
Service Class | | | 209,572 | | | | 2,513,199 | | | | 655,975 | | | | 8,294,328 | |
| | | 292,431 | | | | $3,514,296 | | | | 820,263 | | | | $10,377,893 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 11,192 | | | | $144,716 | | | | 26,195 | | | | $289,454 | |
Service Class | | | 7,319 | | | | 93,317 | | | | 16,169 | | | | 176,240 | |
| | | 18,511 | | | | $238,033 | | | | 42,364 | | | | $465,694 | |
18
MFS Emerging Markets Equity Portfolio
Notes to Financial Statements – continued
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (513,729 | ) | | | $(6,239,751 | ) | | | (483,394 | ) | | | $(6,199,576 | ) |
Service Class | | | (506,841 | ) | | | (6,088,152 | ) | | | (795,776 | ) | | | (10,385,678 | ) |
| | | (1,020,570 | ) | | | $(12,327,903 | ) | | | (1,279,170 | ) | | | $(16,585,254 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (419,678 | ) | | | $(5,093,938 | ) | | | (292,911 | ) | | | $(3,826,557 | ) |
Service Class | | | (289,950 | ) | | | (3,481,636 | ) | | | (123,632 | ) | | | (1,915,110 | ) |
| | | (709,628 | ) | | | $(8,575,574 | ) | | | (416,543 | ) | | | $(5,741,667 | ) |
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 9% of the value of outstanding voting shares of the fund.
The fund and certain other funds managed by MFS participate in a $1.25 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 Overnight Federal Reserve funds rate or daily 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 Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $305 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 | | | 614,094 | | | | 14,168,611 | | | | (14,447,110 | ) | | | 335,595 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $(25 | ) | | | $— | | | | $2,476 | | | | $335,595 | |
19
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, 2016, 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, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Emerging Markets Equity Portfolio as of December 31, 2016, 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 15, 2017
20
MFS Emerging Markets Equity Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, 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 53) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 55) | | Trustee | | January 2014 | | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 74) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 65) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council (until 2015); 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 |
| | | | |
Maureen R. Goldfarb (age 61) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Michael Hegarty (age 72) | | Trustee | | December 2004 | | Private investor | | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) |
| | | | |
John P. Kavanaugh (age 62) | | Trustee and Vice Chair of Trustees | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 60) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 59) | | Trustee | | March 2005 | | Private investor | | The Travelers Companies, Director; Dycom Industries, Inc., Director |
| | | |
| OFFICERS | | | | | | |
Christopher R. Bohane (k) (age 43) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 48) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 57) | | 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 |
| | | | |
Ethan D. Corey (k) (age 53) | | 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 48) | | President | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 43) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
21
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) |
Susan A. Pereira (k) (age 46) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 46) | | 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 64) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 72) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 46) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Martin J. Wolin (k) (age 49) | | Chief Compliance Officer | | July 2015 | | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | | N/A |
| | | | |
James O. Yost (k) (age 56) | | 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. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
| (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. Buller and Kavanaugh and Ms. 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, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a 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 | | |
22
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, 2016 (“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 Senior Officer, a 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 Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of 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 Broadridge 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 Broadridge 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, 2015, 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 2nd quintile for the one-year period and the 4th quintile for the five-year period ended December 31, 2015 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 and its 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, 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 and the Fund’s
23
MFS Emerging Markets Equity Portfolio
Board Review of Investment Advisory Agreement – continued
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 Broadridge. 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 data provided by Broadridge (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 Broadridge expense group median and the Fund’s total expense ratio was approximately at the Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. 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, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate 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, 2016.
24
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 mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios”, then “VIT II” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
Income derived from foreign sources was $1,266,664. The fund intends to pass through foreign tax credits of $138,320 for the fiscal year.
25
rev. 3/16
| | | | |
| 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., and MFS Heritage Trust Company. |
| | |
| 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, or 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, 2016
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 • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Global Governments Portfolio
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
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 | | | 54.7% | |
| U.S. Treasury Securities | | | 38.5% | |
| U.S. Government Agencies | | | 0.5% | |
| Mortgage-Backed Securities | | | 0.3% | |
| Investment Grade Corporates | | | 0.3% | |
| Commercial Mortgage-Backed Securities (o) | | | 0.0% | |
|
| Composition including fixed income credit quality (a)(i) | |
| AAA | | | 12.1% | |
| AA | | | 14.1% | |
| A | | | 16.5% | |
| BBB | | | 10.1% | |
| BB | | | 2.2% | |
| CCC (o) | | | 0.0% | |
| C (o) | | | 0.0% | |
| U.S. Government | | | 38.5% | |
| Federal Agencies | | | 0.8% | |
| Cash & Cash Equivalents | | | 5.7% | |
| Other (o) | | | (0.0)% | |
| | | | |
| Portfolio facts (i) | | | | |
| Average Duration (d) | | | 7.9 | |
| Average Effective Maturity (m) | | | 10.2 yrs. | |
| |
| Issuer country weightings (i)(x) | | | | |
| United States | | | 45.1% | |
| Japan | | | 16.5% | |
| United Kingdom | | | 7.5% | |
| Italy | | | 5.2% | |
| Spain | | | 4.9% | |
| Canada | | | 4.5% | |
| France | | | 4.1% | |
| Australia | | | 3.1% | |
| Belgium | | | 2.4% | |
| Other Countries | | | 6.7% | |
| |
| Currency exposure weightings (i)(y) | | | | |
| United States Dollar | | | 42.6% | |
| Euro | | | 27.0% | |
| Japanese Yen | | | 21.1% | |
| British Pound Sterling | | | 6.4% | |
| Australian Dollar | | | 1.4% | |
| Canadian Dollar | | | 1.3% | |
| Swedish Krona | | | 0.8% | |
| Danish Krone | | | 0.5% | |
| Chinese Yuan Offshore (HK) | | | (1.1)% | |
| (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 or may not have held all of these instruments on this date. 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. |
2
MFS Global Governments Portfolio
Portfolio Composition – continued
| (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 & Cash Equivalents and 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 & Cash Equivalents and Other. |
Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio.
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Other includes equivalent exposure from currency derivatives and/or any offsets to derivative positions and may be negative.
Percentages are based on net assets as of 12/31/16.
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, 2016, Initial Class shares of the MFS Global Governments Portfolio (“fund”) provided a total return of 0.30%, while Service Class shares of the fund provided a total return of 0.00%. These compare with a return of 1.57% for the fund’s benchmark, the JPMorgan Global Government Bond Index (Unhedged).
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Factors Affecting Performance
The fund’s overweight exposure to Italy, and out-of-benchmark exposure to Portugal, detracted from performance relative to the JPMorgan Global Government Bond Index (Unhedged), as both markets underperformed the benchmark. An overweight exposure to the euro, and underweight exposures to the New Zealand dollar and the Canadian dollar, were also negative factors for relative performance. Additionally, the fund’s average short duration (d) exposure to the US yield curve (y) held back relative returns.
The fund’s longer duration stance to both the Japanese and New Zealand yield curves contributed to relative returns. Favorable security selection within Spanish and Italian bonds also benefited relative performance. Currency exposure, most notably an overweight to the US dollar, and underweights to both the British pound and offshore Chinese yuan, was another area of relative strength.
Respectfully,
| | |
| Matt Ryan | | Erik Weisman |
| Portfolio Manager | | Portfolio Manager |
| (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. |
| (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 12/31/16
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 12/31/16
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class Inception Date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 5/16/88 | | 0.30% | | (1.48)% | | 2.55% | | |
| | | Service Class | | 8/24/01 | | 0.00% | | (1.72)% | | 2.29% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | JPMorgan Global Government Bond Index (Unhedged) (f) | | 1.57% | | (0.75)% | | 3.35% | | |
| (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, 2016 through December 31, 2016
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, 2016 through December 31, 2016.
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
7/01/16 | | | Ending Account Value
12/31/16 | | | Expenses Paid
During Period (p)
7/01/16-12/31/16 | |
| Initial Class | | Actual | | | 0.79% | | | | $1,000.00 | | | | $913.89 | | | | $3.80 | |
| | Hypothetical (h) | | | 0.79% | | | | $1,000.00 | | | | $1,021.17 | | | | $4.01 | |
| Service Class | | Actual | | | 1.04% | | | | $1,000.00 | | | | $912.43 | | | | $5.00 | |
| | Hypothetical (h) | | | 1.04% | | | | $1,000.00 | | | | $1,019.91 | | | | $5.28 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.05% (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
6
MFS Global Governments Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – 93.6% | | | | | | | | |
| Foreign Bonds – 54.4% | | | | | |
| Australia – 3.0% | | | | | | | | |
| Commonwealth of Australia, 5.75%, 5/15/2021 | | AUD | 1,800,000 | | | $ | 1,491,855 | |
| Commonwealth of Australia, 5.75%, 7/15/2022 | | AUD | 3,470,000 | | | | 2,947,850 | |
| Commonwealth of Australia, 3.25%, 4/21/2029 | | AUD | 650,000 | | | | 481,984 | |
| | | | | | | | |
| | | | | | $ | 4,921,689 | |
| | | | | | | | |
| Belgium – 2.3% | | | | | | | | |
| Kingdom of Belgium, 4.25%, 9/28/2021 | | EUR | 800,000 | | | $ | 1,029,742 | |
| Kingdom of Belgium, 4.5%, 3/28/2026 | | EUR | 835,000 | | | | 1,206,052 | |
| Kingdom of Belgium, 4%, 3/28/2032 | | EUR | 481,000 | | | | 722,628 | |
| Kingdom of Belgium, 1.9%, 6/22/2038 | | EUR | 200,000 | | | | 236,176 | |
| Kingdom of Belgium, 4.25%, 3/28/2041 | | EUR | 155,000 | | | | 261,887 | |
| Kingdom of Belgium, 1.6%, 6/22/2047 | | EUR | 250,000 | | | | 264,436 | |
| Kingdom of Belgium, 2.15%, 6/22/2066 | | EUR | 100,000 | | | | 114,078 | |
| | | | | | | | |
| | | | | | $ | 3,834,999 | |
| | | | | | | | |
| Canada – 4.5% | | | | | | | | |
| Government of Canada, 0.75%, 9/01/2020 | | CAD | 3,000,000 | | | $ | 2,214,702 | |
| Government of Canada, 1.5%, 6/01/2023 | | CAD | 3,975,000 | | | | 2,979,333 | |
| Government of Canada, 2.5%, 6/01/2024 | | CAD | 200,000 | | | | 159,158 | |
| Government of Canada, 1.5%, 6/01/2026 | | CAD | 2,250,000 | | | | 1,643,950 | |
| Government of Canada, 5.75%, 6/01/2033 | | CAD | 267,000 | | | | 295,877 | |
| Government of Canada, 4%, 6/01/2041 | | CAD | 107,000 | | | | 104,151 | |
| Government of Canada, 2.75%, 12/01/2048 | | CAD | 50,000 | | | | 40,908 | |
| | | | | | | | |
| | | | | | $ | 7,438,079 | |
| | | | | | | | |
| Denmark – 0.8% | | | | | | | | |
| Kingdom of Denmark, 1.75%, 11/15/2025 | | DKK | 6,000,000 | | | $ | 956,224 | |
| Kingdom of Denmark, 4.5%, 11/15/2039 | | DKK | 1,500,000 | | | | 366,051 | |
| | | | | | | | |
| | | | | | $ | 1,322,275 | |
| | | | | | | | |
| France – 4.1% | | | | | | | | |
| Republic of France, 2.5%, 10/25/2020 | | EUR | 535,000 | | | $ | 626,995 | |
| Republic of France, 6%, 10/25/2025 | | EUR | 2,750,000 | | | | 4,302,015 | |
| Republic of France, 4.75%, 4/25/2035 | | EUR | 456,000 | | | | 759,602 | |
| Republic of France, 4.5%, 4/25/2041 | | EUR | 399,000 | | | | 679,572 | |
| Republic of France, 4%, 4/25/2055 | | EUR | 110,000 | | | | 191,465 | |
| Republic of France, 1.75%, 5/25/2066 | | EUR | 150,000 | | | | 153,551 | |
| | | | | | | | |
| | | | | | $ | 6,713,200 | |
| | | | | | | | |
| Germany – 1.7% | | | | | | | | |
| Federal Republic of Germany, 0.5%, 2/15/2026 | | EUR | 1,300,000 | | | $ | 1,417,726 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Foreign Bonds – continued | | | | | |
| Germany – continued | | | | | | | | |
| Federal Republic of Germany, 4%, 1/04/2037 | | EUR | 430,000 | | | $ | 730,817 | |
| Federal Republic of Germany, 2.5%, 7/04/2044 | | EUR | 250,000 | | | | 365,982 | |
| Federal Republic of Germany, 2.5%, 8/15/2046 | | EUR | 135,000 | | | | 199,933 | |
| | | | | | | | |
| | | | | | $ | 2,714,458 | |
| | | | | | | | |
| Italy – 5.1% | | | | | | | | |
| Republic of Italy, 3.75%, 3/01/2021 | | EUR | 2,569,000 | | | $ | 3,079,610 | |
| Republic of Italy, 5.5%, 9/01/2022 | | EUR | 2,495,000 | | | | 3,295,271 | |
| Republic of Italy, 4.75%, 9/01/2028 | | EUR | 1,450,000 | | | | 1,961,040 | |
| | | | | | | | |
| | | | | | $ | 8,335,921 | |
| | | | | | | | |
| Japan – 16.4% | | | | | | | | |
| Government of Japan, 0.9%, 6/20/2022 | | JPY | 150,000,000 | | | $ | 1,352,753 | |
| Government of Japan, 0.4%, 9/20/2025 | | JPY | 780,000,000 | | | | 6,903,375 | |
| Government of Japan, 2.2%, 9/20/2027 | | JPY | 703,900,000 | | | | 7,386,267 | |
| Government of Japan, 1.7%, 9/20/2032 | | JPY | 75,000,000 | | | | 776,682 | |
| Government of Japan, 1.5%, 3/20/2034 | | JPY | 466,000,000 | | | | 4,699,712 | |
| Government of Japan, 2.4%, 3/20/2037 | | JPY | 200,600,000 | | | | 2,305,368 | |
| Government of Japan, 1.8%, 3/20/2043 | | JPY | 233,000,000 | | | | 2,532,987 | |
| Government of Japan, 2%, 3/20/2052 | | JPY | 78,900,000 | | | | 932,691 | |
| | | | | | | | |
| | | | | | $ | 26,889,835 | |
| | | | | | | | |
| Netherlands – 0.5% | | | | | | | | |
| Kingdom of the Netherlands, 3.5%, 7/15/2020 | | EUR | 361,000 | | | $ | 436,511 | |
| Kingdom of the Netherlands, 3.75%, 1/15/2042 | | EUR | 129,000 | | | | 222,501 | |
| Kingdom of the Netherlands, 2.75%, 1/15/2047 | | EUR | 100,000 | | | | 152,582 | |
| | | | | | | | |
| | | | | | $ | 811,594 | |
| | | | | | | | |
| Norway – 0.8% | | | | | | | | |
| Government of Norway, 3%, 3/14/2024 | | NOK | 10,000,000 | | | $ | 1,276,914 | |
| | | | | | | | |
| Portugal – 2.1% | | | | | | | | |
| Republic of Portugal, 4.8%, 6/15/2020 | | EUR | 1,500,000 | | | $ | 1,761,354 | |
| Republic of Portugal, 4.95%, 10/25/2023 | | EUR | 1,500,000 | | | | 1,758,805 | |
| | | | | | | | |
| | | | | | $ | 3,520,159 | |
| | | | | | | | |
| Spain – 4.9% | | | | | | | | |
| Kingdom of Spain, 4.6%, 7/30/2019 | | EUR | 1,000,000 | | | $ | 1,179,888 | |
| Kingdom of Spain, 5.4%, 1/31/2023 | | EUR | 2,192,000 | | | | 2,962,239 | |
| Kingdom of Spain, 2.75%, 10/31/2024 | | EUR | 1,000,000 | | | | 1,183,569 | |
| Kingdom of Spain, 5.15%, 10/31/2028 | | EUR | 1,170,000 | | | | 1,706,141 | |
| Kingdom of Spain, 4.7%, 7/30/2041 | | EUR | 610,000 | | | | 914,607 | |
| | | | | | | | |
| | | | | | $ | 7,946,444 | |
| | | | | | | | |
| Sweden – 0.7% | | | | | | | | |
| Kingdom of Sweden, 1%, 11/12/2026 | | SEK | 10,000,000 | | | $ | 1,144,138 | |
| | | | | | | | |
7
MFS Global Governments Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Foreign Bonds – continued | | | | | |
| United Kingdom – 7.5% | | | | | | | | |
| HSBC Bank PLC, FRN, 1.545%, 5/15/2018 (n) | | $ | 403,000 | | | $ | 403,136 | |
| United Kingdom Treasury, 4.75%, 3/07/2020 | | GBP | 2,379,000 | | | | 3,355,506 | |
| United Kingdom Treasury, 2.5%, 4/16/2020 | | GBP | 1,115,400 | | | | 1,600,258 | |
| United Kingdom Treasury, 1.75%, 9/07/2022 | | GBP | 850,000 | | | | 1,109,837 | |
| United Kingdom Treasury, 4.25%, 12/07/2027 | | GBP | 624,000 | | | | 996,885 | |
| United Kingdom Treasury, 4.25%, 6/07/2032 | | GBP | 461,000 | | | | 771,256 | |
| United Kingdom Treasury, 4.25%, 3/07/2036 | | GBP | 142,000 | | | | 245,463 | |
| United Kingdom Treasury, 4.25%, 12/07/2040 | | GBP | 427,000 | | | | 770,881 | |
| United Kingdom Treasury, 3.25%, 1/22/2044 | | GBP | 836,000 | | | | 1,331,459 | |
| United Kingdom Treasury, 3.75%, 7/22/2052 | | GBP | 466,000 | | | | 877,700 | |
| United Kingdom Treasury, 4%, 1/22/2060 | | GBP | 235,000 | | | | 496,114 | |
| United Kingdom Treasury, 3.5%, 7/22/2068 | | GBP | 150,000 | | | | 300,623 | |
| | | | | | | | |
| | | | | | $ | 12,259,118 | |
| | | | | | | | |
| Total Foreign Bonds | | | | | | $ | 89,128,823 | |
| | | | | | | | |
| U.S. Bonds – 39.2% | | | | | | | | |
| Asset-Backed & Securitized – 0.0% | | | | | |
| Commercial Mortgage Asset Trust, FRN, 0.412%, 1/17/2032 (i)(z) | | $ | 755,742 | | | $ | 533 | |
| First Union National Bank Commercial Mortgage Trust, FRN, 2.187%, 1/12/2043 (i)(q)(z) | | | 47,061 | | | | 230 | |
| | | | | | | | |
| | | $ | 763 | |
| | | | | | | | |
| Mortgage-Backed – 0.3% | | | | | | | | |
| Fannie Mae, 5.14%, 1/01/2018 | | $ | 15,173 | | | $ | 15,553 | |
| Fannie Mae, 5.1%, 3/01/2019 | | | 57,900 | | | | 61,133 | |
| Fannie Mae, 5.18%, 3/01/2019 | | | 58,000 | | | | 60,895 | |
| Freddie Mac, 1.426%, 8/25/2017 | | | 186,555 | | | | 186,679 | |
| Freddie Mac, 3.882%, 11/25/2017 | | | 89,000 | | | | 90,526 | |
| Freddie Mac, 5.085%, 3/25/2019 | | | 43,000 | | | | 45,622 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| U.S. Bonds – continued | | | | | | | | |
| Mortgage-Backed – continued | | | | | | | | |
| Freddie Mac, 3.32%, 2/25/2023 | | $ | 5,000 | | | $ | 5,229 | |
| | | | | | | | |
| | | | | | $ | 465,637 | |
| | | | | | | | |
| U.S. Government Agencies and Equivalents – 0.6% | |
| Small Business Administration, 4.57%, 6/01/2025 | | $ | 7,535 | | | $ | 7,890 | |
| Small Business Administration, 5.09%, 10/01/2025 | | | 7,621 | | | | 8,148 | |
| Small Business Administration, 5.21%, 1/01/2026 | | | 111,499 | | | | 118,787 | |
| Small Business Administration, 2.22%, 3/01/2033 | | | 747,181 | | | | 730,056 | |
| | | | | | | | |
| | | $ | 864,881 | |
| | | | | | | | |
| U.S. Treasury Obligations – 38.3% | | | | | |
| U.S. Treasury Bonds, 5.25%, 2/15/2029 | | $ | 783,000 | | | $ | 999,182 | |
| U.S. Treasury Bonds, 4.5%, 2/15/2036 | | | 630,000 | | | | 795,743 | |
| U.S. Treasury Bonds, 4.5%, 8/15/2039 | | | 4,515,400 | | | | 5,660,257 | |
| U.S. Treasury Bonds, 3.625%, 2/15/2044 | | | 6,379,000 | | | | 7,055,550 | |
| U.S. Treasury Notes, 1.125%, 6/15/2018 | | | 7,000,000 | | | | 7,006,020 | |
| U.S. Treasury Notes, 0.875%, 5/15/2019 | | | 4,500,000 | | | | 4,455,482 | |
| U.S. Treasury Notes, 3.5%, 5/15/2020 | | | 19,522,000 | | | | 20,737,733 | |
| U.S. Treasury Notes, 1.75%, 5/15/2022 | | | 11,717,000 | | | | 11,532,586 | |
| U.S. Treasury Notes, 2.25%, 11/15/2025 | | | 4,595,000 | | | | 4,529,484 | |
| | | | | | | | |
| | | $ | 62,772,037 | |
| | | | | | | | |
| Total U.S. Bonds | | | $ | 64,103,318 | |
| | | | | | | | |
Total Bonds
(Identified Cost, $158,387,197) | | | $ | 153,232,141 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 5.9% | | | | | |
| MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $9,681,927) | | | 9,682,019 | | | $ | 9,682,019 | |
| | | | | | | | |
Total Investments
(Identified Cost, $168,069,124) | | | $ | 162,914,160 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.5% | | | | 869,317 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | $ | 163,783,477 | |
| | | | | | | | |
| (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 $403,136 representing 0.3% 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. |
8
MFS Global Governments Portfolio
Portfolio of Investments – continued
| (z) | | Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The fund holds the following restricted securities: |
| | | | | | | | | | |
| Restricted Securities | | Acquisition
Date | | Cost | | | Value | |
| Commercial Mortgage Asset Trust, FRN, 0.412%, 1/17/2032 | | 8/25/03-12/02/11 | | | $1,501 | | | | $533 | |
| First Union National Bank Commercial Mortgage Trust, FRN, 2.187%, 1/12/2043 | | 12/11/03-11/30/11 | | | 72 | | | | 230 | |
| Total Restricted Securities | | | | $763 | |
| % 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 the current rate may not be the rate reported at period end. |
| PLC | | Public Limited Company |
Abbreviations indicate amounts shown in currencies other than the U.S. dollar. All amounts are stated in U.S. dollars unless otherwise indicated. A list of abbreviations is shown below:
| CNH | | Chinese Yuan Renminbi (Offshore) |
Derivative Contracts at 12/31/16
Forward Foreign Currency Exchange Contracts at 12/31/16
| | | | | | | | | | | | | | | | | | | | | | |
| Type | | Currency | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | | Contracts
at Value | | | Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives | | | | | | | | | | | | | | |
| SELL | | | | AUD | | Barclays Bank PLC | | 669,117 | | 3/10/17 | | $ | 497,914 | | | $ | 482,100 | | | $ | 15,814 | |
| SELL | | | | AUD | | Westpac Banking Corp. | | 3,048,430 | | 3/10/17 | | | 2,268,514 | | | | 2,196,402 | | | | 72,112 | |
| SELL | | | | CAD | | Merrill Lynch International Bank | | 9,841,919 | | 3/10/17 | | | 7,427,387 | | | | 7,335,997 | | | | 91,390 | |
| SELL | | | | CNH | | JPMorgan Chase Bank N.A. | | 12,159,000 | | 5/23/17 | | | 1,806,364 | | | | 1,695,357 | | | | 111,007 | |
| SELL | | | | DKK | | Citibank N.A. | | 4,299,482 | | 3/10/17 | | | 624,575 | | | | 610,895 | | | | 13,680 | |
| SELL | | | | EUR | | JPMorgan Chase Bank N.A. | | 1,127,071 | | 1/17/17-3/10/17 | | | 1,207,006 | | | | 1,188,476 | | | | 18,530 | |
| SELL | | | | EUR | | Morgan Stanley Capital Services, Inc. | | 186,134 | | 3/10/17 | | | 199,021 | | | | 196,557 | | | | 2,464 | |
| SELL | | | | GBP | | Goldman Sachs International | | 653,000 | | 3/10/17 | | | 807,814 | | | | 806,033 | | | | 1,781 | |
| SELL | | | | GBP | | Morgan Stanley Capital Services, Inc. | | 1,553,032 | | 3/10/17 | | | 1,946,040 | | | | 1,916,990 | | | | 29,050 | |
| BUY | | | | JPY | | Goldman Sachs International | | 477,038,000 | | 3/10/17 | | | 4,094,427 | | | | 4,094,465 | | | | 38 | |
| SELL | | | | JPY | | Brown Brothers Harriman | | 190,712,000 | | 3/10/17 | | | 1,643,465 | | | | 1,636,900 | | | | 6,565 | |
| SELL | | | | JPY | | Goldman Sachs International | | 106,693,000 | | 3/10/17 | | | 928,759 | | | | 915,757 | | | | 13,002 | |
| SELL | | | | NOK | | Citibank N.A. | | 55,353 | | 3/10/17 | | | 6,594 | | | | 6,413 | | | | 181 | |
| SELL | | | | NOK | | JPMorgan Chase Bank N.A. | | 11,258,849 | | 3/10/17 | | | 1,337,725 | | | | 1,304,375 | | | | 33,350 | |
| SELL | | | | NZD | | JPMorgan Chase Bank N.A. | | 30,688 | | 3/10/17 | | | 21,913 | | | | 21,278 | | | | 635 | |
| BUY | | | | SEK | | Goldman Sachs International | | 7,558,000 | | 3/10/17 | | | 822,517 | | | | 832,735 | | | | 10,218 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | $ | 419,817 | |
| | | | | | | | | | | | | | | | | | | | | | |
9
MFS Global Governments Portfolio
Portfolio of Investments – continued
Forward Foreign Currency Exchange Contracts at 12/31/16 – continued
| | | | | | | | | | | | | | | | | | | | | | |
| Type | | Currency | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | | Contracts
at Value | | | Unrealized
Appreciation
(Depreciation) | |
| Liability Derivatives | | | | | | | | | | | | | | |
| BUY | | | | CAD | | Goldman Sachs International | | 440,000 | | 3/10/17 | | | $329,364 | | | $ | 327,968 | | | $ | (1,396 | ) |
| BUY | | | | CAD | | JPMorgan Chase Bank N.A. | | 2,140,000 | | 3/10/17 | | | 1,632,302 | | | | 1,595,119 | | | | (37,183 | ) |
| BUY | | | | EUR | | Citibank N.A. | | 9,134,840 | | 3/10/17 | | | 9,832,431 | | | | 9,646,359 | | | | (186,072 | ) |
| BUY | | | | EUR | | Goldman Sachs International | | 432,000 | | 3/10/17 | | | 460,129 | | | | 456,191 | | | | (3,938 | ) |
| BUY | | | | EUR | | JPMorgan Chase Bank N.A. | | 765,000 | | 3/10/17 | | | 824,414 | | | | 807,837 | | | | (16,577 | ) |
| BUY | | | | EUR | | Morgan Stanley Capital Services, Inc. | | 390,000 | | 3/10/17 | | | 412,468 | | | | 411,839 | | | | (629 | ) |
| BUY | | | | GBP | | JPMorgan Chase Bank N.A. | | 65,000 | | 3/10/17 | | | 82,253 | | | | 80,234 | | | | (2,019 | ) |
| BUY | | | | GBP | | Merrill Lynch International Bank | | 972,115 | | 3/10/17 | | | 1,234,829 | | | | 1,199,933 | | | | (34,896 | ) |
| BUY | | | | JPY | | Goldman Sachs International | | 698,934,738 | | 3/10/17 | | | 6,165,430 | | | | 5,999,028 | | | | (166,402 | ) |
| BUY | | | | PLN | | Citibank N.A. | | 24,636 | | 3/10/17 | | | 5,960 | | | | 5,881 | | | | (79 | ) |
| SELL | | | | SEK | | Citibank N.A. | | 5,736,144 | | 3/10/17 | | | 631,297 | | | | 632,005 | | | | (708 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | $ | (449,899 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2016, the fund had cash collateral of $260,000 to cover any commitments for certain derivative contracts. Cash collateral is comprised of “Deposits with brokers” on 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 12/31/16 | | | | | | | | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $158,387,197) | | | $153,232,141 | | | | | |
Underlying affiliated funds, at value (identified cost, $9,681,927) | | | 9,682,019 | | | | | |
Total investments, at value (identified cost, $168,069,124) | | | $162,914,160 | | | | | |
Deposits with brokers | | | 260,000 | | | | | |
Receivables for | | | | | | | | |
Forward foreign currency exchange contracts | | | 419,817 | | | | | |
Fund shares sold | | | 62,242 | | | | | |
Interest | | | 1,156,822 | | | | | |
Other assets | | | 144 | | | | | |
Total assets | | | | | | | $164,813,185 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Forward foreign currency exchange contracts | | | $449,899 | | | | | |
Investments purchased | | | 490,663 | | | | | |
Fund shares reacquired | | | 16,528 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 10,225 | | | | | |
Shareholder servicing costs | | | 17 | | | | | |
Distribution and/or service fees | | | 32 | | | | | |
Payable for independent Trustees’ compensation | | | 48 | | | | | |
Accrued expenses and other liabilities | | | 62,296 | | | | | |
Total liabilities | | | | | | | $1,029,708 | |
Net assets | | | | | | | $163,783,477 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $175,718,832 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | (5,218,905 | ) | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (6,553,086 | ) | | | | |
Accumulated net investment loss | | | (163,364 | ) | | | | |
Net assets | | | | | | | $163,783,477 | |
Shares of beneficial interest outstanding | | | | | | | 16,596,166 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $162,211,072 | | | | 16,433,930 | | | | $9.87 | |
Service Class | | | 1,572,405 | | | | 162,236 | | | | 9.69 | |
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 12/31/16 | | | | | | | | |
Net investment income | | | | | |
Income | | | | | | | | |
Interest | | | $2,576,911 | | | | | |
Dividends from underlying affiliated funds | | | 46,311 | | | | | |
Other | | | 6,365 | | | | | |
Total investment income | | | | | | | $2,629,587 | |
Expenses | | | | | | | | |
Management fee | | | $1,336,006 | | | | | |
Distribution and/or service fees | | | 4,003 | | | | | |
Shareholder servicing costs | | | 3,516 | | | | | |
Administrative services fee | | | 37,467 | | | | | |
Independent Trustees’ compensation | | | 5,488 | | | | | |
Custodian fee | | | 32,290 | | | | | |
Reimbursement of custodian expenses | | | (40,536 | ) | | | | |
Shareholder communications | | | 7,006 | | | | | |
Audit and tax fees | | | 69,804 | | | | | |
Legal fees | | | 1,838 | | | | | |
Miscellaneous | | | 17,596 | | | | | |
Total expenses | | | | | | | $1,474,478 | |
Reduction of expenses by investment adviser | | | (12,653 | ) | | | | |
Net expenses | | | | | | | $1,461,825 | |
Net investment income | | | | | | | $1,167,762 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments: | | | | | | | | |
Non-affiliated issuers | | | $(2,085,116 | ) | | | | |
Underlying affiliated funds | | | 284 | | | | | |
Foreign currency | | | 382,828 | | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $(1,702,004 | ) |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $2,671,026 | | | | | |
Translation of assets and liabilities in foreign currencies | | | (390,524 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $2,280,502 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $578,498 | |
Change in net assets from operations | | | | | | | $1,746,260 | |
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 | | | 2016 | | | | 2015 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $1,167,762 | | | | $1,838,653 | |
Net realized gain (loss) on investments and foreign currency | | | (1,702,004 | ) | | | (9,326,387 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | | 2,280,502 | | | | (116,864 | ) |
Change in net assets from operations | | | $1,746,260 | | | | $(7,604,598 | ) |
| Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $— | | | | $(4,962,664 | ) |
Change in net assets from fund share transactions | | | $(22,526,634 | ) | | | $(14,622,786 | ) |
Total change in net assets | | | $(20,780,374 | ) | | | $(27,190,048 | ) |
| Net assets | | | | | | | | |
At beginning of period | | | 184,563,851 | | | | 211,753,899 | |
At end of period (including accumulated net investment loss of $163,364 and
$582,029, respectively) | | | $163,783,477 | | | | $184,563,851 | |
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 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| | | | | | | | | | | | | | | | | | | | |
Net asset value, beginning of period | | | $9.84 | | | | $10.47 | | | | $10.45 | | | | $11.03 | | | | $11.29 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.07 | (c) | | | $0.09 | | | | $0.11 | | | | $0.10 | | | | $0.11 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | (0.04 | )(g) | | | (0.47 | ) | | | (0.03 | ) | | | (0.68 | ) | | | (0.04 | ) |
Total from investment operations | | | $0.03 | | | | $(0.38 | ) | | | $0.08 | | | | $(0.58 | ) | | | $0.07 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $— | | | | $(0.25 | ) | | | $(0.06 | ) | | | $— | | | | $(0.33 | ) |
From tax return of capital | | | — | | | | — | | | | — | | | | — | | | | (0.00 | )(w) |
Total distributions declared to shareholders | | | $— | | | | $(0.25 | ) | | | $(0.06 | ) | | | $— | | | | $(0.33 | ) |
Net asset value, end of period (x) | | | $9.87 | | | | $9.84 | | | | $10.47 | | | | $10.45 | | | | $11.03 | |
Total return (%) (k)(r)(s)(x) | | | 0.30 | (c) | | | (3.66 | ) | | | 0.73 | | | | (5.26 | ) | | | 0.64 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.83 | (c) | | | 0.85 | | | | 0.84 | | | | 0.84 | | | | 0.98 | |
Expenses after expense reductions (f) | | | 0.82 | (c) | | | 0.84 | | | | 0.83 | | | | 0.84 | | | | 0.98 | |
Net investment income | | | 0.66 | (c) | | | 0.92 | | | | 1.07 | | | | 0.94 | | | | 0.96 | |
Portfolio turnover | | | 75 | | | | 94 | | | | 31 | | | | 56 | | | | 15 | |
Net assets at end of period (000 omitted) | | | $162,211 | | | | $182,978 | | | | $209,945 | | | | $228,029 | | | | $226,668 | |
See Notes to Financial Statements
14
MFS Global Governments Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $9.69 | | | | $10.31 | | | | $10.28 | | | | $10.87 | | | | $11.13 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.04 | (c) | | | $0.07 | | | | $0.09 | | | | $0.07 | | | | $0.08 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | (0.04 | )(g) | | | (0.46 | ) | | | (0.04 | ) | | | (0.66 | ) | | | (0.04 | ) |
Total from investment operations | | | $0.00 | (w) | | | $(0.39 | ) | | | $0.05 | | | | $(0.59 | ) | | | $0.04 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $— | | | | $(0.23 | ) | | | $(0.02 | ) | | | $— | | | | $(0.30 | ) |
From tax return of capital | | | — | | | | — | | | | — | | | | — | | | | (0.00 | )(w) |
Total distributions declared to shareholders | | | $— | | | | $(0.23 | ) | | | $(0.02 | ) | | | $— | | | | $(0.30 | ) |
Net asset value, end of period (x) | | | $9.69 | | | | $9.69 | | | | $10.31 | | | | $10.28 | | | | $10.87 | |
Total return (%) (k)(r)(s)(x) | | | 0.00 | (c)(w) | | | (3.86 | ) | | | 0.49 | | | | (5.43 | ) | | | 0.33 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.08 | (c) | | | 1.10 | | | | 1.09 | | | | 1.09 | | | | 1.25 | |
Expenses after expense reductions (f) | | | 1.07 | (c) | | | 1.09 | | | | 1.08 | | | | 1.09 | | | | 1.25 | |
Net investment income | | | 0.41 | (c) | | | 0.67 | | | | 0.81 | | | | 0.69 | | | | 0.71 | |
Portfolio turnover | | | 75 | | | | 94 | | | | 31 | | | | 56 | | | | 15 | |
Net assets at end of period (000 omitted) | | | $1,572 | | | | $1,586 | | | | $1,809 | | | | $2,553 | | | | $2,268 | |
| (c) | | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
| (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 and total return or ratio was less than 0.01%, as applicable. |
| (x) | | The net asset values 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 October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
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, 2016 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 | | | $— | | | | $63,636,918 | | | | $— | | | | $63,636,918 | |
| Non-U.S. Sovereign Debt | | | — | | | | 88,725,687 | | | | — | | | | 88,725,687 | |
| Residential Mortgage-Backed Securities | | | — | | | | 465,637 | | | | — | | | | 465,637 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 763 | | | | — | | | | 763 | |
| Foreign Bonds | | | — | | | | 403,136 | | | | — | | | | 403,136 | |
| Mutual Funds | | | 9,682,019 | | | | — | | | | — | | | | 9,682,019 | |
| Total Investments | | | $9,682,019 | | | | $153,232,141 | | | | $— | | | | $162,914,160 | |
| | | | |
| Other Financial Instruments | | | | | | | | | | | | |
| Forward Foreign Currency Exchange Contracts – Assets | | | $— | | | | $419,817 | | | | $— | | | | $419,817 | |
| Forward Foreign Currency Exchange Contracts – Liabilities | | | — | | | | (449,899 | ) | | | — | | | | (449,899 | ) |
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, 2016 as reported in the Statement of Assets and Liabilities:
| | | | | | | | | | |
| | | | | Fair Value | |
| Risk | | Derivative Contracts | | Asset Derivatives | | | Liability Derivatives | |
| Foreign Exchange | | Forward Foreign Currency Exchange | | | $419,817 | | | | $449,899 | |
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, 2016 as reported in the Statement of Operations:
| | | | |
| Risk | | Foreign Currency | |
| Foreign Exchange | | | $451,861 | |
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, 2016 as reported in the Statement of Operations:
| | | | |
| Risk | | Translation of
Assets and
Liabilities in
Foreign Currencies | |
| Foreign Exchange | | | $(378,935 | ) |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain, but not all, uncleared 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. 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 agreement 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.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the clearing broker and the clearing house for cleared derivatives (e.g., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for uncleared derivatives (e.g., forward foreign currency exchange contracts, uncleared swap agreements, and uncleared options). For derivatives traded under an ISDA Master Agreement, which contains a collateral support annex, 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 fund may be required to make payments of interest on uncovered collateral or margin obligations with the broker. Any such payments are included in “Miscellaneous” expense in the Statement of Operations.
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, a multicurrency cash settlement system for the centralized settlement of foreign transactions. 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, where applicable, by the posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles. 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.
18
MFS Global Governments Portfolio
Notes to Financial Statements – continued
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.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian 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 net operating losses, amortization and accretion of debt securities, 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:
| | | | | | | | |
| | | 12/31/16 | | | 12/31/15 | |
| Ordinary income (including any short-term capital gains) | | | $— | | | | $4,962,664 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/16 | | | | |
| Cost of investments | | | $169,968,870 | |
| Gross appreciation | | | 1,315,057 | |
| Gross depreciation | | | (8,369,767 | ) |
| Net unrealized appreciation (depreciation) | | | $(7,054,710 | ) |
| Capital loss carryforwards | | | (4,590,336 | ) |
| Other temporary differences | | | (290,309 | ) |
As of December 31, 2016, the fund had capital loss carryforwards available to offset future realized gains. These net capital losses may be carried forward indefinitely and their character is retained as short-term and/or long-term losses. Such losses are characterized as follows:
| | | | |
| Short-Term | | | (2,595,590 | ) |
| Long-Term | | | (1,994,746 | ) |
| Total | | | (4,590,336 | ) |
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
19
MFS Global Governments Portfolio
Notes to Financial Statements – continued
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
12/31/16 | | | Year ended
12/31/15 | |
| Initial Class | | | $— | | | | $4,916,207 | |
| Service Class | | | — | | | | 46,457 | |
| Total | | | $— | | | | $4,962,664 | |
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
| | | | |
| First $300 million of average daily net assets | | | 0.75% | |
| Average daily net assets in excess of $300 million | | | 0.675% | |
The investment adviser 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 terminate on April 27, 2017. For the year ended December 31, 2016, the fund’s average daily net assets did not exceed $1 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, 2016, this management fee reduction amounted to $12,653, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.74% of the fund’s average daily net assets.
Effective April 28, 2017, the management fee will be computed daily and paid monthly at the following annual rates:
| | | | |
| First $300 million of average daily net assets | | | 0.75% | |
| Next $700 million of average daily net assets | | | 0.675% | |
| Average daily net assets in excess of $1 billion | | | 0.625% | |
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, 2018. For the year ended December 31, 2016, 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, 2016, the fee was $2,587, which equated to 0.0015% 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, 2016, these costs amounted to $929.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund 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, 2016 was equivalent to an annual effective rate of 0.0210% of the fund’s average daily net assets.
20
MFS Global Governments 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 – 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. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $351 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the 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. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, were as follows:
| | | | | | | | |
| | | Purchases | | | Sales | |
| U.S. Government securities | | | $43,760,089 | | | | $40,150,736 | |
| Investments (non-U.S. Government securities) | | | $79,066,100 | | | | $101,332,905 | |
| (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 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 403,733 | | | | $4,128,115 | | | | 270,940 | | | | $2,743,138 | |
Service Class | | | 18,778 | | | | 186,575 | | | | 43,244 | | | | 438,974 | |
| | | 422,511 | | | | $4,314,690 | | | | 314,184 | | | | $3,182,112 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | — | | | | $— | | | | 489,662 | | | | $4,916,207 | |
Service Class | | | — | | | | — | | | | 4,697 | | | | 46,457 | |
| | | — | | | | $— | | | | 494,359 | | | | $4,962,664 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (2,563,376 | ) | | | $(26,633,294 | ) | | | (2,211,575 | ) | | | $(22,187,190 | ) |
Service Class | | | (20,241 | ) | | | (208,030 | ) | | | (59,631 | ) | | | (580,372 | ) |
| | | (2,583,617 | ) | | | $(26,841,324 | ) | | | (2,271,206 | ) | | | $(22,767,562 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (2,159,643 | ) | | | $(22,505,179 | ) | | | (1,450,973 | ) | | | $(14,527,845 | ) |
Service Class | | | (1,463 | ) | | | (21,455 | ) | | | (11,690 | ) | | | (94,941 | ) |
| | | (2,161,106 | ) | | | $(22,526,634 | ) | | | (1,462,663 | ) | | | $(14,622,786 | ) |
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 50%, 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 $1.25 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 Overnight Federal Reserve funds rate or daily 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 Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $1,105 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:
| | | | | | | | | | | | | | | | |
| | | Beginning | | | Acquisitions | | | Dispositions | | | Ending | |
| Underlying Affiliated Fund | | Shares/Par
Amount | | | Shares/Par
Amount | | | Shares/Par
Amount | | | Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 8,951,062 | | | | 101,685,779 | | | | (100,954,822 | ) | | | 9,682,019 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $284 | | | | $— | | | | $46,311 | | | | $9,682,019 | |
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, 2016, 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, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Global Governments Portfolio as of December 31, 2016, 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 15, 2017
23
MFS Global Governments Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, 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 53) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 55) | | Trustee | | January 2014 | | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 74) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 65) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council (until 2015); 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 |
| | | | |
Maureen R. Goldfarb (age 61) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Michael Hegarty (age 72) | | Trustee | | December 2004 | | Private investor | | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) |
| | | | |
John P. Kavanaugh (age 62) | | Trustee and Vice Chair of Trustees | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 60) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 59) | | Trustee | | March 2005 | | Private investor | | The Travelers Companies, Director; Dycom Industries, Inc., Director |
| | | |
| OFFICERS | | | | | | |
Christopher R. Bohane (k) (age 43) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 48) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 57) | | 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 |
| | | | |
Ethan D. Corey (k) (age 53) | | 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 48) | | President | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 43) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | 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) |
Susan A. Pereira (k) (age 46) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 46) | | 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 64) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 72) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 46) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Martin J. Wolin (k) (age 49) | | Chief Compliance Officer | | July 2015 | | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | | N/A |
| | | | |
James O. Yost (k) (age 56) | | 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. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
| (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. Buller and Kavanaugh and Ms. 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, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a 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 Erik Weisman Matt Ryan | | |
25
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, 2016 (“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 Senior Officer, a 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 Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of 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 Broadridge 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 Broadridge 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, 2015, 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 3rd quintile for the one-year period and the 5th quintile for the five-year period ended December 31, 2015 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 of their overall conclusions regarding the investment advisory agreement, that MFS’ responses and efforts and plans to improve
26
MFS Global Governments Portfolio
Board Review of Investment Advisory Agreement – continued
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 Broadridge. 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 data provided by Broadridge (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 Broadridge expense group median and the Fund’s total expense ratio was approximately at the Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. 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, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate 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 further reduce 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 “management fee waiver rate”). They also noted that MFS has agreed to amend its contractual advisory fee rate schedule to reflect the existing management fee waiver rate effective as of April 28, 2017. 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, 2016.
27
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 mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios”, then “VIT II” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
28
rev. 3/16
| | | | |
| 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., and MFS Heritage Trust Company. |
| | |
| 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, or 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, 2016
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 • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Global Growth Portfolio
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
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 | | | | |
| Alphabet, Inc., “A” | | | 3.5% | |
| Thermo Fisher Scientific, Inc. | | | 2.4% | |
| Accenture PLC, “A” | | | 2.4% | |
| Abbott Laboratories | | | 2.1% | |
| Nestle S.A. | | | 2.0% | |
| NIKE, Inc., “B” | | | 2.0% | |
| Cognizant Technology Solutions Corp., “A” | | | 1.9% | |
| LVMH Moet Hennessy Louis Vuitton SE | | | 1.9% | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 1.8% | |
| Mead Johnson Nutrition Co., “A” | | | 1.7% | |
| |
| Equity sectors | | | | |
| Consumer Staples | | | 17.5% | |
| Health Care | | | 13.4% | |
| Retailing | | | 12.1% | |
| Special Products & Services | | | 11.9% | |
| Technology | | | 11.5% | |
| Financial Services | | | 8.8% | |
| Leisure | | | 6.9% | |
| Basic Materials | | | 6.4% | |
| Industrial Goods & Services | | | 6.3% | |
| Transportation | | | 2.1% | |
| Autos & Housing | | | 1.5% | |
| Energy | | | 0.9% | |
| | | | |
| Issuer country weightings (x) | | | | |
| United States | | | 60.1% | |
| United Kingdom | | | 10.1% | |
| Switzerland | | | 6.9% | |
| France | | | 6.0% | |
| Japan | | | 2.4% | |
| China | | | 2.0% | |
| Brazil | | | 1.8% | |
| Taiwan | | | 1.8% | |
| South Korea | | | 1.8% | |
| Other Countries | | | 7.1% | |
| |
| Currency exposure weightings (y) | | | | |
| United States Dollar | | | 60.9% | |
| British Pound Sterling | | | 11.2% | |
| Euro | | | 7.7% | |
| Swiss Franc | | | 6.9% | |
| Japanese Yen | | | 2.4% | |
| Brazilian Real | | | 1.8% | |
| Taiwan Dollar | | | 1.8% | |
| South Korean Won | | | 1.8% | |
| Chinese Renminbi | | | 1.6% | |
| Other Currencies | | | 3.9% | |
| (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 & Cash Equivalents. |
| (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 & Cash Equivalents. |
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
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, 2016, Initial Class shares of the MFS Global Growth Portfolio (“fund”) provided a total return of 6.07%, while Service Class shares of the fund provided a total return of 5.85%. These returns compare with a return of 3.66% over the same period for the fund’s benchmark, the MSCI All Country World Growth Index.
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Contributors to Performance
Stock selection and, to a lesser extent, an underweight position in the health care sector contributed to performance relative to the MSCI All Country World Growth Index. The fund’s overweight position in vision and surgical medical device company Cooper Companies, and not holding a position in pharmaceutical company Novo Nordisk, bolstered relative results.
Security selection and an underweight position in the financial services sector also benefited relative returns. Here, an overweight position in strong-performing financial services firm Credicorp (Peru) benefited relative performance throughout the year as the company posted improved profitability and healthier operating trends despite relatively sluggish loan growth.
Security selection and, to a lesser extent, overweight positions in both the special products & services and industrial goods & services sectors aided relative performance. Within the special products & services sector, an overweight position in management consulting firm Accenture and global banking and payment technologies provider Fidelity National Information Services strengthened relative results. Within the industrial goods & services sector, the fund’s position in industrial machinery company Colfax (b) also contributed to relative results.
Other notable contributors to relative performance included the fund’s overweight positions in semiconductor design and manufacturing company Texas Instruments, food producer M Dias Branco (h) (Brazil), semiconductor manufacturer Taiwan Semiconductor Manufacturing (Taiwan) and luxury goods company LVMH Moet Hennessy Louis Vuitton SE (France). Shares of Texas Instruments appreciated after the company reported earnings results that exceeded market expectations and a significant increase in the dividend payout.
Performance for the reporting period includes a 0.55% positive impact due to reimbursement to the fund by a third-party service provider.
Detractors from Performance
Weak stock selection within the leisure sector was a primary detractor from relative performance. An overweight position in hotel and restaurant operator Whitbread (United Kingdom), and not holding a position in cable services provider Comcast, held back relative results. Shares of Whitbread traded lower after the UK Referendum vote to leave the European Union appeared to have negatively impacted market sentiment in the hotel and leisure sectors.
3
MFS Global Growth Portfolio
Management Review – continued
Security selection in both the basic materials and consumer staples sectors also held back relative results. There were no stocks within the basic materials sector that were among the fund’s top relative detractors over the reporting period. Within the consumer staples sector, overweight positions in beauty products manufacturer Coty and pediatric nutrition producer Mead Johnson Nutrition hindered relative performance. Shares of Coty declined after the company reported earnings, towards the end of the reporting period, that were weaker-than-expected with organic revenue growth and operating income declining due to disruptions from the company’s recent deal with Procter & Gamble.
Elsewhere, the fund’s overweight positions in athletic shoes and apparel manufacturer NIKE and pharmaceutical and medical products maker Abbott Laboratories dampened relative performance. Not holding positions in strong-performing computer graphics company NVIDIA, health insurance provider UnitedHealth Group and insurance and investment firm Berkshire Hathaway, and an underweight position in mobile phones and personal computer maker Apple, further detracted from relative results.
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 a detractor from relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our 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 12/31/16
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 12/31/16
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class Inception Date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 11/16/93 | | 6.07% | | 9.60% | | 4.82% | | |
| | | Service Class | | 8/24/01 | | 5.85% | | 9.34% | | 4.56% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | MSCI All Country World Growth Index (f) | | 3.66% | | 10.12% | | 4.88% | | |
The 2016 performance includes a 0.55% positive impact due to reimbursement to the fund by the custodian.
| (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, 2016 through December 31, 2016
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, 2016 through December 31, 2016.
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
7/01/16 | | | Ending
Account Value
12/31/16 | | | Expenses Paid
During Period (p)
7/01/16-12/31/16 | |
| Initial Class | | Actual | | | 0.10% | | | | $1,000.00 | | | | $1,009.91 | | | | $0.51 | |
| | Hypothetical (h) | | | 0.10% | | | | $1,000.00 | | | | $1,024.63 | | | | $0.51 | |
| Service Class | | Actual | | | 0.35% | | | | $1,000.00 | | | | $1,009.06 | | | | $1.77 | |
| | Hypothetical (h) | | | 0.35% | | | | $1,000.00 | | | | $1,023.38 | | | | $1.78 | |
| (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 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian during the six month period. Had this one-time Reimbursement of Expenses by Custodian not occurred during the 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 1.00%, $5.05 and $5.08 for Initial Class and 1.25%, $6.31 and $6.34 for Service Class, respectively. See Note 2 in the Notes to Financial Statements for additional information.
6
MFS Global Growth Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – 99.3% | |
| Aerospace – 1.4% | |
| Rolls-Royce Holdings PLC | | | 55,070 | | | $ | 452,890 | |
| United Technologies Corp. | | | 1,854 | | | | 203,235 | |
| | | | | | | | |
| | | $ | 656,125 | |
| | | | | | | | |
| Airlines – 0.8% | | | | | | | | |
| Aena S.A. | | | 2,816 | | | $ | 384,317 | |
| | | | | | | | |
| Alcoholic Beverages – 4.5% | | | | | | | | |
| AmBev S.A., ADR | | | 118,675 | | | $ | 582,694 | |
| Carlsberg A.S., “B” | | | 4,898 | | | | 422,702 | |
| Diageo PLC | | | 17,680 | | | | 457,401 | |
| Pernod Ricard S.A. | | | 6,666 | | | | 722,397 | |
| | | | | | | | |
| | | $ | 2,185,194 | |
| | | | | | | | |
| Apparel Manufacturers – 6.1% | | | | | | | | |
| Burberry Group PLC | | | 19,062 | | | $ | 351,675 | |
| Compagnie Financiere Richemont S.A. | | | 2,931 | | | | 194,143 | |
| LVMH Moet Hennessy Louis Vuitton SE | | | 4,892 | | | | 932,794 | |
| NIKE, Inc., “B” | | | 18,748 | | | | 952,961 | |
| Samsonite International S.A. | | | 33,900 | | | | 96,445 | |
| VF Corp. | | | 8,386 | | | | 447,393 | |
| | | | | | | | |
| | | $ | 2,975,411 | |
| | | | | | | | |
| Broadcasting – 2.6% | | | | | | | | |
| Time Warner, Inc. | | | 3,075 | | | $ | 296,830 | |
| Twenty-First Century Fox, Inc. | | | 25,670 | | | | 719,787 | |
| Walt Disney Co. | | | 2,167 | | | | 225,845 | |
| | | | | | | | |
| | | $ | 1,242,462 | |
| | | | | | | | |
| Brokerage & Asset Managers – 1.9% | | | | | | | | |
| Blackstone Group LP | | | 22,511 | | | $ | 608,472 | |
| Charles Schwab Corp. | | | 8,489 | | | | 335,061 | |
| | | | | | | | |
| | | $ | 943,533 | |
| | | | | | | | |
| Business Services – 11.9% | | | | | | | | |
| Accenture PLC, “A” | | | 9,855 | | | $ | 1,154,316 | |
| Brenntag AG | | | 3,391 | | | | 187,909 | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 16,834 | | | | 943,209 | |
| Compass Group PLC | | | 30,807 | | | | 567,844 | |
| Equifax, Inc. | | | 4,663 | | | | 551,306 | |
| Experian Group Ltd. | | | 32,324 | | | | 625,669 | |
| Fidelity National Information Services, Inc. | | | 9,111 | | | | 689,156 | |
| Fiserv, Inc. (a) | | | 4,245 | | | | 451,159 | |
| Intertek Group PLC | | | 14,399 | | | | 614,328 | |
| | | | | | | | |
| | | $ | 5,784,896 | |
| | | | | | | | |
| Chemicals – 2.4% | | | | | | | | |
| Monsanto Co. | | | 6,679 | | | $ | 702,698 | |
| PPG Industries, Inc. | | | 5,016 | | | | 475,316 | |
| | | | | | | | |
| | | $ | 1,178,014 | |
| | | | | | | | |
| Computer Software – 0.5% | |
| Dassault Systems S.A. | | | 2,872 | | | $ | 218,850 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – continued | | | | | |
| Computer Software – Systems – 1.1% | | | | | |
| Apple, Inc. | | | 4,660 | | | $ | 539,721 | |
| | | | | | | | |
| Construction – 1.5% | | | | | | | | |
| Sherwin-Williams Co. | | | 2,666 | | | $ | 716,461 | |
| | | | | | | | |
| Consumer Products – 7.5% | | | | | | | | |
| Colgate-Palmolive Co. | | | 8,244 | | | $ | 539,487 | |
| Coty, Inc., “A” | | | 27,297 | | | | 499,808 | |
| Estee Lauder Cos., Inc., “A” | | | 7,061 | | | | 540,096 | |
| Hengan International Group Co. Ltd. | | | 32,500 | | | | 238,288 | |
| KOSE Corp. | | | 7,600 | | | | 631,410 | |
| L’Oréal | | | 3,346 | | | | 610,744 | |
| Reckitt Benckiser Group PLC | | | 6,946 | | | | 587,175 | |
| | | | | | | | |
| | | $ | 3,647,008 | |
| | | | | | | | |
| Electrical Equipment – 3.2% | | | | | | | | |
| Amphenol Corp., “A” | | | 7,735 | | | $ | 519,792 | |
| Fortive Corp. | | | 3,102 | | | | 166,360 | |
| Mettler-Toledo International, Inc. (a) | | | 1,662 | | | | 695,647 | |
| W.W. Grainger, Inc. | | | 798 | | | | 185,336 | |
| | | | | | | | |
| | | $ | 1,567,135 | |
| | | | | | | | |
| Electronics – 4.0% | | | | | | | | |
| Samsung Electronics Co. Ltd. | | | 293 | | | $ | 432,924 | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 30,680 | | | | 882,050 | |
| Texas Instruments, Inc. | | | 8,757 | | | | 638,998 | |
| | | | | | | | |
| | | $ | 1,953,972 | |
| | | | | | | | |
| Food & Beverages – 5.5% | | | | | | | | |
| Chr. Hansen Holding A.S. | | | 2,498 | | | $ | 138,332 | |
| Danone S.A. | | | 6,360 | | | | 402,558 | |
| Mead Johnson Nutrition Co., “A” | | | 11,891 | | | | 841,407 | |
| Nestle S.A. | | | 13,407 | | | | 961,781 | |
| PepsiCo, Inc. | | | 3,288 | | | | 344,023 | |
| | | | | | | | |
| | | $ | 2,688,101 | |
| | | | | | | | |
| Food & Drug Stores – 2.2% | | | | | | | | |
| CVS Health Corp. | | | 7,162 | | | $ | 565,153 | |
| Sundrug Co. Ltd. | | | 7,400 | | | | 512,222 | |
| | | | | | | | |
| | | $ | 1,077,375 | |
| | | | | | | | |
| Gaming & Lodging – 1.1% | | | | | | | | |
| Paddy Power Betfair PLC | | | 5,119 | | | $ | 553,584 | |
| | | | | | | | |
| General Merchandise – 1.2% | | | | | | | | |
| Dollarama, Inc. | | | 3,718 | | | $ | 272,429 | |
| Lojas Renner S.A. | | | 42,690 | | | | 303,907 | |
| | | | | | | | |
| | | $ | 576,336 | |
| | | | | | | | |
| Insurance – 1.1% | | | | | | | | |
| Aon PLC | | | 4,818 | | | $ | 537,352 | |
| | | | | | | | |
| Internet – 5.9% | | | | | | | | |
| Alibaba Group Holding Ltd., ADR (a) | | | 6,313 | | | $ | 554,345 | |
| Alphabet, Inc., “A” (a) | | | 2,128 | | | | 1,686,334 | |
7
MFS Global Growth Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – continued | | | | | |
| Internet – continued | | | | | |
| Baidu, Inc., ADR (a) | | | 1,171 | | | $ | 192,524 | |
| NAVER Corp. (a) | | | 685 | | | | 438,723 | |
| | | | | | | | |
| | | $ | 2,871,926 | |
| | | | | | | | |
| Leisure & Toys – 0.5% | | | | | | | | |
| Electronic Arts, Inc. (a) | | | 3,023 | | | $ | 238,091 | |
| | | | | | | | |
| Machinery & Tools – 1.7% | | | | | | | | |
| Colfax Corp. (a) | | | 9,829 | | | $ | 353,156 | |
| Fastenal Co. | | | 3,938 | | | | 185,007 | |
| Schindler Holding AG | | | 1,606 | | | | 282,806 | |
| | | | | | | | |
| | | $ | 820,969 | |
| | | | | | | | |
| Medical & Health Technology & Services – 0.3% | |
| Express Scripts Holding Co. (a) | | | 2,190 | | | $ | 150,650 | |
| | | | | | | | |
| Medical Equipment – 9.1% | | | | | | | | |
| Abbott Laboratories | | | 26,073 | | | $ | 1,001,464 | |
| Cooper Cos., Inc. | | | 2,267 | | | | 396,566 | |
| Danaher Corp. | | | 4,891 | | | | 380,715 | |
| Dentsply Sirona, Inc. | | | 4,542 | | | | 262,210 | |
| Sonova Holding AG | | | 2,676 | | | | 323,771 | |
| Thermo Fisher Scientific, Inc. | | | 8,416 | | | | 1,187,498 | |
| Waters Corp. (a) | | | 2,541 | | | | 341,485 | |
| Zimmer Biomet Holdings, Inc. | | | 4,896 | | | | 505,267 | |
| | | | | | | | |
| | | $ | 4,398,976 | |
| | | | | | | | |
| Oil Services – 0.9% | | | | | | | | |
| Schlumberger Ltd. | | | 5,154 | | | $ | 432,678 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 5.8% | |
| Credicorp Ltd. | | | 2,476 | | | $ | 390,861 | |
| HDFC Bank Ltd. | | | 37,204 | | | | 725,525 | |
| Julius Baer Group Ltd. | | | 10,810 | | | | 480,150 | |
| Mastercard, Inc., “A” | | | 3,945 | | | | 407,321 | |
| Visa, Inc., “A” | | | 10,219 | | | | 797,286 | |
| | | | | | | | |
| | | $ | 2,801,143 | |
| | | | | | | | |
| Pharmaceuticals – 4.0% | | | | | | | | |
| Eli Lilly & Co. | | | 8,485 | | | $ | 624,072 | |
| Roche Holding AG | | | 3,604 | | | | 821,183 | |
| Zoetis, Inc. | | | 9,231 | | | | 494,135 | |
| | | | | | | | |
| | | $ | 1,939,390 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – continued | | | | | |
| Printing & Publishing – 1.2% | | | | | | | | |
| Moody’s Corp. | | | 6,254 | | | $ | 589,565 | |
| | | | | | | | |
| Railroad & Shipping – 1.3% | |
| Union Pacific Corp. | | | 6,218 | | | $ | 644,682 | |
| | | | | | | | |
| Restaurants – 1.5% | |
| Whitbread PLC | | | 15,471 | | | $ | 719,160 | |
| | | | | | | | |
| Specialty Chemicals – 4.0% | |
| Croda International PLC | | | 13,031 | | | $ | 511,198 | |
| Ecolab, Inc. | | | 7,109 | | | | 833,317 | |
| Sika AG | | | 62 | | | | 297,853 | |
| Symrise AG | | | 4,659 | | | | 283,616 | |
| | | | | | | | |
| | | $ | 1,925,984 | |
| | | | | | | | |
| Specialty Stores – 2.6% | | | | | |
| AutoZone, Inc. (a) | | | 781 | | | $ | 616,826 | |
| TJX Cos., Inc. | | | 8,427 | | | | 633,121 | |
| | | | | | | | |
| | | $ | 1,249,947 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $38,992,627) | | | $ | 48,209,008 | |
| | | | | | | | |
|
| MONEY MARKET FUNDS – 0.6% | |
| MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $284,384) | | | 284,384 | | | $ | 284,384 | |
| | | | | | | | |
Total Investments
(Identified Cost, $39,277,011) | | | | | | $ | 48,493,392 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.1% | | | | | | | 43,057 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 48,536,449 | |
| | | | | | | | |
| (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 12/31/16 | | | | | | | | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $38,992,627) | | | $48,209,008 | | | | | |
Underlying affiliated funds, at value (identified cost, $284,384) | | | 284,384 | | | | | |
Total investments, at value (identified cost, $39,277,011) | | | $48,493,392 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 43,604 | | | | | |
Fund shares sold | | | 157 | | | | | |
Interest and dividends | | | 82,509 | | | | | |
Receivable from investment adviser | | | 4,770 | | | | | |
Other assets | | | 43 | | | | | |
Total assets | | | | | | | $48,624,475 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | $2,956 | | | | | |
Fund shares reacquired | | | 26,375 | | | | | |
Payable to affiliates | | | | | | | | |
Shareholder servicing costs | | | 14 | | | | | |
Distribution and/or service fees | | | 48 | | | | | |
Payable for independent Trustees’ compensation | | | 33 | | | | | |
Accrued expenses and other liabilities | | | 58,600 | | | | | |
Total liabilities | | | | | | | $88,026 | |
Net assets | | | | | | | $48,536,449 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $37,045,027 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 9,212,924 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | 1,692,273 | | | | | |
Undistributed net investment income | | | 586,225 | | | | | |
Net assets | | | | | | | $48,536,449 | |
Shares of beneficial interest outstanding | | | | | | | 2,311,647 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $46,181,727 | | | | 2,199,181 | | | | $21.00 | |
Service Class | | | 2,354,722 | | | | 112,466 | | | | 20.94 | |
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 12/31/16 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $870,013 | | | | | |
Other | | | 37,579 | | | | | |
Dividends from underlying affiliated funds | | | 1,741 | | | | | |
Interest | | | 1,227 | | | | | |
Foreign taxes withheld | | | (37,726 | ) | | | | |
Total investment income | | | | | | | $872,834 | |
Expenses | | | | | | | | |
Management fee | | | $455,612 | | | | | |
Distribution and/or service fees | | | 5,677 | | | | | |
Shareholder servicing costs | | | 2,960 | | | | | |
Administrative services fee | | | 17,675 | | | | | |
Independent Trustees’ compensation | | | 3,098 | | | | | |
Custodian fee | | | 22,150 | | | | | |
Reimbursement of custodian expenses | | | (233,033 | ) | | | | |
Shareholder communications | | | 8,582 | | | | | |
Audit and tax fees | | | 68,700 | | | | | |
Legal fees | | | 585 | | | | | |
Miscellaneous | | | 15,371 | | | | | |
Total expenses | | | | | | | $367,377 | |
Reduction of expenses by investment adviser | | | (85,400 | ) | | | | |
Net expenses | | | | | | | $281,977 | |
Net investment income | | | | | | | $590,857 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments: | | | | | | | | |
Non-affiliated issuers | | | $1,785,994 | | | | | |
Underlying affiliated funds | | | (27 | ) | | | | |
Foreign currency | | | (4,612 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $1,781,355 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $639,696 | | | | | |
Translation of assets and liabilities in foreign currencies | | | 45 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $639,741 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $2,421,096 | |
Change in net assets from operations | | | | | | | $3,011,953 | |
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 | | | 2016 | | | | 2015 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $590,857 | | | | $281,070 | |
Net realized gain (loss) on investments and foreign currency | | | 1,781,355 | | | | 2,424,870 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 639,741 | | | | (3,477,734 | ) |
Change in net assets from operations | | | $3,011,953 | | | | $(771,794 | ) |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(288,513 | ) | | | $(520,645 | ) |
From net realized gain on investments | | | (2,480,138 | ) | | | (2,278,938 | ) |
Total distributions declared to shareholders | | | $(2,768,651 | ) | | | $(2,799,583 | ) |
Change in net assets from fund share transactions | | | $(2,670,304 | ) | | | $(2,886,482 | ) |
Total change in net assets | | | $(2,427,002 | ) | | | $(6,457,859 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 50,963,451 | | | | 57,421,310 | |
At end of period (including undistributed net investment income of $586,225 and
$288,493, respectively) | | | $48,536,449 | | | | $50,963,451 | |
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 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $20.88 | | | | $22.45 | | | | $21.63 | | | | $17.96 | | | | $15.11 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.25 | (c) | | | $0.12 | | | | $0.20 | | | | $0.10 | | | | $0.11 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 1.08 | | | | (0.53 | ) | | | 0.73 | | | | 3.70 | | | | 2.86 | |
Total from investment operations | | | $1.33 | | | | $(0.41 | ) | | | $0.93 | | | | $3.80 | | | | $2.97 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.13 | ) | | | $(0.22 | ) | | | $(0.11 | ) | | | $(0.13 | ) | | | $(0.12 | ) |
From net realized gain on investments | | | (1.08 | ) | | | (0.94 | ) | | | — | | | | — | | | | — | |
Total distributions declared to shareholders | | | $(1.21 | ) | | | $(1.16 | ) | | | $(0.11 | ) | | | $(0.13 | ) | | | $(0.12 | ) |
Net asset value, end of period (x) | | | $21.00 | | | | $20.88 | | | | $22.45 | | | | $21.63 | | | | $17.96 | |
Total return (%) (k)(r)(s)(x) | | | 6.07 | (c) | | | (1.54 | ) | | | 4.32 | | | | 21.26 | | | | 19.72 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.72 | (c) | | | 1.17 | | | | 1.20 | | | | 1.17 | | | | 1.19 | |
Expenses after expense reductions (f) | | | 0.55 | (c) | | | 1.01 | | | | 1.12 | | | | 1.17 | | | | 1.19 | |
Net investment income | | | 1.18 | (c) | | | 0.52 | | | | 0.91 | | | | 0.49 | | | | 0.68 | |
Portfolio turnover | | | 25 | | | | 26 | | | | 25 | | | | 33 | | | | 40 | |
Net assets at end of period (000 omitted) | | | $46,182 | | | | $48,932 | | | | $55,050 | | | | $60,188 | | | | $57,300 | |
See Notes to Financial Statements
12
MFS Global Growth Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $20.82 | | | | $22.38 | | | | $21.55 | | | | $17.89 | | | | $15.04 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.20 | (c) | | | $0.06 | | | | $0.14 | | | | $0.05 | | | | $0.07 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 1.08 | | | | (0.53 | ) | | | 0.73 | | | | 3.69 | | | | 2.86 | |
Total from investment operations | | | $1.28 | | | | $(0.47 | ) | | | $0.87 | | | | $3.74 | | | | $2.93 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.08 | ) | | | $(0.15 | ) | | | $(0.04 | ) | | | $(0.08 | ) | | | $(0.08 | ) |
From net realized gain on investments | | | (1.08 | ) | | | (0.94 | ) | | | — | | | | — | | | | — | |
Total distributions declared to shareholders | | | $(1.16 | ) | | | $(1.09 | ) | | | $(0.04 | ) | | | $(0.08 | ) | | | $(0.08 | ) |
Net asset value, end of period (x) | | | $20.94 | | | | $20.82 | | | | $22.38 | | | | $21.55 | | | | $17.89 | |
Total return (%) (k)(r)(s)(x) | | | 5.85 | (c) | | | (1.82 | ) | | | 4.05 | | | | 20.94 | | | | 19.49 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.94 | (c) | | | 1.42 | | | | 1.45 | | | | 1.42 | | | | 1.44 | |
Expenses after expense reductions (f) | | | 0.77 | (c) | | | 1.26 | | | | 1.37 | | | | 1.42 | | | | 1.44 | |
Net investment income | | | 0.94 | (c) | | | 0.27 | | | | 0.63 | | | | 0.23 | | | | 0.44 | |
Portfolio turnover | | | 25 | | | | 26 | | | | 25 | | | | 33 | | | | 40 | |
Net assets at end of period (000 omitted) | | | $2,355 | | | | $2,031 | | | | $2,372 | | | | $3,614 | | | | $3,152 | |
| (c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. Excluding the effect of the reimbursement of expenses, the total return for the year ended December 31, 2016 would have been approximately 0.55% lower. See Note 2 in the Notes to Financial Statements for additional information. |
| (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 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 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 October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
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 on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange 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. 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
14
MFS Global Growth Portfolio
Notes to Financial Statements – continued
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, 2016 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $28,847,833 | | | | $— | | | | $— | | | | $28,847,833 | |
United Kingdom | | | 351,675 | | | | 4,535,663 | | | | — | | | | 4,887,338 | |
Switzerland | | | 1,933,927 | | | | 1,427,760 | | | | — | | | | 3,361,687 | |
France | | | 1,551,991 | | | | 1,335,352 | | | | — | | | | 2,887,343 | |
Japan | | | 1,143,632 | | | | — | | | | — | | | | 1,143,632 | |
China | | | 746,869 | | | | 238,288 | | | | — | | | | 985,157 | |
Brazil | | | 886,602 | | | | — | | | | — | | | | 886,602 | |
Taiwan | | | 882,050 | | | | — | | | | — | | | | 882,050 | |
South Korea | | | — | | | | 871,648 | | | | — | | | | 871,648 | |
Other Countries | | | 3,171,364 | | | | 284,354 | | | | — | | | | 3,455,718 | |
| Mutual Funds | | | 284,384 | | | | — | | | | — | | | | 284,384 | |
| Total Investments | | | $39,800,327 | | | | $8,693,065 | | | | $— | | | | $48,493,392 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $1,440,948 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $5,574,368 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. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. 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
15
MFS Global Growth Portfolio
Notes to Financial Statements – continued
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, 2016, 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.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian 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:
| | | | | | | | |
| | | 12/31/16 | | | 12/31/15 | |
| Ordinary income (including any short-term capital gains) | | | $289,713 | | | | $520,645 | |
| Long-term capital gains | | | 2,478,938 | | | | 2,278,938 | |
| Total distributions | | | $2,768,651 | | | | $2,799,583 | |
16
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 12/31/16 | | | | |
| Cost of investments | | | $39,401,898 | |
| Gross appreciation | | | 10,724,760 | |
| Gross depreciation | | | (1,633,266 | ) |
| Net unrealized appreciation (depreciation) | | | $9,091,494 | |
| Undistributed ordinary income | | | 726,564 | |
| Undistributed long-term capital gain | | | 1,676,821 | |
| Other temporary differences | | | (3,457 | ) |
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
12/31/16 | | | Year ended
12/31/15 | | | Year ended
12/31/16 | | | Year ended
12/31/15 | |
| Initial Class | | | $279,992 | | | | $506,208 | | | | $2,360,988 | | | | $2,188,632 | |
| Service Class | | | 8,521 | | | | 14,437 | | | | 119,150 | | | | 90,306 | |
| Total | | | $288,513 | | | | $520,645 | | | | $2,480,138 | | | | $2,278,938 | |
| (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, 2016, this management fee reduction amounted to $3,592, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.89% 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 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 shares. This written agreement was terminated on July 31, 2016. For the period January 1, 2016 to July 31, 2016, this reduction amounted to $50,324, which is included in the reduction of total expenses in the Statement of Operations.
Effective August 1, 2016, 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, 2018. For the period August, 1, 2016 to December 31, 2016, this reduction amounted to $31,484, 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.
17
MFS Global Growth Portfolio
Notes to Financial Statements – continued
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2016, the fee was $2,076, which equated to 0.0041% 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, 2016, these costs amounted to $884.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund 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, 2016 was equivalent to an annual effective rate of 0.0349% 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 – 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. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $101 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the 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. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $15,975 and $13,922, respectively. The sales transactions resulted in net realized gains (losses) of $(856).
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, aggregated $12,557,261 and $17,057,768, 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 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 63,324 | | | | $1,346,758 | | | | 55,545 | | | | $1,267,995 | |
Service Class | | | 29,912 | | | | 650,342 | | | | 6,065 | | | | 133,120 | |
| | | 93,236 | | | | $1,997,100 | | | | 61,610 | | | | $1,401,115 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 119,990 | | | | $2,640,980 | | | | 136,103 | | | | $2,694,840 | |
Service Class | | | 5,811 | | | | 127,671 | | | | 5,298 | | | | 104,743 | |
| | | 125,801 | | | | $2,768,651 | | | | 141,401 | | | | $2,799,583 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (327,837 | ) | | | $(6,992,794 | ) | | | (300,272 | ) | | | $(6,646,000 | ) |
Service Class | | | (20,786 | ) | | | (443,261 | ) | | | (19,817 | ) | | | (441,180 | ) |
| | | (348,623 | ) | | | $(7,436,055 | ) | | | (320,089 | ) | | | $(7,087,180 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (144,523 | ) | | | $(3,005,056 | ) | | | (108,624 | ) | | | $(2,683,165 | ) |
Service Class | | | 14,937 | | | | 334,752 | | | | (8,454 | ) | | | (203,317 | ) |
| | | (129,586 | ) | | | $(2,670,304 | ) | | | (117,078 | ) | | | $(2,886,482 | ) |
18
MFS Global Growth Portfolio
Notes to Financial Statements – continued
The fund and certain other funds managed by MFS participate in a $1.25 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 Overnight Federal Reserve funds rate or daily 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 Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $319 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 | | | 326,287 | | | | 8,481,948 | | | | (8,523,851 | ) | | | 284,384 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $(27 | ) | | | $— | | | | $1,741 | | | | $284,384 | |
19
MFS Global Growth Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of MFS Global Growth Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Global Growth Portfolio (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2016, 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, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Global Growth Portfolio as of December 31, 2016, 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 15, 2017
20
MFS Global Growth Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, 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 53) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 55) | | Trustee | | January 2014 | | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 74) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 65) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council (until 2015); 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 |
| | | | |
Maureen R. Goldfarb (age 61) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Michael Hegarty (age 72) | | Trustee | | December 2004 | | Private investor | | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) |
| | | | |
John P. Kavanaugh (age 62) | | Trustee and Vice Chair of Trustees | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 60) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 59) | | Trustee | | March 2005 | | Private investor | | The Travelers Companies, Director; Dycom Industries, Inc., Director |
| | | |
| OFFICERS | | | | | | |
Christopher R. Bohane (k) (age 43) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 48) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 57) | | 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 |
| | | | |
Ethan D. Corey (k) (age 53) | | 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 48) | | President | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 43) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
21
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) |
Susan A. Pereira (k) (age 46) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 46) | | 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 64) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 72) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 46) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Martin J. Wolin (k) (age 49) | | Chief Compliance Officer | | July 2015 | | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | | N/A |
| | | | |
James O. Yost (k) (age 56) | | 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. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
| (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. Buller and Kavanaugh and Ms. 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, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a 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, 2016 (“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 Senior Officer, a 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 Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of 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 Broadridge 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 Broadridge 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, 2015, 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 the one-year period and the 3rd quintile for the five-year period ended December 31, 2015 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 and its 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, 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.
23
MFS Global Growth Portfolio
Board Review of Investment Advisory Agreement – continued
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 Broadridge. 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 data provided by Broadridge (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 Broadridge expense group median. The Trustees also noted that MFS has agreed to further reduce the expense limitation for the Fund, which may not be changed without the Trustees’ approval.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. 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, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate 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, 2016.
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 mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios”, then “VIT II” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $2,727,000 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.
25
rev. 3/16
| | | | |
| 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., and MFS Heritage Trust Company. |
| | |
| 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, or 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, 2016
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 • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Global Research Portfolio
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
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 | | | | |
| Citigroup, Inc | | | 1.7% | |
| Alphabet, Inc., “A” | | | 1.7% | |
| Charter Communications, Inc., “A” | | | 1.6% | |
| U.S. Bancorp | | | 1.4% | |
| Honeywell International, Inc. | | | 1.4% | |
| Facebook, Inc., “A” | | | 1.3% | |
| EOG Resources, Inc. | | | 1.3% | |
| Visa, Inc., “A” | | | 1.2% | |
| Goldman Sachs Group, Inc | | | 1.2% | |
| Cisco Systems, Inc. | | | 1.2% | |
| |
| Global equity sectors | | | | |
| Financial Services | | | 21.9% | |
| Capital Goods | | | 17.6% | |
| Technology | | | 15.7% | |
| Health Care | | | 10.9% | |
| Consumer Cyclicals | | | 10.6% | |
| Energy | | | 10.2% | |
| Consumer Staples | | | 7.8% | |
| Telecommunications/Cable Television | | | 4.4% | |
| | | | |
| Issuer country weightings (x) | | | | |
| United States | | | 66.2% | |
| Switzerland | | | 5.9% | |
| Japan | | | 4.9% | |
| United Kingdom | | | 4.5% | |
| France | | | 4.2% | |
| Canada | | | 2.7% | |
| Germany | | | 1.8% | |
| China | | | 1.3% | |
| Italy | | | 1.2% | |
| Other Countries | | | 7.3% | |
| |
| Currency exposure weightings (y) | | | | |
| United States Dollar | | | 66.7% | |
| Euro | | | 9.2% | |
| Swiss Franc | | | 5.9% | |
| Japanese Yen | | | 4.9% | |
| British Pound Sterling | | | 4.5% | |
| Canadian Dollar | | | 2.7% | |
| Hong Kong Dollar | | | 1.8% | |
| Indian Rupee | | | 1.0% | |
| Taiwan Dollar | | | 0.8% | |
| 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 & Cash Equivalents. |
| (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 & Cash Equivalents. |
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
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, 2016, Initial Class shares of the MFS Global Research Portfolio (“fund”) provided a total return of 5.44%, while Service Class shares of the fund provided a total return of 5.21%. These compare with a return of 8.48% over the same period for the fund’s benchmark, the MSCI All Country World Index.
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
Despite overall strength in the financial services sector in response to the US presidential election results, weak stock selection within this sector was a primary detractor from performance relative to the MSCI All Country World Index. Here, the timing of the fund’s ownership in shares of strong-performing global financial services firm JPMorgan Chase (h) and financial services firm HSBC (h) (United Kingdom), both of which outperformed the benchmark, hurt relative results. Shares of JPMorgan Chase benefited from a rally in the financial sector, the firm also delivered strong results during the reporting period, driven by strength in its capital markets business, improving loan growth and solid expense controls. Overweight positions in investment management and banking firm UBS (Switzerland) and financial services firm Lloyds Banking Group (United Kingdom) also held back relative returns as both stocks underperformed the benchmark.
Security selection in the capital goods sector also hindered relative performance. However, there were no stocks within this sector that were among the fund’s top relative detractors over the reporting period.
Stock selection in the health care sector further weakened relative results. The fund’s overweight positions in pharmaceutical company Valeant Pharmaceuticals International (h) (Canada), biopharmaceutical company Alexion Pharmaceuticals (h), eye care and skin care products company Allergan, health services and information technology company McKesson and pharmaceutical and medical device company Santen Pharmaceutical (Japan) held back relative performance. Shares of Valeant Pharmaceuticals depreciated following the fallout from political pressure on the company’s drug price strategy and accusations of financial fraud through the company’s unusual and undisclosed arrangement with online pharmacy Philidor.
Elsewhere, an overweight position in hotel and restaurant operator Whitbread (United Kingdom) dampened relative performance.
Contributors to Performance
Security selection in the consumer cyclicals sector was a primary contributor to relative performance. However, there were no stocks within this sector that were among the fund’s top relative contributors over the reporting period.
3
MFS Global Research Portfolio
Management Review – continued
Stock selection in the telecommunications/cable television sector also aided relative results led by the fund’s overweight position in cable services provider Charter Communications. Shares of Charter Communications appreciated due, in part, to solid earnings results during the reporting period and the completion of the Time Warner Cable and Bright House Networks acquisitions.
Other top relative contributors during the period included the fund’s overweight position in energy exploration and production company EOG Resources. Shares of EOG Resources appreciated following a significant increase in well inventory, primarily due to cost reductions and efficiency improvements. Overweight positions in diversified financial services firm Citigroup, enterprise information technology provider Hewlett Packard Enterprise, investment services company Goldman Sachs Group, mining company Rio Tinto (United Kingdom), financial services company Credicorp (Peru), railroad franchise Union Pacific, financial services provider Charles Schwab (h) and medical technology products and services company Stryker Corp. also bolstered relative results.
Respectfully,
| | | | |
| James Keating | | Ben Kottler | | Joseph MacDougall |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| (h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
4
MFS Global Research Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/16
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 12/31/16
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class Inception Date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 11/07/94 | | 5.44% | | 9.18% | | 4.51% | | |
| | | Service Class | | 8/24/01 | | 5.21% | | 8.92% | | 4.25% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | MSCI All Country World Index (f) | | 8.48% | | 9.96% | | 4.12% | | |
| (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, 2016 through December 31, 2016
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, 2016 through December 31, 2016.
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
7/01/16 | | | Ending Account Value 12/31/16 | | | Expenses Paid
During Period (p)
7/01/16-12/31/16 | |
| Initial Class | | Actual | | | 0.64% | | | | $1,000.00 | | | | $1,040.45 | | | | $3.28 | |
| | Hypothetical (h) | | | 0.64% | | | | $1,000.00 | | | | $1,021.92 | | | | $3.25 | |
| Service Class | | Actual | | | 0.89% | | | | $1,000.00 | | | | $1,039.39 | | | | $4.56 | |
| | Hypothetical (h) | | | 0.89% | | | | $1,000.00 | | | | $1,020.66 | | | | $4.52 | |
| (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 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian during the six month period. Had this one-time Reimbursement of Expenses by Custodian not occurred during the 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 0.87%, $4.46 and $4.42 for Initial Class and 1.12%, $5.74 and $5.69 for Service Class, respectively. See Note 2 in the Notes to Financial Statements for additional information.
6
MFS Global Research Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – 99.1% | | | | | | | | |
| Aerospace – 2.8% | | | | | | | | |
| Honeywell International, Inc. | | | 11,563 | | | $ | 1,339,574 | |
| Northrop Grumman Corp. | | | 3,984 | | | | 926,599 | |
| United Technologies Corp. | | | 4,711 | | | | 516,420 | |
| | | | | | | | |
| | | $ | 2,782,593 | |
| | | | | | | | |
| Alcoholic Beverages – 1.1% | | | | | | | | |
| AmBev S.A., ADR | | | 83,588 | | | $ | 410,417 | |
| China Resources Enterprise Ltd. (a) | | | 108,000 | | | | 213,369 | |
| Constellation Brands, Inc., “A” | | | 2,992 | | | | 458,704 | |
| | | | | | | | |
| | | $ | 1,082,490 | |
| | | | | | | | |
| Apparel Manufacturers – 1.5% | | | | | | | | |
| LVMH Moet Hennessy Louis Vuitton SE | | | 3,956 | | | $ | 754,320 | |
| NIKE, Inc., “B” | | | 15,247 | | | | 775,005 | |
| | | | | | | | |
| | | $ | 1,529,325 | |
| | | | | | | | |
| Automotive – 1.1% | | | | | | | | |
| Delphi Automotive PLC | | | 8,122 | | | $ | 547,017 | |
| USS Co. Ltd. | | | 32,900 | | | | 523,035 | |
| | | | | | | | |
| | | $ | 1,070,052 | |
| | | | | | | | |
| Biotechnology – 0.6% | | | | | | | | |
| Celgene Corp. (a) | | | 4,874 | | | $ | 564,166 | |
| | | | | | | | |
| Broadcasting – 1.0% | | | | | | | | |
| Twenty-First Century Fox, Inc. | | | 18,385 | | | $ | 515,515 | |
| WPP PLC | | | 20,009 | | | | 447,809 | |
| | | | | | | | |
| | | $ | 963,324 | |
| | | | | | | | |
| Brokerage & Asset Managers – 0.7% | | | | | |
| NASDAQ, Inc. | | | 9,906 | | | $ | 664,891 | |
| | | | | | | | |
| Business Services – 4.5% | | | | | | | | |
| Accenture PLC, “A” | | | 5,416 | | | $ | 634,376 | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 13,861 | | | | 776,632 | |
| Equifax, Inc. | | | 4,392 | | | | 519,266 | |
| Fidelity National Information Services, Inc. | | | 11,030 | | | | 834,309 | |
| Fiserv, Inc. (a) | | | 4,866 | | | | 517,158 | |
| Gartner, Inc. (a) | | | 4,142 | | | | 418,632 | |
| Global Payments, Inc. | | | 10,236 | | | | 710,481 | |
| | | | | | | | |
| | | $ | 4,410,854 | |
| | | | | | | | |
| Cable TV – 1.6% | | | | | | | | |
| Charter Communications, Inc., “A” (a) | | | 5,549 | | | $ | 1,597,668 | |
| | | | | | | | |
| Chemicals – 2.7% | | | | | | | | |
| E.I. du Pont de Nemours & Co. | | | 10,477 | | | $ | 769,012 | |
| Monsanto Co. | | | 8,919 | | | | 938,368 | |
| PPG Industries, Inc. | | | 10,401 | | | | 985,599 | |
| | | | | | | | |
| | | $ | 2,692,979 | |
| | | | | | | | |
| Computer Software – 2.2% | | | | | | | | |
| Adobe Systems, Inc. (a) | | | 7,363 | | | $ | 758,021 | |
| Sabre Corp. | | | 19,436 | | | | 484,928 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – continued | | | | | |
| Computer Software – continued | | | | | | | | |
| Salesforce.com, Inc. (a) | | | 13,569 | | | $ | 928,934 | |
| | | | | | | | |
| | | $ | 2,171,883 | |
| | | | | | | | |
| Computer Software – Systems – 1.9% | | | | | |
| Constellation Software, Inc. | | | 1,019 | | | $ | 463,049 | |
| Hewlett Packard Enterprise | | | 41,417 | | | | 958,389 | |
| SS&C Technologies Holdings, Inc. | | | 14,296 | | | | 408,866 | |
| | | | | | | | |
| | | $ | 1,830,304 | |
| | | | | | | | |
| Construction – 1.1% | | | | | | | | |
| Sherwin-Williams Co. | | | 2,912 | | | $ | 782,571 | |
| Techtronic Industries Co. Ltd. | | | 97,000 | | | | 347,746 | |
| | | | | | | | |
| | | $ | 1,130,317 | |
| | | | | | | | |
| Consumer Products – 1.7% | | | | | | | | |
| Coty, Inc., “A” | | | 19,934 | | | $ | 364,992 | |
| L’Oréal | | | 3,654 | | | | 666,963 | |
| Newell Brands, Inc. | | | 14,097 | | | | 629,431 | |
| | | | | | | | |
| | | $ | 1,661,386 | |
| | | | | | | | |
| Consumer Services – 0.6% | | | | | | | | |
| Priceline Group, Inc. (a) | | | 414 | | | $ | 606,949 | |
| | | | | | | | |
| Containers – 0.5% | | | | | | | | |
| Berry Plastics Group, Inc. (a) | | | 9,283 | | | $ | 452,361 | |
| | | | | | | | |
| Electrical Equipment – 2.6% | | | | | | | | |
| Johnson Controls International PLC | | | 23,621 | | | $ | 972,949 | |
| Schneider Electric S.A. | | | 14,240 | | | | 989,504 | |
| W.W. Grainger, Inc. | | | 2,442 | | | | 567,155 | |
| | | | | | | | |
| | | $ | 2,529,608 | |
| | | | | | | | |
| Electronics – 1.8% | | | | | | | | |
| Broadcom Corp. | | | 5,737 | | | $ | 1,014,129 | |
| Taiwan Semiconductor Manufacturing Co. Ltd. | | | 86,000 | | | | 481,603 | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 10,350 | | | | 297,563 | |
| | | | | | | | |
| | | $ | 1,793,295 | |
| | | | | | | | |
| Energy – Independent – 3.6% | | | | | | | | |
| EOG Resources, Inc. | | | 12,814 | | | $ | 1,295,495 | |
| EQT Corp. | | | 10,840 | | | | 708,936 | |
| Oil Search Ltd. | | | 126,161 | | | | 652,786 | |
| Pioneer Natural Resources Co. | | | 4,723 | | | | 850,471 | |
| | | | | | | | |
| | | $ | 3,507,688 | |
| | | | | | | | |
| Energy – Integrated – 1.8% | | | | | | | | |
| BP PLC | | | 156,817 | | | $ | 974,381 | |
| Suncor Energy, Inc. | | | 23,472 | | | | 767,453 | |
| | | | | | | | |
| | | $ | 1,741,834 | |
| | | | | | | | |
| Food & Beverages – 4.5% | | | | | | | | |
| Danone S.A. | | | 7,658 | | | $ | 484,716 | |
| J.M. Smucker Co. | | | 4,110 | | | | 526,327 | |
7
MFS Global Research Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – continued | | | | | |
| Food & Beverages – continued | | | | | | | | |
| Mead Johnson Nutrition Co., “A” | | | 6,026 | | | $ | 426,400 | |
| Mondelez International, Inc. | | | 15,416 | | | | 683,391 | |
| Nestle S.A. | | | 15,087 | | | | 1,082,299 | |
| PepsiCo, Inc. | | | 8,494 | | | | 888,727 | |
| TreeHouse Foods, Inc. (a) | | | 4,338 | | | | 313,160 | |
| | | | | | | | |
| | | $ | 4,405,020 | |
| | | | | | | | |
| Food & Drug Stores – 1.1% | | | | | | | | |
| CVS Health Corp. | | | 8,664 | | | $ | 683,676 | |
| Sundrug Co. Ltd. | | | 6,500 | | | | 449,925 | |
| | | | | | | | |
| | | $ | 1,133,601 | |
| | | | | | | | |
| General Merchandise – 1.6% | | | | | | | | |
| Costco Wholesale Corp. | | | 5,755 | | | $ | 921,433 | |
| Dollar Tree, Inc. (a) | | | 8,261 | | | | 637,584 | |
| | | | | | | | |
| | | $ | 1,559,017 | |
| | | | | | | | |
| Health Maintenance Organizations – 1.0% | | | | | |
| UnitedHealth Group, Inc. | | | 6,281 | | | $ | 1,005,211 | |
| | | | | | | | |
| Insurance – 3.8% | | | | | | | | |
| AIA Group Ltd. | | | 147,200 | | | $ | 823,770 | |
| American International Group, Inc. | | | 14,867 | | | | 970,964 | |
| Aon PLC | | | 8,891 | | | | 991,613 | |
| Chubb Ltd. | | | 6,997 | | | | 924,444 | |
| | | | | | | | |
| | | $ | 3,710,791 | |
| | | | | | | | |
| Internet – 4.2% | | | | | | | | |
| Alibaba Group Holding Ltd., ADR (a) | | | 7,124 | | | $ | 625,558 | |
| Alphabet, Inc., “A” (a)(s) | | | 2,082 | | | | 1,649,881 | |
| Alphabet, Inc., “C” (a) | | | 693 | | | | 534,871 | |
| Facebook, Inc., “A” (a) | | | 11,386 | | | | 1,309,959 | |
| | | | | | | | |
| | | $ | 4,120,269 | |
| | | | | | | | |
| Machinery & Tools – 3.0% | | | | | | | | |
| GEA Group AG | | | 9,976 | | | $ | 399,872 | |
| Kubota Corp. | | | 43,200 | | | | 614,984 | |
| Roper Technologies, Inc. | | | 4,912 | | | | 899,289 | |
| Schindler Holding AG | | | 2,892 | | | | 509,261 | |
| SPX FLOW, Inc. (a) | | | 18,139 | | | | 581,536 | |
| | | | | | | | |
| | | $ | 3,004,942 | |
| | | | | | | | |
| Major Banks – 5.2% | | | | | | | | |
| Barclays PLC | | | 257,645 | | | $ | 707,743 | |
| BNP Paribas | | | 12,829 | | | | 817,695 | |
| Goldman Sachs Group, Inc. | | | 4,887 | | | | 1,170,192 | |
| Lloyds Banking Group PLC | | | 689,628 | | | | 530,346 | |
| Morgan Stanley | | | 21,526 | | | | 909,474 | |
| Sumitomo Mitsui Financial Group, Inc. | | | 25,200 | | | | 955,333 | |
| | | | | | | | |
| | | $ | 5,090,783 | |
| | | | | | | | |
| Medical & Health Technology & Services – 0.5% | | | | | |
| McKesson Corp. | | | 3,790 | | | $ | 532,306 | |
| | | | | | | | |
| Medical Equipment – 3.5% | | | | | | | | |
| Danaher Corp. (s) | | | 7,006 | | | $ | 545,347 | |
| Medtronic PLC | | | 14,403 | | | | 1,025,926 | |
| PerkinElmer, Inc. | | | 12,234 | | | | 638,003 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – continued | | | | | |
| Medical Equipment – continued | | | | | | | | |
| Stryker Corp. | | | 6,432 | | | $ | 770,618 | |
| Zimmer Biomet Holdings, Inc. | | | 4,851 | | | | 500,623 | |
| | | | | | | | |
| | | $ | 3,480,517 | |
| | | | | | | | |
| Metals & Mining – 0.7% | | | | | | | | |
| Rio Tinto Ltd. | | | 18,402 | | | $ | 700,760 | |
| | | | | | | | |
| Natural Gas – Distribution – 0.9% | | | | | | | | |
| China Resources Gas Group Ltd. | | | 144,000 | | | $ | 403,585 | |
| Engie | | | 37,162 | | | | 473,432 | |
| | | | | | | | |
| | | $ | 877,017 | |
| | | | | | | | |
| Natural Gas – Pipeline – 1.1% | | | | | | | | |
| Enbridge, Inc. | | | 13,737 | | | $ | 578,066 | |
| Enterprise Products Partners LP | | | 17,745 | | | | 479,825 | |
| | | | | | | | |
| | | $ | 1,057,891 | |
| | | | | | | | |
| Network & Telecom – 1.1% | | | | | | | | |
| Cisco Systems, Inc. | | | 37,610 | | | $ | 1,136,574 | |
| | | | | | | | |
| Oil Services – 0.7% | | | | | | | | |
| Schlumberger Ltd. | | | 8,027 | | | $ | 673,867 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 10.7% | | | | | |
| Aeon Credit Service Co. Ltd. | | | 33,800 | | | $ | 597,865 | |
| Citigroup, Inc. | | | 28,253 | | | | 1,679,076 | |
| Credicorp Ltd. | | | 3,002 | | | | 473,896 | |
| Discover Financial Services | | | 9,514 | | | | 685,864 | |
| Element Fleet Management Corp. | | | 89,501 | | | | 830,583 | |
| HDFC Bank Ltd. | | | 52,028 | | | | 1,014,611 | |
| Intesa Sanpaolo S.p.A. | | | 241,953 | | | | 617,883 | |
| Julius Baer Group Ltd. | | | 10,137 | | | | 450,257 | |
| KBC Groep N.V. | | | 11,314 | | | | 700,647 | |
| U.S. Bancorp | | | 26,092 | | | �� | 1,340,346 | |
| UBS AG | | | 63,200 | | | | 989,924 | |
| Visa, Inc., “A” | | | 15,729 | | | | 1,227,177 | |
| | | | | | | | |
| | | $ | 10,608,129 | |
| | | | | | | | |
| Pharmaceuticals – 5.3% | | | | | | | | |
| Allergan PLC (a) | | | 2,953 | | | $ | 620,160 | |
| Eli Lilly & Co. | | | 11,769 | | | | 865,610 | |
| Genomma Lab Internacional S.A., “B” (a) | | | 301,018 | | | | 312,495 | |
| Novartis AG | | | 14,634 | | | | 1,064,892 | |
| Roche Holding AG | | | 4,481 | | | | 1,021,010 | |
| Santen Pharmaceutical Co. Ltd. | | | 51,200 | | | | 625,279 | |
| Zoetis, Inc. | | | 13,075 | | | | 699,905 | |
| | | | | | | | |
| | | $ | 5,209,351 | |
| | | | | | | | |
| Printing & Publishing – 0.6% | | | | | | | | |
| RELX N.V. | | | 36,683 | | | $ | 616,623 | |
| | | | | | | | |
| Railroad & Shipping – 1.0% | | | | | | | | |
| Union Pacific Corp. | | | 9,775 | | | $ | 1,013,472 | |
| | | | | | | | |
| Real Estate – 1.5% | | | | | | | | |
| LEG Immobilien AG | | | 9,566 | | | $ | 742,097 | |
| Store Capital Corp., REIT | | | 31,149 | | | | 769,692 | |
| | | | | | | | |
| | | $ | 1,511,789 | |
| | | | | | | | |
8
MFS Global Research Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – continued | | | | | |
| Restaurants – 2.2% | | | | | | | | |
| Aramark | | | 23,174 | | | $ | 827,775 | |
| Starbucks Corp. | | | 14,736 | | | | 818,143 | |
| Whitbread PLC | | | 11,218 | | | | 521,462 | |
| | | | | | | | |
| | | $ | 2,167,380 | |
| | | | | | | | |
| Specialty Chemicals – 2.0% | | | | | | | | |
| Akzo Nobel N.V. | | | 8,303 | | | $ | 518,534 | |
| LG Chem Ltd. (a) | | | 2,130 | | | | 459,293 | |
| Linde AG | | | 3,803 | | | | 623,594 | |
| Sika AG | | | 83 | | | | 398,739 | |
| | | | | | | | |
| | | $ | 2,000,160 | |
| | | | | | | | |
| Specialty Stores – 1.9% | | | | | | | | |
| Amazon.com, Inc. (a) | | | 1,465 | | | $ | 1,098,555 | |
| Dufry AG (a) | | | 2,757 | | | | 343,847 | |
| Urban Outfitters, Inc. (a) | | | 14,205 | | | | 404,558 | |
| | | | | | | | |
| | | $ | 1,846,960 | |
| | | | | | | | |
| Telecommunications – Wireless – 2.1% | | | | | |
| KDDI Corp. | | | 41,200 | | | $ | 1,040,214 | |
| SBA Communications Corp. (a) | | | 10,388 | | | | 1,072,665 | |
| | | | | | | | |
| | | $ | 2,112,879 | |
| | | | | | | | |
| Telephone Services – 0.7% | | | | | | | | |
| BT Group PLC | | | 118,545 | | | $ | 536,813 | |
| Hellenic Telecommunications Organization S.A. | | | 15,126 | | | | 142,187 | |
| | | | | | | | |
| | | $ | 679,000 | |
| | | | | | | | |
| Tobacco – 0.6% | | | | | | | | |
| Reynolds American, Inc. | | | 10,633 | | | $ | 595,873 | |
| | | | | | | | |
| Utilities – Electric Power – 2.2% | | | | | | | | |
| CMS Energy Corp. (s) | | | 23,891 | | | $ | 994,343 | |
| Enel S.p.A. | | | 128,589 | | | | 565,872 | |
| NextEra Energy, Inc. | | | 5,154 | | | | 615,697 | |
| | | | | | | | |
| | | $ | 2,175,912 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $89,184,747) | | | $ | 97,810,061 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| MONEY MARKET FUNDS – 0.0% | |
| MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $153) | | | 153 | | | $ | 153 | |
| | | | | | | | |
Total Investments
(Identified Cost, $89,184,900) | | | | | | $ | 97,810,214 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.9% | | | | | | | 886,181 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 98,696,395 | |
| | | | | | | | |
| (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, 2016, 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, 2016, the fund had cash collateral of $277 and other liquid securities with an aggregate value of $543,666 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, 2016, the fund had no short sales outstanding.
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
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 12/31/16 | | | | | | | | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $89,184,747) | | | $97,810,061 | | | | | |
Underlying affiliated funds, at value (identified cost, $153) | | | 153 | | | | | |
Total investments, at value (identified cost, $89,184,900) | | | $97,810,214 | | | | | |
Deposits with brokers | | | 277 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 1,091,008 | | | | | |
Fund shares sold | | | 5,535 | | | | | |
Interest and dividends | | | 178,437 | | | | | |
Other assets | | | 89 | | | | | |
Total assets | | | | | | | $99,085,560 | |
Liabilities | | | | | | | | |
Payable to custodian | | | $113,382 | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | 148,902 | | | | | |
Fund shares reacquired | | | 54,777 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 6,225 | | | | | |
Shareholder servicing costs | | | 21 | | | | | |
Distribution and/or service fees | | | 153 | | | | | |
Payable for independent Trustees’ compensation | | | 19 | | | | | |
Accrued expenses and other liabilities | | | 65,686 | | | | | |
Total liabilities | | | | | | | $389,165 | |
Net assets | | | | | | | $98,696,395 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $91,469,235 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 8,614,723 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (3,011,364 | ) | | | | |
Undistributed net investment income | | | 1,623,801 | | | | | |
Net assets | | | | | | | $98,696,395 | |
Shares of beneficial interest outstanding | | | | | | | 3,842,583 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $91,280,938 | | | | 3,552,787 | | | | $25.69 | |
Service Class | | | 7,415,457 | | | | 289,796 | | | | 25.59 | |
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 12/31/16 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $2,510,645 | | | | | |
Interest | | | 8,656 | | | | | |
Other | | | 8,419 | | | | | |
Dividends from underlying affiliated funds | | | 2,262 | | | | | |
Foreign taxes withheld | | | (89,963 | ) | | | | |
Total investment income | | | | | | | $2,440,019 | |
Expenses | | | | | | | | |
Management fee | | | $759,083 | | | | | |
Distribution and/or service fees | | | 19,321 | | | | | |
Shareholder servicing costs | | | 3,925 | | | | | |
Administrative services fee | | | 25,472 | | | | | |
Independent Trustees’ compensation | | | 5,222 | | | | | |
Custodian fee | | | 31,237 | | | | | |
Reimbursement of custodian expenses | | | (120,789 | ) | | | | |
Shareholder communications | | | 15,534 | | | | | |
Audit and tax fees | | | 49,089 | | | | | |
Legal fees | | | 1,280 | | | | | |
Miscellaneous | | | 21,048 | | | | | |
Total expenses | | | | | | | $810,422 | |
Reduction of expenses by investment adviser | | | (7,187 | ) | | | | |
Net expenses | | | | | | | $803,235 | |
Net investment income | | | | | | | $1,636,784 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments: | | | | | | | | |
Non-affiliated issuers (net of $73 country tax) | | | $2,413,872 | | | | | |
Underlying affiliated funds | | | 33 | | | | | |
Foreign currency | | | (12,904 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $2,401,001 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $1,192,381 | | | | | |
Translation of assets and liabilities in foreign currencies | | | 681 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $1,193,062 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $3,594,063 | |
Change in net assets from operations | | | | | | | $5,230,847 | |
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 | | | 2016 | | | | 2015 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $1,636,784 | | | | $1,130,790 | |
Net realized gain (loss) on investments and foreign currency | | | 2,401,001 | | | | 7,560,559 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 1,193,062 | | | | (9,229,787 | ) |
Change in net assets from operations | | | $5,230,847 | | | | $(538,438 | ) |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(1,109,452 | ) | | | $(1,447,722 | ) |
Change in net assets from fund share transactions | | | $(11,897,734 | ) | | | $(14,110,074 | ) |
Total change in net assets | | | $(7,776,339 | ) | | | $(16,096,234 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 106,472,734 | | | | 122,568,968 | |
At end of period (including undistributed net investment income of $1,623,801 and
$1,115,509, respectively) | | | $98,696,395 | | | | $106,472,734 | |
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 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $24.63 | | | | $25.18 | | | | $24.85 | | | | $20.36 | | | | $17.71 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.41 | (c) | | | $0.25 | | | | $0.29 | | | | $0.24 | | | | $0.30 | |
Net realized and unrealized gain (loss) on investments and
foreign currency | | | 0.93 | | | | (0.47 | ) | | | 0.31 | | | | 4.61 | | | | 2.66 | |
Total from investment operations | | | $1.34 | | | | $(0.22 | ) | | | $0.60 | | | | $4.85 | | | | $2.96 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.28 | ) | | | $(0.33 | ) | | | $(0.27 | ) | | | $(0.36 | ) | | | $(0.31 | ) |
Net asset value, end of period (x) | | | $25.69 | | | | $24.63 | | | | $25.18 | | | | $24.85 | | | | $20.36 | |
Total return (%) (k)(r)(s)(x) | | | 5.44 | (c) | | | (0.81 | ) | | | 2.40 | | | | 24.00 | | | | 16.81 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.78 | (c) | | | 0.92 | | | | 0.92 | | | | 0.92 | | | | 0.94 | |
Expenses after expense reductions (f) | | | 0.77 | (c) | | | 0.91 | | | | 0.91 | | | | 0.92 | | | | 0.94 | |
Net investment income | | | 1.64 | (c) | | | 0.98 | | | | 1.15 | | | | 1.08 | | | | 1.58 | |
Portfolio turnover | | | 40 | | | | 40 | | | | 37 | | | | 41 | | | | 40 | |
Net assets at end of period (000 omitted) | | | $91,281 | | | | $98,321 | | | | $113,018 | | | | $126,707 | | | | $117,388 | |
| Supplemental Ratios (%): | | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets after expense reductions
excluding short sale expenses (f) | | | N/A | | | | N/A | | | | 0.91 | | | | 0.91 | | | | 0.93 | |
See Notes to Financial Statements
13
MFS Global Research Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $24.52 | | | | $25.06 | | | | $24.72 | | | | $20.25 | | | | $17.60 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.34 | (c) | | | $0.19 | | | | $0.23 | | | | $0.19 | | | | $0.26 | |
Net realized and unrealized gain (loss) on investments and
foreign currency | | | 0.94 | | | | (0.47 | ) | | | 0.31 | | | | 4.57 | | | | 2.64 | |
Total from investment operations | | | $1.28 | | | | $(0.28 | ) | | | $0.54 | | | | $4.76 | | | | $2.90 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.21 | ) | | | $(0.26 | ) | | | $(0.20 | ) | | | $(0.29 | ) | | | $(0.25 | ) |
Net asset value, end of period (x) | | | $25.59 | | | | $24.52 | | | | $25.06 | | | | $24.72 | | | | $20.25 | |
Total return (%) (k)(r)(s)(x) | | | 5.21 | (c) | | | (1.09 | ) | | | 2.15 | | | | 23.68 | | | | 16.57 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.03 | (c) | | | 1.17 | | | | 1.17 | | | | 1.17 | | | | 1.19 | |
Expenses after expense reductions (f) | | | 1.02 | (c) | | | 1.16 | | | | 1.16 | | | | 1.17 | | | | 1.19 | |
Net investment income | | | 1.39 | (c) | | | 0.74 | | | | 0.90 | | | | 0.86 | | | | 1.35 | |
Portfolio turnover | | | 40 | | | | 40 | | | | 37 | | | | 41 | | | | 40 | |
Net assets at end of period (000 omitted) | | | $7,415 | | | | $8,151 | | | | $9,551 | | | | $11,013 | | | | $12,578 | |
| Supplemental Ratios (%): | | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets after expense reductions
excluding short sale expenses (f) | | | N/A | | | | N/A | | | | 1.16 | | | | 1.16 | | | | 1.18 | |
| (c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
| (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 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 October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
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 on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange 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. 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 Global Research 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, 2016 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $64,454,102 | | | | $— | | | | $— | | | | $64,454,102 | |
Switzerland | | | 4,329,958 | | | | 1,530,272 | | | | — | | | | 5,860,230 | |
Japan | | | 449,925 | | | | 4,356,708 | | | | — | | | | 4,806,633 | |
United Kingdom | | | 447,809 | | | | 3,971,505 | | | | — | | | | 4,419,314 | |
France | | | 1,484,658 | | | | 2,701,972 | | | | — | | | | 4,186,630 | |
Canada | | | 2,639,151 | | | | — | | | | — | | | | 2,639,151 | |
Germany | | | — | | | | 1,765,563 | | | | — | | | | 1,765,563 | |
China | | | 625,558 | | | | 616,954 | | | | — | | | | 1,242,512 | |
Italy | | | 617,883 | | | | 565,872 | | | | — | | | | 1,183,755 | |
Other Countries | | | 4,352,348 | | | | 2,899,823 | | | | — | | | | 7,252,171 | |
| Mutual Funds | | | 153 | | | | — | | | | — | | | | 153 | |
| Total Investments | | | $79,401,545 | | | | $18,408,669 | | | | $— | | | | $97,810,214 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $1,231,106 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $7,995,167 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. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. 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
16
MFS Global Research Portfolio
Notes to Financial Statements – continued
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, 2016, 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.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian 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.
During the year ended December 31, 2016, there were no significant adjustments due to differences between book and tax accounting.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/16 | | | 12/31/15 | |
| Ordinary income (including any short-term capital gains) | | | $1,109,452 | | | | $1,447,722 | |
17
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 12/31/16 | | | | |
| Cost of investments | | | $89,200,712 | |
| Gross appreciation | | | 13,816,892 | |
| Gross depreciation | | | (5,207,390 | ) |
| Net unrealized appreciation (depreciation) | | | $8,609,502 | |
| Undistributed ordinary income | | | 1,623,494 | |
| Capital loss carryforwards | | | (3,001,734 | ) |
| Other temporary differences | | | (4,102 | ) |
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, 2016, 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 | |
| | | Year ended
12/31/16 | | | Year ended
12/31/15 | |
| Initial Class | | | $1,044,460 | | | | $1,360,823 | |
| Service Class | | | 64,992 | | | | 86,899 | |
| Total | | | $1,109,452 | | | | $1,447,722 | |
| (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, 2016, this management fee reduction amounted to $7,187, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.74% 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.
18
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, 2016, the fee was $2,962, 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, 2016, these costs amounted to $963.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund 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, 2016 was equivalent to an annual effective rate of 0.0252% 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 – 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. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $199 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the 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. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $163,559 and $788,921, respectively. The sales transactions resulted in net realized gains (losses) of $284,714.
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, aggregated $39,889,601 and $51,319,267, respectively.
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 42,946 | | | | $1,067,404 | | | | 25,187 | | | | $636,788 | |
Service Class | | | 8,067 | | | | 196,320 | | | | 11,941 | | | | 292,241 | |
| | | 51,013 | | | | $1,263,724 | | | | 37,128 | | | | $929,029 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 40,125 | | | | $1,044,460 | | | | 57,711 | | | | $1,360,823 | |
Service Class | | | 2,505 | | | | 64,992 | | | | 3,698 | | | | 86,899 | |
| | | 42,630 | | | | $1,109,452 | | | | 61,409 | | | | $1,447,722 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (522,570 | ) | | | $(12,961,287 | ) | | | (579,306 | ) | | | $(14,846,461 | ) |
Service Class | | | (53,179 | ) | | | (1,309,623 | ) | | | (64,408 | ) | | | (1,640,364 | ) |
| | | (575,749 | ) | | | $(14,270,910 | ) | | | (643,714 | ) | | | $(16,486,825 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (439,499 | ) | | | $(10,849,423 | ) | | | (496,408 | ) | | | $(12,848,850 | ) |
Service Class | | | (42,607 | ) | | | (1,048,311 | ) | | | (48,769 | ) | | | (1,261,224 | ) |
| | | (482,106 | ) | | | $(11,897,734 | ) | | | (545,177 | ) | | | $(14,110,074 | ) |
19
MFS Global Research Portfolio
Notes to Financial Statements – continued
The fund and certain other funds managed by MFS participate in a $1.25 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 Overnight Federal Reserve funds rate or daily 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 Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $623 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 | | | 110,139 | | | | 19,039,879 | | | | (19,149,865 | ) | | | 153 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $33 | | | | $— | | | | $2,262 | | | | $153 | |
20
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, 2016, 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, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Global Research Portfolio as of December 31, 2016, 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 15, 2017
21
MFS Global Research Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, 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 53) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 55) | | Trustee | | January 2014 | | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 74) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 65) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council (until 2015); 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 |
| | | | |
Maureen R. Goldfarb (age 61) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Michael Hegarty (age 72) | | Trustee | | December 2004 | | Private investor | | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) |
| | | | |
John P. Kavanaugh (age 62) | | Trustee and Vice Chair of Trustees | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 60) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 59) | | Trustee | | March 2005 | | Private investor | | The Travelers Companies, Director; Dycom Industries, Inc., Director |
| | | |
| OFFICERS | | | | | | |
Christopher R. Bohane (k) (age 43) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 48) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 57) | | 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 |
| | | | |
Ethan D. Corey (k) (age 53) | | 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 48) | | President | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 43) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
22
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) |
Susan A. Pereira (k) (age 46) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 46) | | 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 64) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 72) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 46) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Martin J. Wolin (k) (age 49) | | Chief Compliance Officer | | July 2015 | | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | | N/A |
| | | | |
James O. Yost (k) (age 56) | | 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. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
| (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. Buller and Kavanaugh and Ms. 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, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
23
MFS Global Research Portfolio
Trustees and Officers – continued
The Statement of Additional Information for a 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 | | |
24
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, 2016 (“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 Senior Officer, a 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 Broadridge Financial Services, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of 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 Broadridge 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 Broadridge 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, 2015, 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 5th quintile for each of the one- and five-year periods ended December 31, 2015 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 of their overall conclusions regarding the investment advisory agreement, that MFS’ responses and efforts and plans to improve
25
MFS Global Research Portfolio
Board Review of Investment Advisory Agreement – continued
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 Broadridge. The Trustees considered that, according to the data provided by Broadridge (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 Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. 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, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate 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, 2016.
26
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 mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios”, then “VIT II” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 81.02% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
27
rev. 3/16
| | | | |
| 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., and MFS Heritage Trust Company. |
| | |
| 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, or 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, 2016
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 • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Global Tactical Allocation Portfolio
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
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. | | | 25.5% | | | | 8.0% | | | | 33.5% | |
| | Asia/Pacific ex-Japan | | | 1.9% | | | | 10.9% | | | | 12.8% | |
| | North America ex-U.S. | | | 3.0% | | | | 4.1% | | | | 7.1% | |
| | Emerging Markets | | | 1.2% | | | | 0.0% | | | | 1.2% | |
| | United Kingdom | | | 3.2% | | | | (2.0)% | | | | 1.2% | |
| | Supranational | | | 0.1% | | | | 0.0% | | | | 0.1% | |
| | Developed - Middle East/Africa | | | 0.1% | | | | 0.0% | | | | 0.1% | |
| | Europe ex-U.K. | | | 11.4% | | | | (13.7)% | | | | (2.3)% | |
| | Japan | | | 6.4% | | | | (13.2)% | | | | (6.8)% | |
| | | Total | | | 52.8% | | | | (5.9)% | | | | 46.9% | |
| Equity | | U.S. Large Cap | | | 17.3% | | | | (3.6)% | | | | 13.7% | |
| | Europe ex-U.K. | | | 6.5% | | | | 4.0% | | | | 10.5% | |
| | United Kingdom | | | 2.4% | | | | 3.4% | | | | 5.8% | |
| | Emerging Markets | | | 1.8% | | | | 3.5% | | | | 5.3% | |
| | Asia/Pacific ex-Japan | | | 0.9% | | | | 0.7% | | | | 1.6% | |
| | U.S. Small/Mid Cap | | | 1.2% | | | | (1.0)% | | | | 0.2% | |
| | Developed - Middle East/Africa | | | 0.0% | (o) | | | 0.0% | | | | 0.0% | (o) |
| | Japan | | | 2.7% | | | | (2.9)% | | | | (0.2)% | |
| | North America ex-U.S. | | | 0.8% | | | | (1.3)% | | | | (0.5)% | |
| | | Total | | | 33.6% | | | | 2.8% | | | | 36.4% | |
| Real Estate-related | | Non-U.S. | | | 0.7% | | | | 0.0% | | | | 0.7% | |
| | U.S. | | | 0.7% | | | | 0.0% | | | | 0.7% | |
| | | Total | | | 1.4% | | | | 0.0% | | | | 1.4% | |
| Cash | | Cash & Cash Equivalents (d) | | | 7.6% | | | | 1.7% | | | | 9.3% | |
| | Other (e) | | | 2.6% | | | | 3.4% | | | | 6.0% | |
| | | Total | | | 10.2% | | | | 5.1% | | | | 15.3% | |
Total Net Exposure Summary | | | 98.0% | | | | 2.0% | | | | 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) | | | | |
| Australian Treasury Bond 10 yr Future MAR 2017 | | | 10.9% | |
| Canadian Government Bond 10 yr Future MAR 2017 | | | 4.1% | |
| FTSE 100 Index Future MAR 2017 | | | 3.4% | |
| iBoxx USD Liquid High Yield Index Total Return Swap JUN 2017 | | | 3.3% | |
| Bovespa Index Future FEB 2017 | | | 3.2% | |
| MSCI Taiwan Index Future JAN 2017 | | | 3.2% | |
| Hang Seng Index Future JAN 2017 | | | 3.1% | |
| E-Mini S&P 500 Index Future MAR 2017 | | | (3.5)% | |
| Japan Government Bond 10 yr Future MAR 2017 | | | (13.2)% | |
| German Euro Bund 10 yr Future MAR 2017 | | | (13.7)% | |
| (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 the use of derivative positions. Percentages reflect the equivalent exposure of those derivative positions. |
2
MFS Global Tactical Allocation Portfolio
Portfolio Composition – continued
| (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 all derivative positions. These amounts may be negative from time to time. The bond component will include any accrued interest amounts. |
| (d) | | Cash & Cash Equivalents includes any cash, investments in money market funds, short term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities. |
| (e) | | Other includes currency derivatives and/or the offsetting of the leverage produced by the fund’s derivative positions, including payables and/or receivables of the finance leg of interest rate swaps and the unrealized gain or loss in connection with forward currency exchange contracts. |
| (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 these 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 12/31/16.
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, 2016, Initial Class shares of the MFS Global Tactical Allocation Portfolio (“fund”) provided a total return of 6.24%, while Service Class shares of the fund provided a total return of 5.98%. These compare with a return of 2.09% over the same period for the fund’s benchmark, the Bloomberg Barclays Global Aggregate Bond Index (formerly
“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 8.15% and 5.36%, 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, inverse floating rate instruments, and swaps.
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
Within the equity portion of the fund, stock selection and, to a lesser extent, an overweight position in the consumer staples sector held back performance relative to the MSCI World Index. Within this sector, overweight positions in brewing company Heineken (Netherlands), consumer products company Kao (Japan) and tobacco company Japan Tobacco (Japan) hindered relative returns.
Weak stock selection in the basic materials sector weighed on relative returns. The combination of an underweight position and, to a lesser extent, security selection in the energy sector also held back relative performance. However, there were no individual securities within either sector that were among the fund’s top relative detractors over the reporting period.
Other top individual detractors included overweight positions in telecommunications equipment provider Ericsson (Sweden), drugstore retailer CVS Health, business system services company Nomura Research Institute (Japan), pharmaceutical company Bayer (Germany), aerospace and defense technology systems developer Cobham (h) (United Kingdom) and pharmaceutical company Santen Pharmaceutical (Japan).
4
MFS Global Tactical Allocation Portfolio
Management Review – continued
The fund’s cash and/or cash equivalents position within the equity portion of the fund also 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.
Within the fixed income portion of the fund, bond selection within US-based debt weighed on returns relative to the Bloomberg Barclays Global Aggregate Bond Index.
As part of the tactical overlay, the fund’s allocation to Europe ex-UK equities, specifically the fund’s long exposure to Italy and short exposure to Canadian and US small and large cap equities, hindered relative performance. The fund’s long position in the Canadian dollar and short exposure to the New Zealand dollar were additional factors that weakened relative returns.
Contributors to Performance
Within the equity portion of the fund, strong security selection and an underweight position in the health care sector benefited performance relative to the MSCI World Index. The fund’s avoidance of eye and skin care products company Allergan, biotech firm Gilead Sciences and pharmaceutical company Novo Nordisk (Denmark) boosted relative returns.
Security selection in both the technology and financial services sectors also helped relative results. Within the technology sector, overweight positions in computer graphics processors maker NVIDIA, semiconductor company Texas Instruments and electronic equipment and circuit company Analog Devices, and holdings of semiconductor manufacturer Taiwan Semiconductors (b) (Taiwan), bolstered relative results. Within the financial services sector, the fund’s overweight exposure to financial services firms JPMorgan Chase and Goldman Sachs Group aided relative performance.
Individual securities in other sectors that benefited relative results included an overweight position in diversified technology company 3M.
Within the fixed income portion of the fund, a greater-than-benchmark exposure to the industrials sector helped performance relative to the Bloomberg Barclays Global Aggregate Bond Index. Additionally, a lesser-than-benchmark exposure to the treasury sector and strong security selection within European-based issues also helped relative results.
The fund’s tactical overlay contributed to relative performance, led by an overweight allocation to the emerging market equity segment, particularly a long exposure to Brazilian equities. A short exposure to the British pound and a long exposure to the Japanese yen also aided relative returns.
Respectfully,
| | | | | | |
Nevin Chitkara Portfolio Manager | | Pablo De La Mata Portfolio Manager | | Pilar Gomez-Bravo Portfolio Manager | | Steven Gorham Portfolio Manager |
| | | |
| Richard Hawkins | | Ben Nastou | | Robert Persons | | Jonathan Sage |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| | | |
| Natalie Shapiro | | Robert Spector | | Benjamin Stone | | Erik Weisman |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
| (y) | A yield curve graphically depicts the yields of different maturity bonds of the same credit quality and type; a normal yield curve is upward sloping, with short-term rates lower than long-term rates. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
5
MFS Global Tactical Allocation Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/16
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 12/31/16
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class Inception Date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 11/07/94 | | 6.24% | | 5.29% | | 3.93% | | |
| | | Service Class | | 8/24/01 | | 5.98% | | 5.02% | | 3.67% | | |
| | | | |
| Comparative benchmarks | | | | | | | | |
| | | Bloomberg Barclays Global Aggregate Bond Index (f) | | 2.09% | | 0.21% | | 3.29% | | |
| | | MFS Global Tactical Allocation Blended Index (f)(w) | | 5.36% | | 5.91% | | 4.61% | | |
| | | Bloomberg Barclays Global Aggregate Bond Index Hedged (f) | | 3.95% | | 3.59% | | 4.39% | | |
| | | MSCI World Index (f) | | 8.15% | | 11.04% | | 4.41% | | |
| (f) | | Source: FactSet Research Systems Inc. |
| (w) | | As of December 31, 2016, MFS Global Tactical Allocation Blended Index was comprised of 35% MSCI World Index, 54% Bloomberg Barclays Global Aggregate Bond Index Hedged, and 11% Bloomberg Barclays Global Aggregate Bond Index. |
Benchmark Definitions
Bloomberg Barclays Global Aggregate Bond Index (formerly 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.
Bloomberg Barclays Global Aggregate Bond Index Hedged (formerly 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.
6
MFS Global Tactical Allocation Portfolio
Performance Summary – continued
MSCI World Index – a market capitalization-weighted index that is designed to measure equity market performance in the global developed markets.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
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.
Performance information prior to February 8, 2010 reflects time periods when the fund (i) had a policy of investing between 40% and 75% of its assets in equity securities and at least 25% of its assets in fixed income senior securities and (ii) did not employ a tactical asset allocation overlay. The fund’s investment policies and strategies changed effective February 8, 2010.
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, 2016 through December 31, 2016
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, 2016 through December 31, 2016.
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
7/01/16 | | | Ending
Account Value
12/31/16 | | | Expenses Paid
During Period (p)
7/01/16-12/31/16 | |
| Initial Class | | Actual | | | 0.77% | | | | $1,000.00 | | | | $988.21 | | | | $3.85 | |
| | Hypothetical (h) | | | 0.77% | | | | $1,000.00 | | | | $1,021.27 | | | | $3.91 | |
| Service Class | | Actual | | | 1.02% | | | | $1,000.00 | | | | $986.74 | | | | $5.09 | |
| | Hypothetical (h) | | | 1.02% | | | | $1,000.00 | | | | $1,020.01 | | | | $5.18 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios include 0.04% of interest expense on cash collateral held at brokers (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.03% (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
8
MFS Global Tactical Allocation Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – 33.6% | |
| Aerospace – 1.0% | | | | | | | | |
| Honeywell International, Inc. | | | 25,697 | | | $ | 2,976,993 | |
| Lockheed Martin Corp. | | | 11,633 | | | | 2,907,552 | |
| Northrop Grumman Corp. | | | 2,865 | | | | 666,342 | |
| United Technologies Corp. | | | 12,461 | | | | 1,365,975 | |
| | | | | | | | |
| | | | | | $ | 7,916,862 | |
| | | | | | | | |
| Airlines – 0.1% | | | | | | | | |
| Air Canada (a) | | | 45,150 | | | $ | 459,688 | |
| Copa Holdings S.A., “A” | | | 5,337 | | | | 484,760 | |
| | | | | | | | |
| | | | | | $ | 944,448 | |
| | | | | | | | |
| Alcoholic Beverages – 0.6% | | | | | | | | |
| AmBev S.A., ADR | | | 49,616 | | | $ | 243,615 | |
| Heineken N.V. | | | 27,641 | | | | 2,070,401 | |
| Pernod Ricard S.A. | | | 19,440 | | | | 2,106,720 | |
| | | | | | | | |
| | | | | | $ | 4,420,736 | |
| | | | | | | | |
| Apparel Manufacturers – 0.1% | | | | | | | | |
| Compagnie Financiere Richemont S.A. | | | 12,471 | | | $ | 826,052 | |
| | | | | | | | |
| Automotive – 0.4% | | | | | | | | |
| Delphi Automotive PLC | | | 12,067 | | | $ | 812,712 | |
| General Motors Co. | | | 34,918 | | | | 1,216,543 | |
| Hyundai Motor Co. Ltd. | | | 2,592 | | | | 311,411 | |
| Magna International, Inc. | | | 8,153 | | | | 354,016 | |
| USS Co. Ltd. | | | 27,900 | | | | 443,546 | |
| | | | | | | | |
| | | | | | $ | 3,138,228 | |
| | | | | | | | |
| Broadcasting – 0.4% | | | | | | | | |
| Omnicom Group, Inc. | | | 23,333 | | | $ | 1,985,872 | |
| ProSiebenSat.1 Media AG | | | 2,903 | | | | 112,224 | |
| Time Warner, Inc. | | | 12,819 | | | | 1,237,418 | |
| | | | | | | | |
| | | | | | $ | 3,335,514 | |
| | | | | | | | |
| Brokerage & Asset Managers – 0.2% | |
| BlackRock, Inc. | | | 3,914 | | | $ | 1,489,434 | |
| Daiwa Securities Group, Inc. | | | 75,000 | | | | 460,730 | |
| | | | | | | | |
| | | | | | $ | 1,950,164 | |
| | | | | | | | |
| Business Services – 1.9% | | | | | | | | |
| Accenture PLC, “A” | | | 31,031 | | | $ | 3,634,661 | |
| Amadeus IT Holding S.A. | | | 37,228 | | | | 1,691,749 | |
| Bunzl PLC | | | 47,963 | | | | 1,241,166 | |
| Compass Group PLC | | | 143,216 | | | | 2,639,803 | |
| Equifax, Inc. | | | 2,608 | | | | 308,344 | |
| Fidelity National Information Services, Inc. | | | 12,440 | | | | 940,962 | |
| Global Payments, Inc. | | | 15,104 | | | | 1,048,369 | |
| Nomura Research, Inc. | | | 52,140 | | | | 1,584,974 | |
| Secom Co. Ltd. | | | 17,100 | | | | 1,247,877 | |
| SGS S.A. | | | 477 | | | | 968,680 | |
| | | | | | | | |
| | | | | | $ | 15,306,585 | |
| | | | | | | | |
| Cable TV – 0.6% | | | | | | | | |
| Charter Communications, Inc., “A” (a) | | | 6,125 | | | $ | 1,763,510 | |
| Comcast Corp., “A” | | | 38,142 | | | | 2,633,705 | |
| | | | | | | | |
| | | | | | $ | 4,397,215 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – continued | |
| Chemicals – 1.2% | | | | | | | | |
| 3M Co. (s) | | | 23,559 | | | $ | 4,206,931 | |
| Givaudan S.A. | | | 655 | | | | 1,200,265 | |
| LyondellBasell Industries N.V., “A” | | | 7,766 | | | | 666,167 | |
| Monsanto Co. | | | 5,196 | | | | 546,671 | |
| Orica Ltd. | | | 46,230 | | | | 587,238 | |
| PPG Industries, Inc. | | | 26,307 | | | | 2,492,851 | |
| | | | | | | | |
| | | | | | $ | 9,700,123 | |
| | | | | | | | |
| Computer Software – 0.4% | | | | | | | | |
| Cadence Design Systems, Inc. (a) | | | 65,717 | | | $ | 1,657,383 | |
| Check Point Software Technologies Ltd. (a) | | | 3,515 | | | | 296,877 | |
| Oracle Corp. | | | 25,356 | | | | 974,938 | |
| | | | | | | | |
| | | | | | $ | 2,929,198 | |
| | | | | | | | |
| Computer Software – Systems – 0.3% | | | | | |
| Hon Hai Precision Industry Co. Ltd. | | | 358,900 | | | $ | 929,730 | |
| International Business Machines Corp. | | | 10,871 | | | | 1,804,477 | |
| | | | | | | | |
| | | | | | $ | 2,734,207 | |
| | | | | | | | |
| Construction – 0.4% | | | | | | | | |
| Bellway PLC | | | 2,873 | | | $ | 87,418 | |
| Geberit AG | | | 1,677 | | | | 671,123 | |
| Owens Corning | | | 18,230 | | | | 939,939 | |
| Sherwin-Williams Co. | | | 4,317 | | | | 1,160,151 | |
| Stanley Black & Decker, Inc. | | | 3,813 | | | | 437,313 | |
| | | | | | | | |
| | | | | | $ | 3,295,944 | |
| | | | | | | | |
| Consumer Products – 1.6% | | | | | | | | |
| Coty, Inc., “A” | | | 29,768 | | | $ | 545,052 | |
| Kao Corp. | | | 54,600 | | | | 2,583,295 | |
| Kobayashi Pharmaceutical Co. Ltd. | | | 22,200 | | | | 948,132 | |
| KOSE Corp. | | | 4,800 | | | | 398,785 | |
| Procter & Gamble Co. | | | 41,131 | | | | 3,458,294 | |
| Reckitt Benckiser Group PLC | | | 31,324 | | | | 2,647,952 | |
| Svenska Cellulosa Aktiebolaget | | | 62,742 | | | | 1,769,153 | |
| | | | | | | | |
| | | | | | $ | 12,350,663 | |
| | | | | | | | |
| Containers – 0.3% | | | | | | | | |
| Brambles Ltd. | | | 213,824 | | | $ | 1,907,340 | |
| Crown Holdings, Inc. (a) | | | 7,055 | | | | 370,881 | |
| | | | | | | | |
| | | | | | $ | 2,278,221 | |
| | | | | | | | |
| Electrical Equipment – 1.1% | | | | | | | | |
| IMI PLC | | | 37,352 | | | $ | 476,331 | |
| Johnson Controls International PLC | | | 50,311 | | | | 2,072,310 | |
| Legrand S.A. | | | 18,984 | | | | 1,075,108 | |
| OMRON Corp. | | | 23,100 | | | | 884,076 | |
| Schneider Electric S.A. | | | 17,636 | | | | 1,225,484 | |
| Siemens AG | | | 18,002 | | | | 2,213,338 | |
| Spectris PLC | | | 22,558 | | | | 642,252 | |
| | | | | | | | |
| | | | | | $ | 8,588,899 | |
| | | | | | | | |
| Electronics – 2.0% | | | | | | | | |
| Analog Devices, Inc. | | | 13,474 | | | $ | 978,482 | |
| Halma PLC | | | 63,202 | | | | 696,600 | |
9
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – continued | |
| Electronics – continued | | | | | | | | |
| Hirose Electric Co. Ltd. | | | 6,900 | | | $ | 853,262 | |
| Intel Corp. | | | 31,629 | | | | 1,147,184 | |
| NVIDIA Corp. | | | 12,480 | | | | 1,332,115 | |
| Samsung Electronics Co. Ltd. | | | 1,157 | | | | 1,709,535 | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 178,089 | | | | 5,120,059 | |
| Texas Instruments, Inc. | | | 49,525 | | | | 3,613,839 | |
| | | | | | | | |
| | | | | | $ | 15,451,076 | |
| | | | | | | | |
| Energy – Independent – 0.6% | | | | | | | | |
| Cairn Energy PLC (a) | | | 105,069 | | | $ | 304,462 | |
| Galp Energia SGPS S.A., “B” | | | 59,637 | | | | 886,509 | |
| Occidental Petroleum Corp. | | | 13,483 | | | | 960,394 | |
| Rice Energy, Inc. (a) | | | 47,212 | | | | 1,007,976 | |
| Valero Energy Corp. | | | 20,838 | | | | 1,423,652 | |
| | | | | | | | |
| | | | | | $ | 4,582,993 | |
| | | | | | | | |
| Energy – Integrated – 1.1% | | | | | | | | |
| BP PLC | | | 227,652 | | | $ | 1,414,514 | |
| Chevron Corp. | | | 10,624 | | | | 1,250,445 | |
| China Petroleum & Chemical Corp. | | | 614,000 | | | | 434,501 | |
| Exxon Mobil Corp. | | | 38,788 | | | | 3,501,005 | |
| LUKOIL PJSC, ADR | | | 13,397 | | | | 750,250 | |
| OAO Gazprom, ADR | | | 104,976 | | | | 529,321 | |
| Suncor Energy, Inc. | | | 25,089 | | | | 820,323 | |
| | | | | | | | |
| | | | | | $ | 8,700,359 | |
| | | | | | | | |
| Engineering – Construction – 0.1% | | | | | | | | |
| VINCI S.A. | | | 14,540 | | | $ | 988,999 | |
| | | | | | | | |
| Food & Beverages – 1.7% | | | | | | | | |
| Danone S.A. | | | 28,967 | | | $ | 1,833,476 | |
| General Mills, Inc. | | | 58,279 | | | | 3,599,894 | |
| J.M. Smucker Co. | | | 6,839 | | | | 875,802 | |
| Marine Harvest | | | 60,765 | | | | 1,095,626 | |
| Mead Johnson Nutrition Co., “A” | | | 9,148 | | | | 647,312 | |
| Nestle S.A. | | | 69,114 | | | | 4,958,045 | |
| Tyson Foods, Inc., “A” | | | 7,271 | | | | 448,475 | |
| | | | | | | | |
| | | | | | $ | 13,458,630 | |
| | | | | | | | |
| Food & Drug Stores – 0.5% | | | | | | | | |
| CVS Health Corp. | | | 30,444 | | | $ | 2,402,336 | |
| Lawson, Inc. | | | 6,600 | | | | 463,624 | |
| Wesfarmers Ltd. | | | 28,667 | | | | 870,327 | |
| | | | | | | | |
| | | | | | $ | 3,736,287 | |
| | | | | | | | |
| Gaming & Lodging – 0.1% | | | | | | | | |
| Crown Resorts Ltd. | | | 17,348 | | | $ | 144,633 | |
| Sands China Ltd. | | | 204,800 | | | | 880,799 | |
| | | | | | | | |
| | | | | | $ | 1,025,432 | |
| | | | | | | | |
| General Merchandise – 0.1% | | | | | | | | |
| Target Corp. | | | 12,657 | | | $ | 914,215 | |
| | | | | | | | |
| Health Maintenance Organizations – 0.1% | | | | | |
| Cigna Corp. | | | 6,052 | | | $ | 807,276 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – continued | |
| Insurance – 2.2% | | | | | | | | |
| Aon PLC | | | 15,958 | | | $ | 1,779,796 | |
| Chubb Ltd. | | | 10,139 | | | | 1,339,565 | |
| Fairfax Financial Holdings Ltd. | | | 4,265 | | | | 2,059,995 | |
| Hiscox Ltd. | | | 46,024 | | | | 576,247 | |
| MetLife, Inc. | | | 57,735 | | | | 3,111,339 | |
| Prudential Financial, Inc. | | | 23,024 | | | | 2,395,877 | |
| Swiss Re Ltd. | | | 5,364 | | | | 508,324 | |
| Travelers Cos., Inc. | | | 22,533 | | | | 2,758,490 | |
| Zurich Insurance Group AG | | | 10,065 | | | | 2,764,468 | |
| | | | | | | | |
| | | | | | $ | 17,294,101 | |
| | | | | | | | |
| Internet – 0.1% | | | | | | | | |
| Facebook, Inc., “A” (a) | | | 3,709 | | | $ | 426,720 | |
| | | | | | | | |
| Machinery & Tools – 0.2% | | | | | | | | |
| Illinois Tool Works, Inc. | | | 9,839 | | | $ | 1,204,884 | |
| | | | | | | | |
| Major Banks – 2.5% | | | | | | | | |
| Bank of New York Mellon Corp. | | | 40,577 | | | $ | 1,922,538 | |
| BNP Paribas | | | 9,680 | | | | 616,984 | |
| BOC Hong Kong Holdings Ltd. | | | 171,500 | | | | 613,724 | |
| Canadian Imperial Bank of Commerce | | | 10,861 | | | | 886,256 | |
| Goldman Sachs Group, Inc. | | | 7,618 | | | | 1,824,130 | |
| JPMorgan Chase & Co. | | | 52,640 | | | | 4,542,306 | |
| National Australia Bank Ltd. | | | 13,109 | | | | 289,334 | |
| PNC Financial Services Group, Inc. | | | 5,217 | | | | 610,180 | |
| Royal Bank of Canada | | | 5,447 | | | | 368,816 | |
| State Street Corp. | | | 19,416 | | | | 1,509,012 | |
| Sumitomo Mitsui Financial Group, Inc. | | | 11,600 | | | | 439,757 | |
| Svenska Handelsbanken AB, “A” | | | 168,468 | | | | 2,341,015 | |
| Toronto-Dominion Bank | | | 12,945 | | | | 638,452 | |
| Wells Fargo & Co. | | | 65,320 | | | | 3,599,785 | |
| | | | | | | | |
| | | | | | $ | 20,202,289 | |
| | | | | | | | |
| Medical & Health Technology & Services – 0.1% | |
| HCA Holdings, Inc. (a) | | | 9,554 | | | $ | 707,187 | |
| | | | | | | | |
| Medical Equipment – 0.8% | | | | | | | | |
| Abbott Laboratories | | | 32,906 | | | $ | 1,263,919 | |
| Danaher Corp. | | | 14,806 | | | | 1,152,499 | |
| Medtronic PLC | | | 31,397 | | | | 2,236,408 | |
| St. Jude Medical, Inc. | | | 11,079 | | | | 888,425 | |
| Thermo Fisher Scientific, Inc. | | | 2,938 | | | | 414,552 | |
| | | | | | | | |
| | | | | | $ | 5,955,803 | |
| | | | | | | | |
| Metals & Mining – 0.2% | | | | | | | | |
| Rio Tinto Ltd. | | | 45,927 | | | $ | 1,748,929 | |
| | | | | | | | |
| Natural Gas – Distribution – 0.2% | | | | | | | | |
| Engie | | | 98,990 | | | $ | 1,261,102 | |
| | | | | | | | |
| Network & Telecom – 0.2% | | | | | | | | |
| Cisco Systems, Inc. | | | 32,829 | | | $ | 992,092 | |
| LM Ericsson Telephone Co., “B” | | | 69,368 | | | | 404,387 | |
| | | | | | | | |
| | | | | | $ | 1,396,479 | |
| | | | | | | | |
| Oil Services – 0.3% | | | | | | | | |
| Schlumberger Ltd. | | | 19,940 | | | $ | 1,673,963 | |
| Technip | | | 11,595 | | | | 822,809 | |
| | | | | | | | |
| | | | | | $ | 2,496,772 | |
| | | | | | | | |
10
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – continued | |
| Other Banks & Diversified Financials – 1.4% | | | | | |
| Agricultural Bank of China Ltd., “H” | | | 710,000 | | | $ | 289,897 | |
| American Express Co. | | | 12,031 | | | | 891,256 | |
| China Construction Bank | | | 1,699,000 | | | | 1,301,628 | |
| DBS Group Holdings Ltd. | | | 117,600 | | | | 1,403,056 | |
| DnB NOR A.S.A. | | | 32,804 | | | | 487,766 | |
| Hachijuni Bank Ltd. | | | 41,000 | | | | 237,080 | |
| ING Groep N.V. | | | 109,521 | | | | 1,541,392 | |
| North Pacific Bank Ltd. | | | 35,900 | | | | 147,619 | |
| U.S. Bancorp | | | 49,470 | | | | 2,541,274 | |
| UBS AG | | | 153,965 | | | | 2,411,609 | |
| | | | | | | | |
| | | | | | $ | 11,252,577 | |
| | | | | | | | |
| Pharmaceuticals – 2.9% | | | | | | | | |
| Bayer AG | | | 30,620 | | | $ | 3,195,174 | |
| Eli Lilly & Co. | | | 28,883 | | | | 2,124,345 | |
| Johnson & Johnson (s) | | | 41,798 | | | | 4,815,548 | |
| Merck & Co., Inc. | | | 67,290 | | | | 3,961,362 | |
| Novartis AG | | | 40,284 | | | | 2,931,400 | |
| Pfizer, Inc. | | | 85,590 | | | | 2,779,963 | |
| Roche Holding AG | | | 10,774 | | | | 2,454,890 | |
| Santen Pharmaceutical Co. Ltd. | | | 76,200 | | | | 930,592 | |
| | | | | | | | |
| | | | | | $ | 23,193,274 | |
| | | | | | | | |
| Printing & Publishing – 0.2% | | | | | | | | |
| Moody’s Corp. | | | 9,345 | | | $ | 880,953 | |
| RELX N.V. | | | 55,258 | | | | 928,859 | |
| | | | | | | | |
| | | | | | $ | 1,809,812 | |
| | | | | | | | |
| Railroad & Shipping – 0.1% | | | | | | | | |
| Canadian National Railway Co. | | | 7,742 | | | $ | 521,811 | |
| Union Pacific Corp. | | | 5,472 | | | | 567,337 | |
| | | | | | | | |
| | | | | | $ | 1,089,148 | |
| | | | | | | | |
| Real Estate – 0.6% | | | | | | | | |
| Deutsche Wohnen AG | | | 95,194 | | | $ | 2,985,207 | |
| Medical Properties Trust, Inc., REIT | | | 82,684 | | | | 1,017,013 | |
| Starwood Property Trust, Inc., REIT | | | 24,118 | | | | 529,390 | |
| Washington Prime Group, Inc., REIT | | | 17,708 | | | | 184,340 | |
| | | | | | | | |
| | | | | | $ | 4,715,950 | |
| | | | | | | | |
| Restaurants – 0.1% | | | | | | | | |
| Brinker International, Inc. | | | 12,169 | | | $ | 602,731 | |
| Greggs PLC | | | 14,680 | | | | 175,489 | |
| Yum China Holdings, Inc. (a) | | | 4,816 | | | | 125,794 | |
| | | | | | | | |
| | | | | | $ | 904,014 | |
| | | | | | | | |
| Specialty Chemicals – 0.1% | | | | | | | | |
| PTT Global Chemical PLC | | | 616,700 | | | $ | 1,084,936 | |
| | | | | | | | |
| Specialty Stores – 0.3% | | | | | | | | |
| Esprit Holdings Ltd. (a) | | | 286,300 | | | $ | 223,364 | |
| Gap, Inc. | | | 50,076 | | | | 1,123,705 | |
| Just Eat PLC (a) | | | 96,881 | | | | 696,676 | |
| Urban Outfitters, Inc. (a) | | | 8,406 | | | | 239,403 | |
| | | | | | | | |
| | | | | | $ | 2,283,148 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – continued | |
| Telecommunications – Wireless – 0.6% | |
| KDDI Corp. | | | 135,700 | | | $ | 3,426,141 | |
| SoftBank Corp. | | | 6,700 | | | | 442,316 | |
| Vodafone Group PLC | | | 306,521 | | | | 753,881 | |
| | | | | | | | |
| | | | | | $ | 4,622,338 | |
| | | | | | | | |
| Telephone Services – 0.8% | | | | | | | | |
| AT&T, Inc. | | | 9,876 | | | $ | 420,026 | |
| BT Group PLC | | | 340,318 | | | | 1,541,077 | |
| Nippon Television Holdings, Inc. | | | 17,400 | | | | 731,284 | |
| TDC A.S. (a) | | | 127,309 | | | | 653,625 | |
| Verizon Communications, Inc. | | | 49,427 | | | | 2,638,413 | |
| | | | | | | | |
| | | | | | $ | 5,984,425 | |
| | | | | | | | |
| Tobacco – 1.8% | | | | | | | | |
| Altria Group, Inc. | | | 55,422 | | | $ | 3,747,636 | |
| British American Tobacco PLC | | | 34,570 | | | | 1,962,847 | |
| Imperial Tobacco Group PLC | | | 9,016 | | | | 392,212 | |
| Japan Tobacco, Inc. | | | 90,400 | | | | 2,973,242 | |
| Philip Morris International, Inc. (s) | | | 55,531 | | | | 5,080,531 | |
| Reynolds American, Inc. | | | 8,632 | | | | 483,737 | |
| | | | | | | | |
| | | | | | $ | 14,640,205 | |
| | | | | | | | |
| Trucking – 0.4% | | | | | | | | |
| United Parcel Service, Inc., “B” | | | 13,221 | | | $ | 1,515,655 | |
| Yamato Holdings Co. Ltd. | | | 93,000 | | | | 1,885,275 | |
| | | | | | | | |
| | | | | | $ | 3,400,930 | |
| | | | | | | | |
| Utilities – Electric Power – 0.6% | |
| American Electric Power Co., Inc. | | | 30,426 | | | $ | 1,915,621 | |
| Energias de Portugal S.A. | | | 83,521 | | | | 254,436 | |
| Korea Electric Power Corp. (a) | | | 10,560 | | | | 385,951 | |
| SSE PLC | | | 71,443 | | | | 1,365,724 | |
| Xcel Energy, Inc. | | | 17,310 | | | | 704,517 | |
| | | | | | | | |
| | | | | | $ | 4,626,249 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $191,029,059) | | | $ | 266,079,598 | |
| | | | | | | | |
| | |
| BONDS – 55.8% | | | | | | | | |
| Aerospace – 0.1% | | | | | | | | |
| Lockheed Martin Corp., 3.55%, 1/15/2026 | | $ | 749,000 | | | $ | 764,213 | |
| | | | | | | | |
| Airlines – 0.1% | | | | | | | | |
| Ryanair Ltd., 1.125%, 3/10/2023 | | EUR | 475,000 | | | $ | 500,865 | |
| | | | | | | | |
| Apparel Manufacturers – 0.0% | | | | | | | | |
| Christian Dior SE, 0.75%, 6/24/2021 | | EUR | 300,000 | | | $ | 319,080 | |
| | | | | | | | |
| Asset-Backed & Securitized – 2.9% | | | | | |
| Cent LP, 2013-17A, “A1”, CLO, FRN, 2.187%, 1/30/2025 (n) | | $ | 1,367,000 | | | $ | 1,366,209 | |
| Chesapeake Funding II LLC, 2016-1A, “A2”, FRN, 1.674%, 3/15/2028 (n) | | | 1,832,000 | | | | 1,844,622 | |
| Chesapeake Funding II LLC, 2016-2A, “A2”, FRN, 1.703%, 6/15/2028 (z) | | | 1,356,000 | | | | 1,363,052 | |
| Dryden Senior Loan Fund, 2013-26A, “A”, CLO, FRN, 1.98%, 7/15/2025 (n) | | | 1,757,000 | | | | 1,750,287 | |
11
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Asset-Backed & Securitized – continued | | | | | |
| Ford Credit Floorplan Master Owner Trust, 2015-1, “A2”, FRN, 1.103%, 1/15/2020 | | $ | 3,710,000 | | | $ | 3,713,990 | |
| ING Investment Management Ltd., 2013-2A, “A1”, CLO, FRN, 2.031%, 4/25/2025 (n) | | | 1,595,000 | | | | 1,593,506 | |
| John Deere Owner Trust , “A2”, 1.15%, 10/15/2018 | | | 1,631,156 | | | | 1,631,697 | |
| JPMBB Commercial Mortgage Securities Trust, 2014-C26, 3.494%, 1/15/2048 | | | 2,570,000 | | | | 2,634,194 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., “A4”, FRN, 5.753%, 6/15/2049 | | | 1,889,396 | | | | 1,900,776 | |
| Merrill Lynch Mortgage Trust, FRN, 5.826%, 6/12/2050 | | | 3,078,937 | | | | 3,104,844 | |
| Wells Fargo Commercial Mortgage Trust, 2015-C28, “A4”, 3.54%, 5/15/2048 | | | 2,271,943 | | | | 2,329,826 | |
| | | | | | | | |
| | | | | | $ | 23,233,003 | |
| | | | | | | | |
| Automotive – 0.6% | | | | | | | | |
| Delphi Automotive PLC, 1.5%, 3/10/2025 | | EUR | 575,000 | | | $ | 605,700 | |
| Ferrari N.V., 1.5%, 3/16/2023 | | EUR | 600,000 | | | | 627,990 | |
| FGA Capital Ireland PLC, 2%, 10/23/2019 | | EUR | 1,050,000 | | | | 1,149,794 | |
| General Motors Co., 6.6%, 4/01/2036 | | $ | 794,000 | | | | 906,283 | |
| RCI Banque S.A., 1%, 5/17/2023 | | EUR | 200,000 | | | | 210,688 | |
| Valeo S.A., 1.625%, 3/18/2026 | | EUR | 300,000 | | | | 325,288 | |
| Volkswagen International Finance N.V., 3.75%, 3/29/2049 | | EUR | 550,000 | | | | 587,098 | |
| Volkswagen International Finance N.V., 3.875% to 9/04/2018, FRN to 9/29/2049 | | EUR | 400,000 | | | | 434,408 | |
| | | | | | | | |
| | | | | | $ | 4,847,249 | |
| | | | | | | | |
| Biotechnology – 0.1% | | | | | | | | |
| Life Technologies Corp., 6%, 3/01/2020 | | $ | 411,000 | | | $ | 447,460 | |
| | | | | | | | |
| Broadcasting – 0.4% | | | | | | | | |
| Omnicom Group, Inc., 3.65%, 11/01/2024 | | $ | 357,000 | | | $ | 358,642 | |
| Omnicom Group, Inc., 3.6%, 4/15/2026 | | | 758,000 | | | | 749,100 | |
| ProSiebenSat.1 Media AG, 2.625%, 4/15/2021 | | EUR | 715,000 | | | | 802,320 | |
| Time Warner, Inc., 3.8%, 2/15/2027 | | $ | 921,000 | | | | 912,912 | |
| | | | | | | | |
| | | | | | $ | 2,822,974 | |
| | | | | | | | |
| Brokerage & Asset Managers – 0.4% | | | | | |
| CME Group, Inc., 3%, 3/15/2025 | | $ | 1,000,000 | | | $ | 998,176 | |
| Intercontinental Exchange, Inc., 2.75%, 12/01/2020 | | | 506,000 | | | | 511,159 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Brokerage & Asset Managers – continued | | | | | |
| Intercontinental Exchange, Inc., 3.75%, 12/01/2025 | | $ | 831,000 | | | $ | 848,046 | |
| TD Ameritrade Holding Corp., 2.95%, 4/01/2022 | | | 676,000 | | | | 683,729 | |
| | | | | | | | |
| | | | | | $ | 3,041,110 | |
| | | | | | | | |
| Building – 0.2% | | | | | | | | |
| Martin Marietta Materials, Inc., 4.25%, 7/02/2024 | | $ | 367,000 | | | $ | 372,454 | |
| Mohawk Industries, Inc., 2%, 1/14/2022 | | EUR | 825,000 | | | | 916,913 | |
| Owens Corning, 4.2%, 12/15/2022 | | $ | 281,000 | | | | 291,513 | |
| | | | | | | | |
| | | | | | $ | 1,580,880 | |
| | | | | | | | |
| Business Services – 0.5% | | | | | | | | |
| Cisco Systems, Inc., 2.2%, 2/28/2021 | | $ | 953,000 | | | $ | 949,932 | |
| Fidelity National Information Services, Inc., 5%, 3/15/2022 | | | 717,000 | | | | 736,768 | |
| Fidelity National Information Services, Inc., 3.875%, 6/05/2024 | | | 658,000 | | | | 670,512 | |
| Fidelity National Information Services, Inc., 5%, 10/15/2025 | | | 386,000 | | | | 420,284 | |
| Fidelity National Information Services, Inc., 3%, 8/15/2026 | | | 758,000 | | | | 711,753 | |
| Fidelity National Information Services, Inc., 4.5%, 8/15/2046 | | | 379,000 | | | | 361,988 | |
| | | | | | | | |
| | | | | | $ | 3,851,237 | |
| | | | | | | | |
| Cable TV – 0.9% | | | | | | | | |
| Charter Communications Operating LLC, 6.384%, 10/23/2035 | | $ | 1,140,000 | | | $ | 1,299,871 | |
| Comcast Corp., 2.75%, 3/01/2023 | | | 2,015,000 | | | | 1,998,433 | |
| Comcast Corp., 4.65%, 7/15/2042 | | | 712,000 | | | | 739,890 | |
| Cox Communications, Inc., 3.25%, 12/15/2022 (n) | | | 498,000 | | | | 484,539 | |
| NBCUniversal Enterprise, Inc., 1.974%, 4/15/2019 (n) | | | 886,000 | | | | 888,848 | |
| Shaw Communications, Inc., 5.65%, 10/01/2019 | | CAD | 674,000 | | | | 547,849 | |
| Sky PLC, 2.5%, 9/15/2026 | | EUR | 700,000 | | | | 796,303 | |
| Time Warner Cable, Inc., 5.75%, 6/02/2031 | | GBP | 350,000 | | | | 511,108 | |
| | | | | | | | |
| | | | | | $ | 7,266,841 | |
| | | | | | | | |
| Chemicals – 0.4% | | | | | | | | |
| Air Liquide Finance Co., 2.25%, 9/27/2023 (n) | | $ | 727,000 | | | $ | 692,213 | |
| International Flavors & Fragrances, Inc., 1.75%, 3/14/2024 | | EUR | 570,000 | | | | 628,734 | |
| LyondellBasell Industries N.V., 5%, 4/15/2019 | | $ | 903,000 | | | | 953,324 | |
| PPG Industries, Inc., 0.875%, 11/03/2025 | | EUR | 500,000 | | | | 516,957 | |
| | | | | | | | |
| | | | | | $ | 2,791,228 | |
| | | | | | | | |
12
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Computer Software – Systems – 0.3% | | | | | |
| Apple, Inc., 2.7%, 5/13/2022 | | $ | 1,582,000 | | | $ | 1,590,356 | |
| Apple, Inc., 3.6%, 7/31/2042 | | GBP | 300,000 | | | | 422,288 | |
| | | | | | | | |
| | | | | | $ | 2,012,644 | |
| | | | | | | | |
| Consumer Products – 0.2% | | | | | | | | |
| Newell Rubbermaid, Inc., 5.375%, 4/01/2036 | | $ | 294,000 | | | $ | 330,866 | |
| Reckitt Benckiser Treasury Services PLC, 3.625%, 9/21/2023 (n) | | | 577,000 | | | | 587,759 | |
| Whirlpool Finance Luxembourg S.A., 1.25%, 11/02/2026 | | EUR | 390,000 | | | | 403,672 | |
| | | | | | | | |
| | | | | | $ | 1,322,297 | |
| | | | | | | | |
| Consumer Services – 0.2% | | | | | | | | |
| Priceline Group, Inc., 2.15%, 11/25/2022 | | EUR | 310,000 | | | $ | 345,365 | |
| Priceline Group, Inc., 1.8%, 3/03/2027 | | EUR | 950,000 | | | | 965,446 | |
| | | | | | | | |
| | | | | | $ | 1,310,811 | |
| | | | | | | | |
| Defense Electronics – 0.1% | | | | | | | | |
| BAE Systems PLC, 4.125%, 6/08/2022 | | GBP | 350,000 | | | $ | 485,736 | |
| | | | | | | | |
| Electronics – 0.2% | | | | | | | | |
| Flextronics International Ltd., 4.625%, 2/15/2020 | | $ | 264,000 | | | $ | 277,531 | |
| Tyco Electronics Group S.A., 2.375%, 12/17/2018 | | | 778,000 | | | | 785,347 | |
| Tyco Electronics Group S.A., 1.1%, 3/01/2023 | | EUR | 850,000 | | | | 907,458 | |
| | | | | | | | |
| | | | | | $ | 1,970,336 | |
| | | | | | | | |
| Emerging Market Quasi-Sovereign – 0.3% | |
| Comision Federal de Electricidad, 4.875%, 1/15/2024 | | $ | 669,000 | | | $ | 664,819 | |
| Office Cherifien des Phosphates S.A., 6.875%, 4/25/2044 (n) | | | 1,570,000 | | | | 1,578,048 | |
| Petroleos Mexicanos, 6.5%, 3/13/2027 (n) | | | 266,000 | | | | 274,379 | |
| | | | | | | | |
| | | | | | $ | 2,517,246 | |
| | | | | | | | |
| Emerging Market Sovereign – 0.1% | |
| Republic of Indonesia, 2.875%, 7/08/2021 (z) | | EUR | 500,000 | | | $ | 549,023 | |
| | | | | | | | |
| Entertainment – 0.1% | | | | | | | | |
| Carnival Corp., 1.875%, 11/07/2022 | | EUR | 820,000 | | | $ | 912,620 | |
| | | | | | | | |
| Financial Institutions – 0.1% | | | | | | | | |
| International Lease Finance Corp., 7.125%, 9/01/2018 (n) | | $ | 859,000 | | | $ | 925,573 | |
| | | | | | | | |
| Food & Beverages – 1.3% | | | | | | | | |
| Anheuser-Busch InBev N.V., 1.5%, 4/18/2030 | | EUR | 400,000 | | | $ | 411,481 | |
| Anheuser-Busch InBev Worldwide, Inc., 3.75%, 1/15/2022 | | $ | 342,000 | | | | 356,622 | |
| Anheuser-Busch InBev Worldwide, Inc., 0.875%, 3/17/2022 | | EUR | 200,000 | | | | 216,010 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Food & Beverages – continued | |
| Anheuser-Busch InBev Worldwide, Inc., 3.3%, 2/01/2023 | | $ | 1,130,000 | | | $ | 1,148,859 | |
| Anheuser-Busch InBev Worldwide, Inc., 4.7%, 2/01/2036 | | | 1,479,000 | | | | 1,555,204 | |
| Coca-Cola Co., 0.75%, 3/09/2023 | | EUR | 425,000 | | | | 456,186 | |
| Coca-Cola Co., 1.1%, 9/02/2036 | | EUR | 110,000 | | | | 105,202 | |
| Coca-Cola Enterprises, Inc., 1.875%, 3/18/2030 | | EUR | 600,000 | | | | 631,760 | |
| Fomento Economico Mexicano S.A.B. de C.V., 1.75%, 3/20/2023 | | EUR | 750,000 | | | | 802,317 | |
| J.M. Smucker Co., 2.5%, 3/15/2020 | | $ | 1,515,000 | | | | 1,521,366 | |
| J.M. Smucker Co., 4.375%, 3/15/2045 | | | 272,000 | | | | 269,340 | |
| Kraft Heinz Foods Co., 3.5%, 7/15/2022 | | | 1,419,000 | | | | 1,438,936 | |
| Kraft Heinz Foods Co., 5%, 7/15/2035 | | | 308,000 | | | | 322,643 | |
| Tyson Foods, Inc., 5.15%, 8/15/2044 | | | 239,000 | | | | 247,360 | |
| Wm. Wrigley Jr. Co., 2.9%, 10/21/2019 (n) | | | 409,000 | | | | 415,949 | |
| | | | | | | | |
| | | | | | $ | 9,899,235 | |
| | | | | | | | |
| Food & Drug Stores – 0.5% | | | | | | | | |
| CVS Health Corp., 2.125%, 6/01/2021 | | $ | 1,235,000 | | | $ | 1,213,388 | |
| Walgreens Boots Alliance, Inc., 2.7%, 11/18/2019 | | | 1,164,000 | | | | 1,178,878 | |
| Walgreens Boots Alliance, Inc., 2.875%, 11/20/2020 | | GBP | 400,000 | | | | 516,768 | |
| Walgreens Boots Alliance, Inc., 4.65%, 6/01/2046 | | $ | 917,000 | | | | 928,710 | |
| | | | | | | | |
| | | | | | $ | 3,837,744 | |
| | | | | | | | |
| Forest & Paper Products – 0.2% | | | | | |
| Georgia-Pacific LLC, 5.4%, 11/01/2020 (n) | | $ | 1,090,000 | | | $ | 1,197,431 | |
| | | | | | | | |
| Gaming & Lodging – 0.2% | | | | | | | | |
| InterContinental Hotels Group PLC, 3.75%, 8/14/2025 | | GBP | 660,000 | | | $ | 892,386 | |
| Wyndham Worldwide Corp., 2.5%, 3/01/2018 | | $ | 742,000 | | | | 748,159 | |
| | | | | | | | |
| | | | | | $ | 1,640,545 | |
| | | | | | | | |
| Insurance – 0.6% | | | | | | | | |
| American International Group, Inc., 4.875%, 6/01/2022 | | $ | 887,000 | | | $ | 968,302 | |
| American International Group, Inc., 1.5%, 6/08/2023 | | EUR | 410,000 | | | | 439,145 | |
| American International Group, Inc., 3.75%, 7/10/2025 | | $ | 1,038,000 | | | | 1,043,354 | |
| Aviva PLC, 3.375%, 12/04/2045 | | EUR | 470,000 | | | | 485,862 | |
| CNP Assurances S.A., 6% to 9/14/2020, FRN to 9/14/2040 | | EUR | 600,000 | | | | 710,539 | |
| Delta Lloyd N.V., FRN, 9%, 8/29/2042 | | EUR | 650,000 | | | | 857,844 | |
13
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Insurance – continued | | | | | | | | |
| Hiscox Ltd., 6.125%, 11/24/2045 | | GBP | 300,000 | | | $ | 390,169 | |
| | | | | | | | |
| | | | | | $ | 4,895,215 | |
| | | | | | | | |
| Insurance – Health – 0.1% | | | | | | | | |
| Aetna, Inc., 2.8%, 6/15/2023 | | $ | 850,000 | | | $ | 836,318 | |
| | | | | | | | |
| Insurance – Property & Casualty – 0.7% | | | | | |
| Berkshire Hathaway, Inc., 2.75%, 3/15/2023 | | $ | 636,000 | | | $ | 632,958 | |
| Berkshire Hathaway, Inc., 2.15%, 3/15/2028 | | EUR | 590,000 | | | | 660,651 | |
| Berkshire Hathaway, Inc., 1.625%, 3/16/2035 | | EUR | 400,000 | | | | 392,554 | |
| Berkshire Hathaway, Inc., 4.5%, 2/11/2043 | | $ | 400,000 | | | | 424,500 | |
| Chubb Corp., 6.375% to 4/15/2017, FRN to 3/29/2067 | | | 1,010,000 | | | | 949,400 | |
| Chubb INA Holdings, Inc., 2.3%, 11/03/2020 | | | 267,000 | | | | 266,731 | |
| Liberty Mutual Group, Inc., 4.25%, 6/15/2023 | | | 839,000 | | | | 877,509 | |
| Liberty Mutual Group, Inc., 2.75%, 5/04/2026 (z) | | EUR | 200,000 | | | | 217,385 | |
| Liberty Mutual Group, Inc., 4.85%, 8/01/2044 (n) | | $ | 244,000 | | | | 240,994 | |
| Marsh & McLennan Cos., Inc., 2.55%, 10/15/2018 | | | 505,000 | | | | 509,655 | |
| QBE Capital Funding III Ltd., 7.5% to 5/24/2021, FRN to 5/24/2041 | | GBP | 400,000 | | | | 547,680 | |
| | | | | | | | |
| | | | | | $ | 5,720,017 | |
| | | | | | | | |
| International Market Quasi-Sovereign – 0.9% | |
| Electricite de France S.A., 5.375% to 1/29/2025, FRN to 1/29/2049 | | EUR | 400,000 | | | $ | 421,153 | |
| Electricite de France S.A., 6% to 1/29/26, FRN to 12/29/2049 | | GBP | 500,000 | | | | 590,734 | |
| ESB Finance Ltd., 2.125%, 6/08/2027 | | EUR | 600,000 | | | | 681,314 | |
| Israel Electric Corp. Ltd., 5.625%, 6/21/2018 (n) | | $ | 710,000 | | | | 738,684 | |
| Statoil A.S.A., 4.25%, 11/23/2041 | | | 1,260,000 | | | | 1,255,199 | |
| Statoil A.S.A., FRN, 1.195%, 5/15/2018 | | | 759,000 | | | | 758,619 | |
| Temasek Financial I Ltd., 2.375%, 1/23/2023 (n) | | | 2,880,000 | | | | 2,805,756 | |
| | | | | | | | |
| | | | | | $ | 7,251,459 | |
| | | | | | | | |
| International Market Sovereign – 19.7% | |
| Commonwealth of Australia, 5.75%, 5/15/2021 | | AUD | 11,189,000 | | | $ | 9,273,533 | |
| Commonwealth of Australia, 3.75%, 4/21/2037 | | AUD | 1,208,000 | | | | 903,864 | |
| Federal Republic of Germany, 1.75%, 2/15/2024 | | EUR | 2,100,000 | | | | 2,519,939 | |
| Federal Republic of Germany, 0.5%, 2/15/2026 | | EUR | 2,477,000 | | | | 2,701,313 | |
| Federal Republic of Germany, 6.25%, 1/04/2030 | | EUR | 700,000 | | | | 1,284,732 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| International Market Sovereign – continued | |
| Federal Republic of Germany, 2.5%, 7/04/2044 | | EUR | 1,661,000 | | | $ | 2,431,583 | |
| Government of Canada, 4.25%, 6/01/2018 | | CAD | 4,927,000 | | | | 3,851,548 | |
| Government of Canada, 2.5%, 6/01/2024 | | CAD | 14,271,000 | | | | 11,356,746 | |
| Government of Canada, 5.75%, 6/01/2033 | | CAD | 2,402,000 | | | | 2,661,781 | |
| Government of Canada, 4%, 6/01/2041 | | CAD | 1,043,000 | | | | 1,015,229 | |
| Government of Japan, 2.1%, 9/20/2024 | | JPY | 16,250,000 | | | | 161,746 | |
| Government of Japan, 0.4%, 9/20/2025 | | JPY | 821,000,000 | | | | 7,266,245 | |
| Government of Japan, 0.3%, 12/20/2025 | | JPY | 37,550,000 | | | | 329,656 | |
| Government of Japan, 2.2%, 9/20/2027 | | JPY | 1,104,450,000 | | | | 11,589,378 | |
| Government of Japan, 1.7%, 9/20/2032 | | JPY | 589,000,000 | | | | 6,099,545 | |
| Government of Japan, 1.5%, 3/20/2034 | | JPY | 1,278,000,000 | | | | 12,888,910 | |
| Government of Japan, 2.4%, 3/20/2037 | | JPY | 321,000,000 | | | | 3,689,049 | |
| Government of Japan, 1.8%, 3/20/2043 | | JPY | 569,400,000 | | | | 6,190,054 | |
| Government of Japan, 2%, 3/20/2052 | | JPY | 175,000,000 | | | | 2,068,706 | |
| Kingdom of Belgium, 4.5%, 3/28/2026 | | EUR | 1,691,000 | | | | 2,442,435 | |
| Kingdom of Belgium, 4%, 3/28/2032 | | EUR | 3,978,000 | | | | 5,976,328 | |
| Kingdom of Denmark, 1.75%, 11/15/2025 | | DKK | 14,845,000 | | | | 2,365,857 | |
| Kingdom of Spain, 5.4%, 1/31/2023 | | EUR | 1,982,000 | | | | 2,678,448 | |
| Kingdom of Spain, 5.15%, 10/31/2028 | | EUR | 2,115,000 | | | | 3,084,177 | |
| Kingdom of the Netherlands, 5.5%, 1/15/2028 | | EUR | 2,549,000 | | | | 4,149,836 | |
| Republic of France, 6%, 10/25/2025 | | EUR | 3,951,000 | | | | 6,180,822 | |
| Republic of France, 4.75%, 4/25/2035 | | EUR | 1,505,000 | | | | 2,507,020 | |
| Republic of France, 4.5%, 4/25/2041 | | EUR | 1,777,000 | | | | 3,026,566 | |
| Republic of Ireland, 5.4%, 3/13/2025 | | EUR | 49,000 | | | | 71,538 | |
| Republic of Italy, 3.75%, 3/01/2021 | | EUR | 8,531,000 | | | | 10,226,607 | |
| Republic of Italy, 5.5%, 9/01/2022 | | EUR | 9,138,000 | | | | 12,069,013 | |
| United Kingdom Treasury, 5%, 3/07/2018 | | GBP | 2,069,000 | | | | 2,697,828 | |
| United Kingdom Treasury, 4.25%, 12/07/2027 | | GBP | 1,649,000 | | | | 2,634,397 | |
| United Kingdom Treasury, 4.25%, 3/07/2036 | | GBP | 1,392,000 | | | | 2,406,226 | |
| United Kingdom Treasury, 3.25%, 1/22/2044 | | GBP | 2,103,000 | | | | 3,349,353 | |
| United Kingdom Treasury, 3.75%, 7/22/2052 | | GBP | 799,000 | | | | 1,504,898 | |
14
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| International Market Sovereign – continued | |
| United Kingdom Treasury, 4%, 1/22/2060 | | GBP | 344,000 | | | $ | 726,227 | |
| | | | | | | | |
| | | | | | $ | 156,381,133 | |
| | | | | | | | |
| Local Authorities – 0.2% | | | | | | | | |
| Province of Alberta, 1.25%, 6/01/2020 | | CAD | 489,000 | | | $ | 362,391 | |
| Province of Alberta, 4.5%, 12/01/2040 | | CAD | 665,000 | | | | 591,068 | |
| Province of Manitoba, 4.15%, 6/03/2020 | | CAD | 430,000 | | | | 349,352 | |
| | | | | | | | |
| | | | | | $ | 1,302,811 | |
| | | | | | | | |
| Major Banks – 3.2% | | | | | | | | |
| ABN AMRO Bank N.V., 1.8%, 6/04/2018 (n) | | $ | 760,000 | | | $ | 758,138 | |
| ABN AMRO North America Finance, Inc., 7.125%, 7/06/2022 | | EUR | 450,000 | | | | 604,433 | |
| Bank of America Corp., 1.75%, 6/05/2018 | | $ | 750,000 | | | | 749,854 | |
| Bank of America Corp., 7.625%, 6/01/2019 | | | 690,000 | | | | 775,056 | |
| Bank of America Corp., 2.625%, 4/19/2021 | | | 972,000 | | | | 964,498 | |
| Bank of America Corp., 3.5%, 4/19/2026 | | | 974,000 | | | | 959,641 | |
| Bank of America Corp., 3.248%, 10/21/2027 | | | 1,280,000 | | | | 1,220,014 | |
| Barclays Bank PLC, 6%, 1/14/2021 | | EUR | 548,000 | | | | 668,628 | |
| Barclays Bank PLC, 6.75% to 1/16/2018, FRN to 1/16/2023 | | GBP | 350,000 | | | | 449,274 | |
| Credit Agricole S.A., 7.375%, 12/18/2023 | | GBP | 300,000 | | | | 473,754 | |
| Credit Suisse Group AG, 6.5%, 8/08/2023 (n) | | $ | 1,265,000 | | | | 1,343,746 | |
| Goldman Sachs Group, Inc., 2.625%, 4/25/2021 | | | 530,000 | | | | 525,697 | |
| Goldman Sachs Group, Inc., 5.75%, 1/24/2022 | | | 1,486,000 | | | | 1,669,001 | |
| Goldman Sachs Group, Inc., 1.625%, 7/27/2026 | | EUR | 550,000 | | | | 573,981 | |
| HSBC Bank PLC, FRN, 1.545%, 5/15/2018 (n) | | $ | 1,833,000 | | | | 1,833,620 | |
| HSBC Holdings PLC, 4.375%, 11/23/2026 | | | 743,000 | | | | 747,428 | |
| JPMorgan Chase & Co., 4.25%, 10/15/2020 | | | 1,579,000 | | | | 1,669,706 | |
| JPMorgan Chase & Co., 2.95%, 10/01/2026 | | | 1,647,000 | | | | 1,569,644 | |
| JPMorgan Chase & Co., 6.75% to 2/01/2024, FRN to 1/29/2049 | | | 761,000 | | | | 819,978 | |
| Morgan Stanley, 2.2%, 12/07/2018 | | | 751,000 | | | | 753,610 | |
| Morgan Stanley, 2.5%, 4/21/2021 | | | 650,000 | | | | 642,377 | |
| Morgan Stanley, 5.5%, 7/28/2021 | | | 850,000 | | | | 941,097 | |
| Morgan Stanley, 3.125%, 7/27/2026 | | | 831,000 | | | | 792,737 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Major Banks – continued | |
| Morgan Stanley, 3.95%, 4/23/2027 | | $ | 636,000 | | | $ | 628,619 | |
| Nationwide Building Society, 0.5%, 10/29/2019 | | EUR | 500,000 | | | | 531,171 | |
| Nationwide Building Society, 1.25%, 3/03/2025 | | EUR | 470,000 | | | | 502,046 | |
| PNC Bank N.A., 2.6%, 7/21/2020 | | $ | 873,000 | | | | 879,891 | |
| PNC Financial Services Group, Inc., FRN, 6.75%, 7/29/2049 | | | 510,000 | | | | 548,888 | |
| Wells Fargo & Co., 4.1%, 6/03/2026 | | | 760,000 | | | | 768,933 | |
| | | | | | | | |
| | | | | | $ | 25,365,460 | |
| | | | | | | | |
| Medical & Health Technology & Services – 0.4% | |
| Becton, Dickinson and Co., 3.734%, 12/15/2024 | | $ | 619,000 | | | $ | 632,454 | |
| Laboratory Corp. of America Holdings, 3.2%, 2/01/2022 | | | 1,025,000 | | | | 1,032,486 | |
| Laboratory Corp. of America Holdings, 4.7%, 2/01/2045 | | | 541,000 | | | | 533,347 | |
| Thermo Fisher Scientific, Inc., 3%, 4/15/2023 | | | 910,000 | | | | 893,434 | |
| Thermo Fisher Scientific, Inc., 2.95%, 9/19/2026 | | | 394,000 | | | | 371,037 | |
| | | | | | | | |
| | | | | | $ | 3,462,758 | |
| | | | | | | | |
| Medical Equipment – 0.3% | | | | | | | | |
| Medtronic, Inc., 3.5%, 3/15/2025 | | $ | 1,853,000 | | | $ | 1,905,586 | |
| Zimmer Biomet Holdings, Inc., 2.425%, 12/13/2026 | | EUR | 310,000 | | | | 331,070 | |
| Zimmer Holdings, Inc., 4.25%, 8/15/2035 | | $ | 164,000 | | | | 152,693 | |
| | | | | | | | |
| | | | | | $ | 2,389,349 | |
| | | | | | | | |
| Metals & Mining – 0.4% | | | | | | | | |
| Barrick Gold Corp., 4.1%, 5/01/2023 | | $ | 539,000 | | | $ | 552,369 | |
| Barrick North America Finance LLC, 5.7%, 5/30/2041 | | | 44,000 | | | | 44,833 | |
| Cameco Corp., 5.67%, 9/02/2019 | | CAD | 679,000 | | | | 540,692 | |
| Glencore Finance (Europe) S.A., 6.5%, 2/27/2019 | | GBP | 250,000 | | | | 337,578 | |
| Glencore Finance (Europe) S.A., 1.25%, 3/17/2021 | | EUR | 760,000 | | | | 802,371 | |
| Glencore Finance (Europe) S.A., 1.75%, 3/17/2025 | | EUR | 500,000 | | | | 502,641 | |
| Southern Copper Corp., 5.25%, 11/08/2042 | | $ | 754,000 | | | | 689,642 | |
| | | | | | | | |
| | | | | | $ | 3,470,126 | |
| | | | | | | | |
| Midstream – 0.7% | | | | | | | | |
| APT Pipelines Ltd., 5%, 3/23/2035 (n) | | $ | 705,000 | | | $ | 684,856 | |
| Dominion Gas Holdings LLC, 2.8%, 11/15/2020 | | | 1,493,000 | | | | 1,505,437 | |
| Enbridge, Inc., 5.5%, 12/01/2046 | | | 232,000 | | | | 248,891 | |
| Enterprise Products Operating LLC, 1.65%, 5/07/2018 | | | 1,250,000 | | | | 1,246,308 | |
15
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Midstream – continued | |
| Enterprise Products Operating LLC, 3.9%, 2/15/2024 | | $ | 513,000 | | | $ | 528,516 | |
| Enterprise Products Operating LLC, 4.85%, 3/15/2044 | | | 231,000 | | | | 232,786 | |
| Kinder Morgan Energy Partners LP, 5.4%, 9/01/2044 | | | 967,000 | | | | 962,145 | |
| | | | | | | | |
| | | | | | $ | 5,408,939 | |
| | | | | | | | |
| Mortgage-Backed – 5.5% | | | | | | | | |
| Fannie Mae, 5.286%, 6/01/2018 | | $ | 402,294 | | | $ | 416,951 | |
| Fannie Mae, 3.829%, 7/01/2018 | | | 1,127,848 | | | | 1,159,443 | |
| Fannie Mae, 4.57%, 5/01/2019 | | | 220,091 | | | | 231,658 | |
| Fannie Mae, 4.6%, 9/01/2019 | | | 580,296 | | | | 616,322 | |
| Fannie Mae, 4.45%, 10/01/2019 | | | 404,334 | | | | 429,379 | |
| Fannie Mae, 5%, 12/01/2020 – 8/01/2040 | | | 3,544,646 | | | | 3,884,947 | |
| Fannie Mae, 4.5%, 7/01/2023 – 6/01/2044 | | | 9,769,470 | | | | 10,534,189 | |
| Fannie Mae, 4%, 3/01/2025 – 2/01/2041 | | | 5,760,939 | | | | 6,069,841 | |
| Fannie Mae, 5.5%, 11/01/2036 – 4/01/2037 | | | 288,766 | | | | 322,837 | |
| Fannie Mae, 6%, 9/01/2037 – 6/01/2038 | | | 489,733 | | | | 555,688 | |
| Fannie Mae, 3.5%, 5/01/2043 – 5/01/2046 | | | 3,624,296 | | | | 3,730,071 | |
| Freddie Mac, 3.882%, 11/25/2017 | | | 278,000 | | | | 282,767 | |
| Freddie Mac, 2.699%, 5/25/2018 | | | 696,418 | | | | 706,050 | |
| Freddie Mac, 2.323%, 10/25/2018 | | | 446,110 | | | | 451,697 | |
| Freddie Mac, 5.085%, 3/25/2019 | | | 30,000 | | | | 31,829 | |
| Freddie Mac, 4.186%, 8/25/2019 | | | 650,000 | | | | 687,131 | |
| Freddie Mac, 2.757%, 5/25/2020 | | | 145,819 | | | | 147,107 | |
| Freddie Mac, 3.32%, 7/25/2020 | | | 813,790 | | | | 824,863 | |
| Freddie Mac, 4%, 7/01/2025 – 9/01/2044 | | | 2,101,088 | | | | 2,203,958 | |
| Freddie Mac, 2.673%, 3/25/2026 | | | 2,800,000 | | | | 2,741,253 | |
| Freddie Mac, 5.5%, 5/01/2034 – 7/01/2037 | | | 76,630 | | | | 85,828 | |
| Freddie Mac, 5%, 10/01/2036 – 7/01/2041 | | | 1,340,605 | | | | 1,475,191 | |
| Freddie Mac, 4.5%, 12/01/2039 – 5/01/2042 | | | 2,204,128 | | | | 2,371,725 | |
| Ginnie Mae, 5%, 5/15/2040 | | | 186,195 | | | | 204,172 | |
| Ginnie Mae, 3.5%, 6/20/2043 – 5/20/2046 | | | 2,898,225 | | | | 3,020,433 | |
| | | | | | | | |
| | | | | | $ | 43,185,330 | |
| | | | | | | | |
| Natural Gas – Distribution – 0.2% | |
| Gas Natural SDG S.A., 1.375%, 1/21/2025 | | EUR | 500,000 | | | $ | 539,909 | |
| GNL Quintero S.A., 4.634%, 7/31/2029 (n) | | $ | 1,420,000 | | | | 1,398,700 | |
| | | | | | | | |
| | | | | | $ | 1,938,609 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Network & Telecom – 1.2% | | | | | | | | |
| AT&T, Inc., 2.45%, 6/30/2020 | | $ | 739,000 | | | $ | 733,330 | |
| AT&T, Inc., 3%, 6/30/2022 | | | 1,936,000 | | | | 1,898,360 | |
| AT&T, Inc., 4.75%, 5/15/2046 | | | 1,432,000 | | | | 1,354,119 | |
| British Telecom PLC, 5.75%, 12/07/2028 | | GBP | 250,000 | | | | 411,832 | |
| Empresa Nacional de Telecomunicaciones S.A., 4.75%, 8/01/2026 (n) | | $ | 1,720,000 | | | | 1,679,613 | |
| Verizon Communications, Inc., 4.5%, 9/15/2020 | | | 1,819,000 | | | | 1,945,115 | |
| Verizon Communications, Inc., 1.375%, 11/02/2028 | | EUR | 530,000 | | | | 542,066 | |
| Verizon Communications, Inc., 6.4%, 9/15/2033 | | $ | 548,000 | | | | 660,281 | |
| Verizon Communications, Inc., 6.55%, 9/15/2043 | | | 443,000 | | | | 552,337 | |
| | | | | | | | |
| | | | | | $ | 9,777,053 | |
| | | | | | | | |
| Oils – 0.2% | | | | | | | | |
| Marathon Petroleum Corp., 3.4%, 12/15/2020 | | $ | 452,000 | | | $ | 461,915 | |
| Marathon Petroleum Corp., 3.625%, 9/15/2024 | | | 500,000 | | | | 493,201 | |
| Valero Energy Corp., 4.9%, 3/15/2045 | | | 977,000 | | | | 971,791 | |
| | | | | | | | |
| | | | | | $ | 1,926,907 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 1.0% | |
| Arion Banki, 2.5%, 4/26/2019 | | EUR | 126,000 | | | $ | 137,215 | |
| Bank of Iceland, 1.75%, 9/07/2020 | | EUR | 800,000 | | | | 860,285 | |
| Belfius Bank S.A., 3.125%, 5/11/2026 | | EUR | 300,000 | | | | 318,872 | |
| BPCE S.A., 4.5%, 3/15/2025 (n) | | $ | 384,000 | | | | 373,659 | |
| Citigroup, Inc., 3.2%, 10/21/2026 | | | 1,273,000 | | | | 1,215,429 | |
| Citizens Bank N.A., 2.55%, 5/13/2021 | | | 471,000 | | | | 467,699 | |
| Deutsche Bank AG London, 3.7%, 5/30/2024 | | | 470,000 | | | | 456,509 | |
| Discover Bank, 7%, 4/15/2020 | | | 1,071,000 | | | | 1,188,463 | |
| Discover Bank, 3.1%, 6/04/2020 | | | 501,000 | | | | 506,663 | |
| Intesa Sanpaolo S.p.A., 5.25%, 1/28/2022 | | GBP | 450,000 | | | | 611,203 | |
| KBC Groep N.V., 2.375% to 11/25/2019, FRN to 11/25/2024 | | EUR | 600,000 | | | | 654,945 | |
| Rabobank Nederland N.V., 4%, 9/19/2022 | | GBP | 175,000 | | | | 243,280 | |
| UniCredit S.p.A., 2%, 3/04/2023 | | EUR | 600,000 | | | | 649,496 | |
| | | | | | | | |
| | | | | | $ | 7,683,718 | |
| | | | | | | | |
| Personal Computers & Peripherals – 0.1% | |
| Equifax, Inc., 2.3%, 6/01/2021 | | $ | 437,000 | | | $ | 427,547 | |
| Equifax, Inc., 3.3%, 12/15/2022 | | | 717,000 | | | | 728,159 | |
| | | | | | | | |
| | | | | | $ | 1,155,706 | |
| | | | | | | | |
| Pharmaceuticals – 0.6% | | | | | | | | |
| Celgene Corp., 2.875%, 8/15/2020 | | $ | 1,479,000 | | | $ | 1,494,849 | |
16
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Pharmaceuticals – continued | |
| Forest Laboratories, Inc., 4.375%, 2/01/2019 (n) | | $ | 898,000 | | | $ | 932,816 | |
| Gilead Sciences, Inc., 2.35%, 2/01/2020 | | | 448,000 | | | | 450,091 | |
| Gilead Sciences, Inc., 4.5%, 2/01/2045 | | | 518,000 | | | | 516,548 | |
| Shire Acquisitions Investments Ireland, 2.4%, 9/23/2021 | | | 1,112,000 | | | | 1,073,163 | |
| | | | | | | | |
| | | | | | $ | 4,467,467 | |
| | | | | | | | |
| Real Estate – Apartment – 0.1% | |
| Deutsche Wohnen AG, REIT, 1.375%, 7/24/2020 | | EUR | 500,000 | | | $ | 545,603 | |
| Vonovia SE, REIT, 2.125%, 7/09/2022 | | EUR | 550,000 | | | | 619,323 | |
| | | | | | | | |
| | | | | | $ | 1,164,926 | |
| | | | | | | | |
| Real Estate – Office – 0.3% | | | | | | | | |
| Boston Properties, Inc., REIT, 3.125%, 9/01/2023 | | $ | 950,000 | | | $ | 930,529 | |
| Merlin Properties SOCIMI S.A., REIT, 2.225%, 4/25/2023 | | EUR | 1,050,000 | | | | 1,134,966 | |
| | | | | | | | |
| | | | | | $ | 2,065,495 | |
| | | | | | | | |
| Real Estate – Retail – 0.2% | |
| Hammerson PLC, REIT, 2%, 7/01/2022 | | EUR | 500,000 | | | $ | 544,103 | |
| Simon International Finance S.C.A., REIT, 1.375%, 11/18/2022 | | EUR | 400,000 | | | | 437,048 | |
| Simon Property Group, Inc., REIT, 5.65%, 2/01/2020 | | $ | 750,000 | | | | 819,787 | |
| | | | | | | | |
| | | | | | $ | 1,800,938 | |
| | | | | | | | |
| Retailers – 0.5% | | | | | | | | |
| Best Buy Co., Inc., 5.5%, 3/15/2021 | | $ | 1,107,000 | | | $ | 1,213,803 | |
| Dollar General Corp., 4.125%, 7/15/2017 | | | 742,000 | | | | 752,738 | |
| Home Depot, Inc., 2.625%, 6/01/2022 | | | 695,000 | | | | 697,612 | |
| Home Depot, Inc., 3%, 4/01/2026 | | | 830,000 | | | | 827,195 | |
| Kering S.A., 1.25%, 5/10/2026 | | EUR | 200,000 | | | | 209,677 | |
| | | | | | | | |
| | | | | | $ | 3,701,025 | |
| | | | | | | | |
| Specialty Chemicals – 0.0% | | | | | | | | |
| Ecolab, Inc., 2.625%, 7/08/2025 | | EUR | 325,000 | | | $ | 379,748 | |
| | | | | | | | |
| Supermarkets – 0.1% | | | | | | | | |
| Loblaw Cos. Ltd., 4.86%, 9/12/2023 | | CAD | 680,000 | | | $ | 566,659 | |
| William Morrison Supermarkets PLC, 3.5%, 7/27/2026 | | GBP | 300,000 | | | | 383,686 | |
| | | | | | | | |
| | | | | | $ | 950,345 | |
| | | | | | | | |
| Supranational – 0.1% | | | | | | | | |
| International Bank for Reconstruction and Development, 2.8%, 1/13/2021 | | AUD | 420,000 | | | $ | 304,090 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Supranational – continued | |
| International Bank for Reconstruction and Development, 4.25%, 6/24/2025 | | AUD | 465,000 | | | $ | 359,860 | |
| International Finance Corp., 3.25%, 7/22/2019 | | AUD | 675,000 | | | | 497,403 | |
| | | | | | | | |
| | | | | | $ | 1,161,353 | |
| | | | | | | | |
| Telecommunications – Wireless – 0.5% | | | | | |
| America Movil S.A.B. de C.V., 1.5%, 3/10/2024 | | EUR | 600,000 | | | $ | 636,327 | |
| American Tower Corp., REIT, 4.7%, 3/15/2022 | | $ | 327,000 | | | | 348,848 | |
| American Tower Corp., REIT, 3.5%, 1/31/2023 | | | 812,000 | | | | 813,607 | |
| Crown Castle International Corp., 2.25%, 9/01/2021 | | | 1,072,000 | | | | 1,036,133 | |
| Crown Castle International Corp., 3.7%, 6/15/2026 | | | 425,000 | | | | 416,551 | |
| SBA Tower Trust, 2.898%, 10/15/2044 (n) | | | 349,000 | | | | 351,476 | |
| | | | | | | | |
| | | | | | $ | 3,602,942 | |
| | | | | | | | |
| Telephone Services – 0.1% | | | | | | | | |
| Chorus Ltd. Co., 1.125%, 10/18/2023 | | EUR | 400,000 | | | $ | 418,922 | |
| TELUS Corp., 5.05%, 7/23/2020 | | CAD | 687,000 | | | | 563,753 | |
| | | | | | | | |
| | | | | | $ | 982,675 | |
| | | | | | | | |
| Tobacco – 0.4% | | | | | | | | |
| B.A.T. International Finance PLC, 0.875%, 10/13/2023 | | EUR | 500,000 | | | $ | 525,085 | |
| Imperial Tobacco Finance PLC, 4.25%, 7/21/2025 (n) | | $ | 660,000 | | | | 680,403 | |
| Reynolds American, Inc., 8.125%, 6/23/2019 | | | 327,000 | | | | 372,902 | |
| Reynolds American, Inc., 3.25%, 6/12/2020 | | | 266,000 | | | | 272,403 | |
| Reynolds American, Inc., 4.45%, 6/12/2025 | | | 258,000 | | | | 272,058 | |
| Reynolds American, Inc., 5.7%, 8/15/2035 | | | 819,000 | | | | 939,094 | |
| | | | | | | | |
| | | | | | $ | 3,061,945 | |
| | | | | | | | |
| Transportation – Services – 0.5% | |
| Autostrade per L’Italia S.p.A., 1.75%, 6/26/2026 | | EUR | 250,000 | | | $ | 271,009 | |
| Autrostrade per L’italia Group, 1.125%, 11/04/2021 | | EUR | 600,000 | | | | 652,899 | |
| Compagnie Financial et Indus Unternehmensanleihe, 0.75%, 9/09/2028 | | EUR | 500,000 | | | | 493,218 | |
| ERAC USA Finance Co., 2.75%, 3/15/2017 (n) | | $ | 376,000 | | | | 377,005 | |
| ERAC USA Finance LLC, 7%, 10/15/2037 (n) | | | 824,000 | | | | 1,042,497 | |
| Heathrow Funding Ltd., 4.625%, 10/31/2046 | | GBP | 225,000 | | | | 360,893 | |
17
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Transportation – Services – continued | |
| Stagecoach Group PLC, 4%, 9/29/2025 | | GBP | 450,000 | | | $ | 604,372 | |
| | | | | | | | |
| | | | | | $ | 3,801,893 | |
| | | | | | | | |
| U.S. Government Agencies and Equivalents – 0.3% | |
| Small Business Administration, 5.09%, 10/01/2025 | | $ | 9,854 | | | $ | 10,536 | |
| Small Business Administration, 5.21%, 1/01/2026 | | | 348,434 | | | | 371,210 | |
| Small Business Administration, 5.31%, 5/01/2027 | | | 107,603 | | | | 116,126 | |
| Small Business Administration, 2.22%, 3/01/2033 | | | 1,655,092 | | | | 1,617,159 | |
| | | | | | | | |
| | | | | | $ | 2,115,031 | |
| | | | | | | | |
| U.S. Treasury Obligations – 5.0% | |
| U.S. Treasury Bonds, 4.5%, 2/15/2036 | | $ | 2,716,000 | | | $ | 3,430,536 | |
| U.S. Treasury Bonds, 4.5%, 8/15/2039 (f) | | | 2,370,000 | | | | 2,970,902 | |
| U.S. Treasury Bonds, 3.625%, 2/15/2044 (f) | | | 6,353,000 | | | | 7,026,793 | |
| U.S. Treasury Notes, 3.5%, 5/15/2020 (f) | | | 9,797,000 | | | | 10,407,108 | |
| U.S. Treasury Notes, 1.75%, 5/15/2022 (f) | | | 4,384,000 | | | | 4,315,000 | |
| U.S. Treasury Notes, 2%, 2/15/2025 (f) | | | 11,735,000 | | | | 11,405,763 | |
| | | | | | | | |
| | | | | | $ | 39,556,102 | |
| | | | | | | | |
| Utilities – Electric Power – 1.3% | |
| CMS Energy Corp., 5.05%, 3/15/2022 | | $ | 954,000 | | | $ | 1,044,104 | |
| Duke Energy Corp., 2.65%, 9/01/2026 | | | 995,000 | | | | 927,240 | |
| E.ON International Finance B.V., 6.375%, 6/07/2032 | | GBP | 350,000 | | | | 609,138 | |
| EDP Finance B.V., 4.9%, 10/01/2019 (n) | | $ | 416,000 | | | | 435,920 | |
| EDP Finance B.V., 4.125%, 1/20/2021 | | EUR | 500,000 | | | | 588,491 | |
| Emera U.S. Finance LP, 2.7%, 6/15/2021 (n) | | $ | 376,000 | | | | 371,850 | |
| Emera U.S. Finance LP, 3.55%, 6/15/2026 (n) | | | 430,000 | | | | 422,090 | |
| Enel Finance International N.V., 5.625%, 8/14/2024 | | GBP | 200,000 | | | | 299,651 | |
| Engie Energia Chile S.A., 4.5%, 1/29/2025 (n) | | $ | 1,180,000 | | | | 1,183,315 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Utilities – Electric Power – continued | |
| Innogy Finance B.V., 4.75%, 1/31/2034 | | GBP | 200,000 | | | $ | 295,689 | |
| PPL Capital Funding, Inc., 3.1%, 5/15/2026 | | $ | 1,033,000 | | | | 986,802 | |
| PPL Capital Funding, Inc., 5%, 3/15/2044 | | | 473,000 | | | | 499,272 | |
| PPL WEM Holdings PLC, 5.375%, 5/01/2021 (n) | | | 280,000 | | | | 301,888 | |
| Public Service Enterprise Group, 2%, 11/15/2021 | | | 1,215,000 | | | | 1,175,306 | |
| Southern Co., 2.95%, 7/01/2023 | | | 609,000 | | | | 600,306 | |
| Southern Co., 4.4%, 7/01/2046 | | | 920,000 | | | | 908,141 | |
| | | | | | | | |
| | | | | | $ | 10,649,203 | |
| | | | | | | | |
Total Bonds
(Identified Cost, $451,825,980) | | | $ | 441,659,377 | |
| | | | | | | | |
|
| CONVERTIBLE PREFERRED STOCKS – 0.2% | |
| Utilities – Electric Power – 0.2% | |
Exelon Corp.
(Identified Cost, $1,715,204) | | | 39,249 | | | $ | 1,900,044 | |
| | | | | | | | |
| |
| PREFERRED STOCKS – 0.3% | | | | | |
| Consumer Products – 0.3% | | | | | |
| Henkel AG & Co. KGaA | | | 20,402 | | | $ | 2,432,177 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 0.0% | |
| Itau Unibanco Holding S.A. | | | 21,800 | | | $ | 226,728 | |
| | | | | | | | |
Total Preferred Stocks
(Identified Cost, $1,245,285) | | | $ | 2,658,905 | |
| | | | | | | | |
| Issuer/Expiration Date/Strike Price | | Number of
Contracts | | | | |
| PUT OPTIONS PURCHASED – 0.0% | | | | | |
| Russell 2000 Index – March 2017 @ $1,100 (Premiums Paid, $81,315) | | | 173 | | | $ | 74,390 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | | |
| MONEY MARKET FUNDS – 8.6% | | | | | |
MFS Institutional Money Market Portfolio, 0.51% (v)
(Identified Cost, $67,747,971) | | | 67,748,319 | | | $ | 67,748,319 | |
| | | | | | | | |
Total Investments
(Identified Cost, $713,644,814) | | | $ | 780,120,633 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 1.5% | | | | 11,707,823 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 791,828,456 | |
| | | | | | | | |
| (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 $31,556,389, representing 4.0% of net assets. |
| (s) | | Security or a portion of the security was pledged to cover collateral requirements for securities sold short and certain derivative transactions. At December 31, 2016, the fund had no short sales outstanding. |
18
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| (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 | |
| Chesapeake Funding II LLC, 2016-2A, “A2”, FRN, 1.703%, 6/15/2028 | | 6/14/16 | | | $1,356,000 | | | | $1,363,052 | |
| Liberty Mutual Group, Inc., 2.75%, 5/04/2026 | | 4/26/16 | | | 224,210 | | | | 217,385 | |
| Republic of Indonesia, 2.875%, 7/08/2021 | | 7/02/14 | | | 679,615 | | | | 549,023 | |
| Total Restricted Securities | | | | $2,129,460 | |
| % of Net assets | | | | 0.3% | |
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 the current rate may not be the rate reported at period end. |
| PJSC | | Public Joint Stock Company |
| 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:
| CNH | | Chinese Yuan Renminbi (Offshore) |
19
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
Derivative Contracts at 12/31/16
Forward Foreign Currency Exchange Contracts at 12/31/16
| | | | | | | | | | | | | | | | | | | | | | | | |
| Type | | Currency | | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | | Contracts
at Value | | | Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives | | | | | | | | | | | | | | | | |
| SELL | | | AUD | | | JPMorgan Chase Bank N.A. | | 20,250,878 | | 2/15/17 | | $ | 15,156,000 | | | $ | 14,598,910 | | | $ | 557,090 | |
| SELL | | | AUD | | | Westpac Banking Corp. | | 7,303,071 | | 3/10/17 | | | 5,434,639 | | | | 5,261,881 | | | | 172,758 | |
| SELL | | | CAD | | | Citibank N.A. | | 778,479 | | 3/10/17 | | | 583,916 | | | | 580,265 | | | | 3,651 | |
| SELL | | | CAD | | | Goldman Sachs International | | 477,302 | | 3/10/17 | | | 360,473 | | | | 355,772 | | | | 4,701 | |
| SELL | | | CAD | | | JPMorgan Chase Bank N.A. | | 26,267,366 | | 2/15/17 | | | 19,885,886 | | | | 19,574,027 | | | | 311,859 | |
| SELL | | | CAD | | | Merrill Lynch International | | 21,084,439 | | 3/10/17 | | | 15,911,763 | | | | 15,715,977 | | | | 195,786 | |
| SELL | | | CHF | | | JPMorgan Chase Bank N.A. | | 41,025,620 | | 2/15/17 | | | 40,570,499 | | | | 40,400,707 | | | | 169,792 | |
| SELL | | | CNH | | | JPMorgan Chase Bank N.A. | | 33,952,000 | | 4/26/17 | | | 5,097,516 | | | | 4,750,041 | | | | 347,475 | |
| SELL | | | DKK | | | Citibank N.A. | | 6,373,569 | | 3/10/17 | | | 925,872 | | | | 905,593 | | | | 20,279 | |
| SELL | | | DKK | | | JPMorgan Chase Bank N.A. | | 10,498,333 | | 2/15/17 | | | 1,503,736 | | | | 1,489,855 | | | | 13,881 | |
| BUY | | | EUR | | | Citibank N.A. | | 255,000 | | 3/10/17 | | | 267,286 | | | | 269,279 | | | | 1,993 | |
| BUY | | | EUR | | | Goldman Sachs International | | 2,476,000 | | 3/10/17 | | | 2,585,477 | | | | 2,614,648 | | | | 29,171 | |
| BUY | | | EUR | | | Morgan Stanley Capital Services, Inc. | | 4,190,000 | | 3/10/17 | | | 4,373,061 | | | | 4,424,626 | | | | 51,565 | |
| SELL | | | EUR | | | Brown Brothers Harriman | | 310,000 | | 3/10/17 | | | 335,019 | | | | 327,359 | | | | 7,660 | |
| SELL | | | EUR | | | Goldman Sachs International | | 91,182,755 | | 2/15/17 | | | 97,228,881 | | | | 96,181,756 | | | | 1,047,125 | |
| SELL | | | EUR | | | JPMorgan Chase Bank N.A. | | 30,223,688 | | 2/15/17 | | | 32,225,100 | | | | 31,880,670 | | | | 344,430 | |
| SELL | | | GBP | | | JPMorgan Chase Bank N.A. | | 41,078,115 | | 2/15/17 | | | 51,737,516 | | | | 50,678,659 | | | | 1,058,857 | |
| SELL | | | GBP | | | Merrill Lynch International | | 2,512,067 | | 3/10/17 | | | 3,190,953 | | | | 3,100,778 | | | | 90,175 | |
| SELL | | | ILS | | | JPMorgan Chase Bank N.A. | | 2,517,156 | | 2/15/17 | | | 661,356 | | | | 654,137 | | | | 7,219 | |
| BUY | | | JPY | | | Barclays Bank PLC | | 171,803,000 | | 3/10/17 | | | 1,463,557 | | | | 1,474,602 | | | | 11,045 | |
| BUY | | | JPY | | | Goldman Sachs International | | 218,866,000 | | 3/10/17 | | | 1,864,440 | | | | 1,878,549 | | | | 14,109 | |
| BUY | | | JPY | | | Merrill Lynch International | | 163,423,000 | | 3/10/17 | | | 1,392,186 | | | | 1,402,676 | | | | 10,490 | |
| SELL | | | JPY | | | JPMorgan Chase Bank N.A. | | 6,304,888,230 | | 2/15/17 | | | 55,390,882 | | | | 54,061,906 | | | | 1,328,976 | |
| SELL | | | KRW | | | JPMorgan Chase Bank N.A. | | 6,083,816,100 | | 2/15/17 | | | 5,230,466 | | | | 5,037,240 | | | | 193,226 | |
| BUY | | | MYR | | | Citibank N.A. | | 2,774,756 | | 2/06/17 | | | 615,382 | | | | 617,876 | | | | 2,494 | |
| SELL | | | MYR | | | Barclays Bank PLC | | 3,839,000 | | 1/06/17 | | | 860,762 | | | | 855,697 | | | | 5,065 | |
| SELL | | | NOK | | | Goldman Sachs International | | 63,072,201 | | 2/15/17 | | | 7,498,000 | | | | 7,306,386 | | | | 191,614 | |
| SELL | | | NZD | | | Goldman Sachs International | | 4,391,121 | | 2/15/17 | | | 3,160,000 | | | | 3,046,506 | | | | 113,494 | |
| BUY | | | SEK | | | Citibank N.A. | | 67,588,522 | | 3/10/17 | | | 7,438,509 | | | | 7,446,858 | | | | 8,349 | |
| BUY | | | SEK | | | Goldman Sachs International | | 14,260,113 | | 2/15/17 | | | 1,565,000 | | | | 1,569,207 | | | | 4,207 | |
| SELL | | | SGD | | | JPMorgan Chase Bank N.A. | | 1,238,213 | | 2/15/17 | | | 869,776 | | | | 854,796 | | | | 14,980 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | $ | 6,333,516 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Derivatives | | | | | | | | | | | | | | |
| BUY | | | AUD | | | JPMorgan Chase Bank N.A. | | 23,901,813 | | 2/15/17 | | $ | 17,784,646 | | | $ | 17,230,879 | | | $ | (553,767 | ) |
| BUY | | | CAD | | | Citibank N.A. | | 787,374 | | 3/10/17 | | | 590,847 | | | | 586,895 | | | | (3,952 | ) |
| BUY | | | CAD | | | JPMorgan Chase Bank N.A. | | 34,261,582 | | 2/15/17-3/10/17 | | | 26,106,049 | | | | 25,531,588 | | | | (574,461 | ) |
| BUY | | | CHF | | | JPMorgan Chase Bank N.A. | | 3,983,585 | | 2/15/17 | | | 3,956,000 | | | | 3,922,906 | | | | (33,094 | ) |
| BUY | | | CHF | | | UBS AG | | 3,538,000 | | 3/10/17 | | | 3,521,888 | | | | 3,488,520 | | | | (33,368 | ) |
| BUY | | | CZK | | | Goldman Sachs International | | 15,672,000 | | 3/10/17 | | | 625,867 | | | | 612,427 | | | | (13,440 | ) |
| BUY | | | EUR | | | Citibank N.A. | | 807,830 | | 3/10/17 | | | 869,521 | | | | 853,066 | | | | (16,455 | ) |
| BUY | | | EUR | | | JPMorgan Chase Bank N.A. | | 6,337,152 | | 1/17/17-3/10/17 | | | 6,765,975 | | | | 6,676,877 | | | | (89,098 | ) |
| BUY | | | EUR | | | Morgan Stanley Capital Services, Inc. | | 7,149,979 | | 3/10/17 | | | 7,627,580 | | | | 7,550,353 | | | | (77,227 | ) |
| SELL | | | EUR | | | Brown Brothers Harriman | | 500,000 | | 3/10/17 | | | 525,832 | | | | 527,998 | | | | (2,166 | ) |
| SELL | | | EUR | | | Morgan Stanley Capital Services, Inc. | | 4,937,117 | | 3/10/17 | | | 5,158,771 | | | | 5,213,578 | | | | (54,807 | ) |
| BUY | | | GBP | | | Goldman Sachs International | | 992,000 | | 3/10/17 | | | 1,229,132 | | | | 1,224,478 | | | | (4,654 | ) |
| BUY | | | GBP | | | JPMorgan Chase Bank N.A. | | 14,482,205 | | 2/15/17 | | | 18,404,000 | | | | 17,866,903 | | | | (537,097 | ) |
| BUY | | | GBP | | | Morgan Stanley Capital Services, Inc. | | 113,391 | | 3/10/17 | | | 143,920 | | | | 139,964 | | | | (3,956 | ) |
| BUY | | | ILS | | | Goldman Sachs International | | 2,860,000 | | 3/10/17 | | | 755,432 | | | | 743,779 | | | | (11,653 | ) |
| BUY | | | INR | | | JPMorgan Chase Bank N.A. | | 1,364,000 | | 1/23/17 | | | 20,239 | | | | 20,061 | | | | (178 | ) |
20
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
Forward Foreign Currency Exchange Contracts at 12/31/16 – continued
| | | | | | | | | | | | | | | | | | | | | | | | |
| Type | | Currency | | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | | Contracts
at Value | | | Unrealized
Appreciation
(Depreciation) | |
| Liability Derivatives – continued | | | | | | | | | | | | | | |
| BUY | | | JPY | | | Goldman Sachs International | | 3,756,861,209 | | 3/10/17 | | $ | 33,139,955 | | | $ | 32,245,518 | | | $ | (894,437 | ) |
| BUY | | | JPY | | | JPMorgan Chase Bank N.A. | | 175,205,794 | | 3/10/17 | | | 1,528,257 | | | | 1,503,809 | | | | (24,448 | ) |
| SELL | | | JPY | | | Citibank N.A. | | 23,752,000 | | 3/10/17 | | | 203,088 | | | | 203,866 | | | | (778 | ) |
| SELL | | | JPY | | | Morgan Stanley Capital Services, Inc. | | 336,016,064 | | 3/10/17 | | | 2,864,634 | | | | 2,884,060 | | | | (19,426 | ) |
| BUY | | | KRW | | | Barclays Bank PLC | | 7,238,553,000 | | 1/17/17-3/16/17 | | | 6,193,935 | | | | 5,993,745 | | | | (200,190 | ) |
| BUY | | | MXN | | | JPMorgan Chase Bank N.A. | | 29,698,081 | | 3/10/17 | | | 1,445,801 | | | | 1,420,337 | | | | (25,464 | ) |
| BUY | | | MYR | | | Barclays Bank PLC | | 6,613,756 | | 1/06/17 | | | 1,482,905 | | | | 1,474,179 | | | | (8,726 | ) |
| SELL | | | MYR | | | Citibank N.A. | | 2,774,756 | | 1/06/17 | | | 616,613 | | | | 618,482 | | | | (1,869 | ) |
| BUY | | | NOK | | | Citibank N.A. | | 48,458,284 | | 3/10/17 | | | 5,772,417 | | | | 5,614,054 | | | | (158,363 | ) |
| BUY | | | NOK | | | Goldman Sachs International | | 348,667,653 | | 2/15/17 | | | 41,320,391 | | | | 40,390,229 | | | | (930,162 | ) |
| BUY | | | NZD | | | Goldman Sachs International | | 5,262,772 | | 2/15/17 | | | 3,760,724 | | | | 3,651,247 | | | | (109,477 | ) |
| BUY | | | NZD | | | JPMorgan Chase Bank N.A. | | 912,028 | | 3/10/17 | | | 651,238 | | | | 632,369 | | | | (18,869 | ) |
| BUY | | | PLN | | | Citibank N.A. | | 4,992,931 | | 3/10/17 | | | 1,207,889 | | | | 1,191,800 | | | | (16,089 | ) |
| SELL | | | SEK | | | Goldman Sachs International | | 143,302,503 | | 2/15/17 | | | 15,751,682 | | | | 15,769,249 | | | | (17,567 | ) |
| BUY | | | SGD | | | Barclays Bank PLC | | 1,438,000 | | 3/10/17 | | | 1,014,465 | | | | 992,648 | | | | (21,817 | ) |
| BUY | | | THB | | | JPMorgan Chase Bank N.A. | | 56,941,650 | | 1/23/17 | | | 1,603,313 | | | | 1,589,837 | | | | (13,476 | ) |
| BUY | | | TRY | | | Citibank N.A. | | 81,000 | | 3/10/17 | | | 23,036 | | | | 22,641 | | | | (395 | ) |
| BUY | | | ZAR | | | JPMorgan Chase Bank N.A. | | 18,564,135 | | 3/10/17 | | | 1,350,266 | | | | 1,335,324 | | | | (14,942 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | $ | (4,485,868 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Futures Contracts at 12/31/16
| | | | | | | | | | | | | | | | | | |
| Description | | Currency | | | Contracts | | | Value | | Expiration
Date | | | Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives | | | | | | | | | | | | | | | | | | |
| Equity Futures | | | | | | | | | | | | | | | | | | |
| BIST 30 Index (Long) | | | TRY | | | | 5,307 | | | $14,476,951 | | | February - 2017 | | | | $21,398 | |
| CAC 40 Index (Long) | | | EUR | | | | 193 | | | 9,863,631 | | | January - 2017 | | | | 155,913 | |
| DAX Index (Long) | | | EUR | | | | 20 | | | 6,014,882 | | | March - 2017 | | | | 101,301 | |
| FTSE/MIB Index (Long) | | | EUR | | | | 155 | | | 15,634,130 | | | March - 2017 | | | | 484,816 | |
| FTSE 100 Index (Long) | | | GBP | | | | 306 | | | 26,532,165 | | | March - 2017 | | | | 480,541 | |
| FTSE JSE Top 40 Index (Short) | | | ZAR | | | | 617 | | | 19,792,929 | | | March - 2017 | | | | 350,894 | |
| Hang Seng China Enterprises Index (Long) | | | HKD | | | | 204 | | | 12,189,673 | | | January - 2017 | | | | 152,765 | |
| Hang Seng Index (Long) | | | HKD | | | | 173 | | | 24,295,821 | | | January - 2017 | | | | 224,017 | |
| IBEX 35 Index (Long) | | | EUR | | | | 31 | | | 3,035,681 | | | January - 2017 | | | | 7,449 | |
| Mex Bolsa Index (Short) | | | MXN | | | | 194 | | | 4,284,730 | | | March - 2017 | | | | 76,272 | |
| MSCI Taiwan Index (Long) | | | USD | | | | 729 | | | 24,959,084 | | | January - 2017 | | | | 246,888 | |
| Russell 2000 Index (Short) | | | USD | | | | 105 | | | 7,123,725 | | | March - 2017 | | | | 83,685 | |
| E-Mini S&P 500 Index (Short) | | | USD | | | | 250 | | | 27,952,500 | | | March - 2017 | | | | 178,625 | |
| S&P/TSX 60 Index (Short) | | | CAD | | | | 74 | | | 9,886,508 | | | March - 2017 | | | | 33,915 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | $2,598,479 | |
| | | | | | | | | | | | | | | | | | |
| Interest Rate Futures | | | | | | | | | | | | | | | | | | |
| Australian Treasury Bond 10 yr (Long) | | | AUD | | | | 937 | | | $86,377,739 | | | March - 2017 | | | | $635,854 | |
| Canadian Government Bond 10 yr (Long) | | | CAD | | | | 315 | | | 32,266,004 | | | March - 2017 | | | | 92,361 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | $728,215 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | $3,326,694 | |
| | | | | | | | | | | | | | | | | | |
21
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
Futures Contracts at 12/31/16 – continued
| | | | | | | | | | | | | | | | |
| Description | | Currency | | | Contracts | | | Value | | Expiration
Date | | Unrealized
Appreciation
(Depreciation) | |
| Liability Derivatives | | | | | | | | | | | | | | | | |
| Equity Futures | | | | | | | | | | | | | | | | |
| AEX 25 Index (Short) | | | EUR | | | | 35 | | | $3,553,582 | | January - 2017 | | | $(84,804 | ) |
| ASX SPI 200 Index (Short) | | | AUD | | | | 223 | | | 22,588,916 | | March - 2017 | | | (478,055 | ) |
| Bovespa Index (Long) | | | BRL | | | | 1,354 | | | 25,411,369 | | February - 2017 | | | (213,104 | ) |
| KOSPI 200 Index (Short) | | | KRW | | | | 71 | | | 7,622,551 | | March - 2017 | | | (305,342 | ) |
| MSCI Singapore Index (Long) | | | SGD | | | | 180 | | | 3,954,142 | | January - 2017 | | | (27,076 | ) |
| NIFTY 50 Index (Short) | | | USD | | | | 1,075 | | | 17,596,675 | | January - 2017 | | | (442,180 | ) |
| OMX 30 Index (Long) | | | SEK | | | | 27 | | | 449,917 | | January - 2017 | | | (8,268 | ) |
| TOPIX Index (Short) | | | JPY | | | | 176 | | | 22,762,371 | | March - 2017 | | | (701,345 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | $(2,260,174 | ) |
| | | | | | | | | | | | | | | | |
| Interest Rate Futures | | | | | | | | | | | | | | | | |
| United Kingdom Gilt Bond 10 yr (Short) | | | GBP | | | | 101 | | | $15,662,359 | | March - 2017 | | | $(381,197 | ) |
| Japan Government Bond 10 yr (Short) | | | JPY | | | | 81 | | | 104,123,551 | | March - 2017 | | | (106,109 | ) |
| German Euro Bund 10 yr (Short) | | | EUR | | | | 629 | | | 108,686,524 | | March - 2017 | | | (1,974,278 | ) |
| U.S. Treasury Note 10 yr (Long) | | | USD | | | | 126 | | | 15,659,438 | | March - 2017 | | | (65,664 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | $(2,527,248 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | $(4,787,422 | ) |
| | | | | | | | | | | | | | | | |
Swap Agreements at 12/31/16
| | | | | | | | | | | | | | | | | | | | |
| Expiration | | Notional
Amount | | | Counterparty | | Cash Flows to
Receive | | Cash Flows
to Pay | | | Fair
Value | |
| Asset Derivatives | | | | | | | | | | | | | |
| Total Return Swap Agreements | | | | | | | | | | | | | |
| 6/20/17 | | | USD | | | | 26,389,427 | | | Morgan Stanley Capital Services, Inc. | | (1) | | | 3-Month LIBOR | | | | $102,280 | |
| | | | | | | | | | | | | | | | | | | | |
| (1) | | Fund to receive notional amount multiplied by the rate of return of the iBoxx USD Liquid High Yield Index. |
At December 31, 2016, the fund had cash collateral of $6,500,493 and other liquid securities with an aggregate value of $24,144,691 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
22
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 12/31/16 | | | | | | | | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $645,896,843) | | | $712,372,314 | | | | | |
Underlying affiliated funds, at value (identified cost, $67,747,971) | | | 67,748,319 | | | | | |
Total investments, at value (identified cost, $713,644,814) | | | $780,120,633 | | | | | |
Cash | | | 26 | | | | | |
Restricted cash | | | 420,000 | | | | | |
Foreign currency, at value (identified cost, $53,424) | | | 54,019 | | | | | |
Deposits with brokers | | | 6,080,493 | | | | | |
Receivables for | | | | | | | | |
Forward foreign currency exchange contracts | | | 6,333,516 | | | | | |
Daily variation margin on open futures contracts | | | 1,019,256 | | | | | |
Investments sold | | | 736,929 | | | | | |
Fund shares sold | | | 11,367 | | | | | |
Interest and dividends | | | 4,725,745 | | | | | |
Swaps, at value | | | 102,280 | | | | | |
Other assets | | | 754 | | | | | |
Total assets | | | | | | | $799,605,018 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Forward foreign currency exchange contracts | | | $4,485,868 | | | | | |
Investments purchased | | | 2,207,496 | | | | | |
Fund shares reacquired | | | 836,822 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 46,180 | | | | | |
Shareholder servicing costs | | | 143 | | | | | |
Distribution and/or service fees | | | 15,021 | | | | | |
Payable for independent Trustees’ compensation | | | 35 | | | | | |
Deferred country tax expense payable | | | 18,001 | | | | | |
Accrued expenses and other liabilities | | | 166,996 | | | | | |
Total liabilities | | | | | | | $7,776,562 | |
Net assets | | | | | | | $791,828,456 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $711,142,905 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies (net of $18,001 deferred country tax) | | | 67,277,046 | | | | | |
Accumulated distributions in excess of net realized gain on investments and foreign currency | | | (4,477,485 | ) | | | | |
Undistributed net investment income | | | 17,885,990 | | | | | |
Net assets | | | | | | | $791,828,456 | |
Shares of beneficial interest outstanding | | | | | | | 53,458,433 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $58,053,113 | | | | 3,858,963 | | | | $15.04 | |
Service Class | | | 733,775,343 | | | | 49,599,470 | | | | 14.79 | |
See Notes to Financial Statements
23
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 12/31/16 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Interest | | | $12,861,596 | | | | | |
Dividends | | | 9,403,732 | | | | | |
Dividends from underlying affiliated funds | | | 193,620 | | | | | |
Other | | | 22,920 | | | | | |
Foreign taxes withheld | | | (455,836 | ) | | | | |
Total investment income | | | | | | | $22,026,032 | |
Expenses | | | | | | | | |
Management fee | | | $5,815,093 | | | | | |
Distribution and/or service fees | | | 1,917,818 | | | | | |
Shareholder servicing costs | | | 22,344 | | | | | |
Administrative services fee | | | 138,660 | | | | | |
Independent Trustees’ compensation | | | 19,003 | | | | | |
Custodian fee | | | 155,461 | | | | | |
Reimbursement of custodian expenses | | | (137,325 | ) | | | | |
Shareholder communications | | | 50,877 | | | | | |
Audit and tax fees | | | 76,172 | | | | | |
Legal fees | | | 9,653 | | | | | |
Miscellaneous | | | 365,069 | | | | | |
Total expenses | | | | | | | $8,432,825 | |
Reduction of expenses by investment adviser | | | (58,811 | ) | | | | |
Net expenses | | | | | | | $8,374,014 | |
Net investment income | | | | | | | $13,652,018 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments: | | | | | | | | |
Non-affiliated issuers (net of $2,488 country tax) | | | $448,406 | | | | | |
Underlying affiliated funds | | | (150 | ) | | | | |
Futures contracts | | | (9,579,838 | ) | | | | |
Swap agreements | | | 2,018,827 | | | | | |
Foreign currency | | | 17,830,231 | | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $10,717,476 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments (net of $18,001 increase in deferred country tax) | | | $21,132,926 | | | | | |
Futures contracts | | | 3,726,243 | | | | | |
Swap agreements | | | 102,280 | | | | | |
Translation of assets and liabilities in foreign currencies | | | (12,937 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $24,948,512 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $35,665,988 | |
Change in net assets from operations | | | | | | | $49,318,006 | |
See Notes to Financial Statements
24
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 | | | 2016 | | | | 2015 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $13,652,018 | | | | $14,526,887 | |
Net realized gain (loss) on investments and foreign currency | | | 10,717,476 | | | | 39,139,824 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 24,948,512 | | | | (73,857,637 | ) |
Change in net assets from operations | | | $49,318,006 | | | | $(20,190,926 | ) |
| Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $— | | | | $(46,021,696 | ) |
From net realized gain on investments | | | (44,278,276 | ) | | | (14,844,367 | ) |
Total distributions declared to shareholders | | | $(44,278,276 | ) | | | $(60,866,063 | ) |
Change in net assets from fund share transactions | | | $(50,184,585 | ) | | | $(71,256,514 | ) |
Total change in net assets | | | $(45,144,855 | ) | | | $(152,313,503 | ) |
| Net assets | | | | | | | | |
At beginning of period | | | 836,973,311 | | | | 989,286,814 | |
At end of period (including undistributed net investment income of $17,885,990 and
accumulated distributions in excess of net investment income of $3,470,464, respectively) | | | $791,828,456 | | | | $836,973,311 | |
See Notes to Financial Statements
25
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 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $14.92 | | | | $16.43 | | | | $16.20 | | | | $15.27 | | | | $14.22 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.29 | (c) | | | $0.29 | | | | $0.37 | | | | $0.32 | | | | $0.30 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | 0.67 | | | | (0.66 | ) | | | 0.36 | | | | 1.02 | | | | 1.04 | |
Total from investment operations | | | $0.96 | | | | $(0.37 | ) | | | $0.73 | | | | $1.34 | | | | $1.34 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $— | | | | $(0.87 | ) | | | $(0.48 | ) | | | $(0.41 | ) | | | $(0.29 | ) |
From net realized gain on investments | | | (0.84 | ) | | | (0.27 | ) | | | (0.02 | ) | | | — | | | | — | |
Total distributions declared to shareholders | | | $(0.84 | ) | | | $(1.14 | ) | | | $(0.50 | ) | | | $(0.41 | ) | | | $(0.29 | ) |
Net asset value, end of period (x) | | | $15.04 | | | | $14.92 | | | | $16.43 | | | | $16.20 | | | | $15.27 | |
Total return (%) (k)(r)(s)(x) | | | 6.24 | (c) | | | (2.23 | ) | | | 4.46 | | | | 8.91 | | | | 9.49 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.79 | (c) | | | 0.76 | | | | 0.76 | | | | 0.75 | | | | 0.76 | |
Expenses after expense reductions (f) | | | 0.78 | (c) | | | 0.75 | | | | 0.75 | | | | 0.75 | | | | 0.76 | |
Net investment income | | | 1.88 | (c) | | | 1.80 | | | | 2.23 | | | | 2.04 | | | | 2.02 | |
Portfolio turnover | | | 38 | | | | 57 | | | | 32 | | | | 65 | | | | 38 | |
Net assets at end of period (000 omitted) | | | $58,053 | | | | $63,253 | | | | $76,670 | | | | $75,559 | | | | $73,189 | |
See Notes to Financial Statements
26
MFS Global Tactical Allocation Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $14.72 | | | | $16.22 | | | | $15.99 | | | | $15.09 | | | | $14.06 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.25 | (c) | | | $0.25 | | | | $0.33 | | | | $0.28 | | | | $0.26 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | 0.66 | | | | (0.66 | ) | | | 0.35 | | | | 0.99 | | | | 1.03 | |
Total from investment operations | | | $0.91 | | | | $(0.41 | ) | | | $0.68 | | | | $1.27 | | | | $1.29 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $— | | | | $(0.82 | ) | | | $(0.43 | ) | | | $(0.37 | ) | | | $(0.26 | ) |
From net realized gain on investments | | | (0.84 | ) | | | (0.27 | ) | | | (0.02 | ) | | | — | | | | — | |
Total distributions declared to shareholders | | | $(0.84 | ) | | | $(1.09 | ) | | | $(0.45 | ) | | | $(0.37 | ) | | | $(0.26 | ) |
Net asset value, end of period (x) | | | $14.79 | | | | $14.72 | | | | $16.22 | | | | $15.99 | | | | $15.09 | |
Total return (%) (k)(r)(s)(x) | | | 5.98 | (c) | | | (2.49 | ) | | | 4.25 | | | | 8.54 | | | | 9.26 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.04 | (c) | | | 1.01 | | | | 1.01 | | | | 1.00 | | | | 1.01 | |
Expenses after expense reductions (f) | | | 1.03 | (c) | | | 1.00 | | | | 1.00 | | | | 1.00 | | | | 1.01 | |
Net investment income | | | 1.63 | (c) | | | 1.55 | | | | 2.00 | | | | 1.79 | | | | 1.77 | |
Portfolio turnover | | | 38 | | | | 57 | | | | 32 | | | | 65 | | | | 38 | |
Net assets at end of period (000 omitted) | | | $733,775 | | | | $773,721 | | | | $912,616 | | | | $995,404 | | | | $994,165 | |
| (c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
| (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 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
27
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 October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
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 on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange as provided by a third-party pricing service. 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 on their primary exchange as provided by a third-party pricing service. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation on their primary exchange as provided by a third-party pricing service. 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 on their primary exchange as provided by a third-party pricing service. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation on their primary exchange as provided by a third-party pricing service. 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.
28
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, forward foreign currency exchange contracts, and swap agreements. The following is a summary of the levels used as of December 31, 2016 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $148,325,018 | | | | $— | | | | $— | | | | $148,325,018 | |
Japan | | | 4,566,934 | | | | 16,514,671 | | | | — | | | | 21,081,605 | |
Switzerland | | | 12,835,696 | | | | 6,859,161 | | | | — | | | | 19,694,857 | |
United Kingdom | | | 872,165 | | | | 18,491,416 | | | | — | | | | 19,363,581 | |
Germany | | | 7,840,688 | | | | 3,097,431 | | | | — | | | | 10,938,119 | |
France | | | 2,723,703 | | | | 7,206,979 | | | | — | | | | 9,930,682 | |
Canada | | | 6,109,358 | | | | — | | | | — | | | | 6,109,358 | |
Taiwan | | | 5,120,059 | | | | 929,730 | | | | — | | | | 6,049,789 | |
Netherlands | | | 1,541,392 | | | | 2,999,260 | | | | — | | | | 4,540,652 | |
Other Countries | | | 8,515,709 | | | | 16,163,559 | | | | — | | | | 24,679,268 | |
| U.S. Treasury Bonds & U.S. Government Agency & Equivalents | | | — | | | | 41,671,133 | | | | — | | | | 41,671,133 | |
| Non-U.S. Sovereign Debt | | | — | | | | 167,860,214 | | | | — | | | | 167,860,214 | |
| U.S. Corporate Bonds | | | — | | | | 116,956,536 | | | | — | | | | 116,956,536 | |
| Residential Mortgage-Backed Securities | | | — | | | | 43,185,330 | | | | — | | | | 43,185,330 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 9,969,640 | | | | — | | | | 9,969,640 | |
| Asset-Backed Securities (including CDOs) | | | — | | | | 13,263,363 | | | | — | | | | 13,263,363 | |
| Foreign Bonds | | | — | | | | 48,753,169 | | | | — | | | | 48,753,169 | |
| Mutual Funds | | | 67,748,319 | | | | — | | | | — | | | | 67,748,319 | |
| Total Investments | | | $266,199,041 | | | | $513,921,592 | | | | $— | | | | $780,120,633 | |
29
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
| | | | | | | | | | | | | | | | |
| Other Financial Instruments | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Futures Contracts – Assets | | | $1,100,712 | | | | $2,225,982 | | | | $— | | | | $3,326,694 | |
| Futures Contracts – Liabilities | | | (3,182,533 | ) | | | (1,604,889 | ) | | | — | | | | (4,787,422 | ) |
| Swap Agreements – Assets | | | — | | | | 102,280 | | | | — | | | | 102,280 | |
| Forward Foreign Currency Exchange Contracts – Assets | | | — | | | | 6,333,516 | | | | — | | | | 6,333,516 | |
| Forward Foreign Currency Exchange Contracts – Liabilities | | | — | | | | (4,485,868 | ) | | | — | | | | (4,485,868 | ) |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $8,254,648 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $32,465,225 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 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 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, 2016 as reported in the Statement of Assets and Liabilities:
| | | | | | | | | | |
| Equity | | | | Fair Value (a) | |
| Risk | | Derivative Contracts | | Asset Derivatives | | | Liability Derivatives | |
| Interest Rate | | Interest Rate Futures | | | $728,215 | | | | $(2,527,248 | ) |
| Foreign Exchange | | Forward Foreign Currency Exchange | | | 6,333,516 | | | | (4,485,868 | ) |
| Equity | | Equity Futures | | | 2,598,478 | | | | (2,260,174 | ) |
| Equity | | Purchased Equity Options | | | 74,390 | | | | — | |
| Interest Rate | | Total Return Swaps | | | 102,280 | | | | — | |
| Total | | | | | $9,836,879 | | | | $(9,273,290 | ) |
| (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 net 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, 2016 as reported in the Statement of Operations:
| | | | | | | | | | | | | | | | |
| Risk | | Futures Contracts | | | Swap Agreements | | | Foreign Currency | | | Investments
(Purchased Options) | |
| Interest Rate | | | $902,708 | | | | $2,018,827 | | | | $— | | | | $— | |
| Foreign Exchange | | | — | | | | — | | | | 18,251,458 | | | | — | |
| Equity | | | (10,482,546 | ) | | | — | | | | — | | | | (1,416,365 | ) |
| Total | | | $(9,579,838 | ) | | | $2,018,827 | | | | $18,251,458 | | | | $(1,416,365 | ) |
30
MFS Global Tactical Allocation 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, 2016 as reported in the Statement of Operations:
| | | | | | | | | | | | | | | | |
| Risk | | Futures Contracts | | | Swap Agreements | | | Translation of
Assets and
Liabilities in
Foreign Currencies | | | Investments
(Purchased Options) | |
| Interest Rate | | | $(1,228,203 | ) | | | $102,280 | | | | $— | | | | $— | |
| Foreign Exchange | | | — | | | | — | | | | (452,596 | ) | | | — | |
| Equity | | | 4,954,446 | | | | — | | | | — | | | | 39,768 | |
| Total | | | $3,726,243 | | | | $102,280 | | | | $(452,596 | ) | | | $39,768 | |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain, but not all, uncleared 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. 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 agreement 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.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the clearing broker and the clearing house for cleared derivatives (e.g., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for uncleared derivatives (e.g., forward foreign currency exchange contracts, uncleared swap agreements, and uncleared options). For derivatives traded under an ISDA Master Agreement, which contains a collateral support annex, 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 fund may be required to make payments of interest on uncovered collateral or margin obligations with the broker. Any such payments are included in “Miscellaneous” expense in the Statement of Operations.
The following table presents the fund’s derivative assets and liabilities (by type) on a gross basis as of December 31, 2016:
| | | | | | | | |
| Gross Amounts of: | | Derivative Assets | | | Derivative Liabilities | |
| Futures Contracts (a) | | | $1,019,256 | | | | $— | |
| Swaps, at value | | | 102,280 | | | | — | |
| Forward Foreign Currency Exchange Contracts | | | 6,333,516 | | | | (4,485,868 | ) |
| Purchased Options | | | 74,390 | | | | — | |
| Total Gross Amount of Derivative Assets and Liabilities Presented in the Statement of Assets & Liabilities | | | $7,529,442 | | | | $(4,485,868 | ) |
Less: Derivatives Assets and Liabilities Not Subject to a Master Netting Agreement or Similar Arrangement | | | 1,093,646 | | | | (33,368 | ) |
| Total Gross Amount of Derivative Assets and Liabilities Subject to a Master Netting Agreement or Similar Arrangement | | | $6,435,796 | | | | $(4,452,500 | ) |
| (a) | The amount presented here represents the fund’s current day net variation margin for futures contracts. The amount presented here represents the fund’s current day net variation margin. 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. |
31
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
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, 2016:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | 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 | | | $16,110 | | | | $(16,110 | ) | | | $— | | | | $— | | | | $— | |
| Brown Brothers Harriman | | | 7,660 | | | | (2,166 | ) | | | — | | | | — | | | | 5,494 | |
| Citibank N.A. | | | 36,766 | | | | (36,766 | ) | | | — | | | | — | | | | — | |
| Goldman Sachs International | | | 1,404,421 | | | | (1,404,421 | ) | | | — | | | | — | | | | — | |
| JPMorgan Chase Bank N.A. | | | 4,347,785 | | | | (1,884,894 | ) | | | (2,462,891 | ) | | | — | | | | — | |
| Merrill Lynch International | | | 296,451 | | | | — | | | | (296,451 | ) | | | — | | | | — | |
| Morgan Stanley Capital Services, Inc. | | | 153,845 | | | | (153,845 | ) | | | — | | | | — | | | | — | |
| Westpac Banking Corp. | | | 172,758 | | | | — | | | | — | | | | — | | | | 172,758 | |
| Total | | | $6,435,796 | | | | $(3,498,202 | ) | | | $(2,759,342 | ) | | | $— | | | | $178,252 | |
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, 2016:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | 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 | | | $(230,733 | ) | | | $16,110 | | | | $— | | | | $— | | | | $(214,623 | ) |
| Brown Brothers Harriman | | | (2,166 | ) | | | 2,166 | | | | — | | | | — | | | | — | |
| Citibank N.A. | | | (197,901 | ) | | | 36,766 | | | | — | | | | 161,135 | | | | — | |
| Goldman Sachs International | | | (1,981,390 | ) | | | 1,404,421 | | | | — | | | | — | | | | (576,969 | ) |
| JPMorgan Chase Bank N.A. | | | (1,884,894 | ) | | | 1,884,894 | | | | — | | | | — | | | | — | |
| Morgan Stanley Capital Services, Inc. | | | (155,416 | ) | | | 153,845 | | | | — | | | | — | | | | (1,571 | ) |
| Total | | | $(4,452,500 | ) | | | $3,498,202 | | | | $— | | | | $161,135 | | | | $(793,163 | ) |
| (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. |
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 uncleared 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, where applicable, 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.
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.
32
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
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, a multicurrency cash settlement system for the centralized settlement of foreign transactions. 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, where applicable, 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.
Short Sales – The fund may enter into short sales whereby it sells a security it does not own in anticipation of a decline in the value of that security. The fund will realize a gain if the security price decreases and a loss if the security price increases between the date of the short sale and the date on which the fund replaces the borrowed security. Losses from short sales can exceed the proceeds of the security sold; and they can also exceed the potential loss from an ordinary buy and sell transaction. The amount of any premium, dividends, or interest the fund may be required to pay in connection with a short sale will be recognized as a fund expense. The fund segregates cash or marketable securities in an amount that, when combined with the amount of proceeds from the short sale deposited with the broker, at least equals the current market value of the security sold short. At December 31, 2016, the fund has yet to enter into such transactions.
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 ultimate counterparty to the transaction is a clearinghouse (the “clearinghouse”). The contract is transferred and accepted by 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 and has counterparty risk to the clearing broker as well.
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. Collateral for uncleared swaps, in the form of cash or securities, is held in segregated accounts with the fund’s custodian in connection with these agreements. Collateral for cleared swaps, in the form of cash or securities, is posted by the fund directly with the clearing broker.
33
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
Risks related to swap agreements include the possible lack of a liquid market, unfavorable market and interest rate movements of the underlying instrument and the failure of the counterparty to perform under the terms of the agreements. 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, uncleared swap agreements are limited to only highly-rated counterparties. Risk is further reduced by having an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and, where applicable, by the posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement. The fund’s counterparty risk due to cleared swaps is mitigated by the fact that the clearinghouse is the true counterparty to the transaction and the regulatory requirement safeguards in the event of a clearing broker bankruptcy.
The fund entered into total return swaps which involve commitments to pay interest in exchange for a market-linked return based on a notional amount. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the fund will receive a payment from or make a payment to the counterparty, respectively. The fund may enter into total return swap agreements on a particular security, or a basket or index of securities, in order to gain exposure to the underlying security or securities.
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. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. 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, 2016, 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. 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 that value 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.
34
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
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. 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.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian 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:
| | | | | | | | |
| | | 12/31/16 | | | 12/31/15 | |
| Ordinary income (including any short-term capital gains) | | | $— | | | | $46,021,257 | |
| Long-term capital gains | | | 44,278,276 | | | | 14,844,806 | |
| Total distributions | | | $44,278,276 | | | | $60,866,063 | |
35
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/16 | | | | |
| Cost of investments | | | $720,694,530 | |
| Gross appreciation | | | 84,841,816 | |
| Gross depreciation | | | (25,415,713 | ) |
| Net unrealized appreciation (depreciation) | | | $59,426,103 | |
| Undistributed ordinary income | | | 22,826,965 | |
| Undistributed long-term capital gain | | | 1,882,932 | |
| Other temporary differences | | | (3,450,449 | ) |
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
12/31/16 | | | Year ended
12/31/15 | | | Year ended
12/31/16 | | | Year ended
12/31/15 | |
| Initial Class | | | $— | | | | $3,735,562 | | | | $3,200,005 | | | | $1,145,311 | |
| Service Class | | | — | | | | 42,286,134 | | | | 41,078,271 | | | | 13,699,056 | |
| Total | | | $— | | | | $46,021,696 | | | | $44,278,276 | | | | $14,844,367 | |
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
| | | | |
| First $300 million of average daily net assets | | | 0.75% | |
| Average daily net assets in excess of $300 million | | | 0.675% | |
The investment adviser has agreed in writing to reduce its management fee to 0.65% of average daily net assets in excess of $2.5 billion. This written agreement will terminate on April 27, 2017. For the year ended December 31, 2016, 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 year ended December 31, 2016, this management fee reduction amounted to $58,811, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.70% of the fund’s average daily net assets.
Effective April 28, 2017, the management fee will be computed daily and paid monthly at the following annual rates:
| | | | |
| First $300 million of average daily net assets | | | 0.75% | |
| Next $300 million up to $2.5 billion of average daily net assets | | | 0.675% | |
| Average daily net assets in excess of $2.5 billion | | | 0.65% | |
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, 2018. For the year ended December 31, 2016, 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.
36
MFS Global Tactical Allocation 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, 2016, the fee was $20,918, which equated to 0.0025% 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, 2016, these costs amounted to $1,426.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund 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, 2016 was equivalent to an annual effective rate of 0.0167% 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 – 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. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $1,641 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the 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. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $953,598 and $2,067,735, respectively. The sales transactions resulted in net realized gains (losses) of $(188,525).
For the year ended December 31, 2016, purchases and sales of investments, other than purchased option transactions, and short-term obligations, were as follows:
| | | | | | | | |
| | | Purchases | | | Sales | |
| U.S. Government securities | | | $49,203,751 | | | | $54,502,162 | |
| Investments (non-U.S. Government securities) | | | $244,737,462 | | | | $360,591,017 | |
| (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 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 145,928 | | | | $2,264,285 | | | | 114,930 | | | | $1,816,640 | |
Service Class | | | 1,469,776 | | | | 22,295,848 | | | | 561,096 | | | | 9,001,816 | |
| | | 1,615,704 | | | | $24,560,133 | | | | 676,026 | | | | $10,818,456 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 204,997 | | | | $3,200,005 | | | | 329,121 | | | | $4,880,873 | |
Service Class | | | 2,674,367 | | | | 41,078,271 | | | | 3,824,125 | | | | 55,985,190 | |
| | | 2,879,364 | | | | $44,278,276 | | | | 4,153,246 | | | | $60,866,063 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (731,005 | ) | | | $(11,227,969 | ) | | | (871,802 | ) | | | $(13,802,506 | ) |
Service Class | | | (7,097,065 | ) | | | (107,795,025 | ) | | | (8,105,528 | ) | | | (129,138,527 | ) |
| | | (7,828,070 | ) | | | $(119,022,994 | ) | | | (8,977,330 | ) | | | $(142,941,033 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (380,080 | ) | | | $(5,763,679 | ) | | | (427,751 | ) | | | $(7,104,993 | ) |
Service Class | | | (2,952,922 | ) | | | (44,420,906 | ) | | | (3,720,307 | ) | | | (64,151,521 | ) |
| | | (3,333,002 | ) | | | $(50,184,585 | ) | | | (4,148,058 | ) | | | $(71,256,514 | ) |
37
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
The fund and certain other funds managed by MFS participate in a $1.25 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 Overnight Federal Reserve funds rate or daily 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 Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $5,116 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 | | | 15,979,526 | | | | 314,035,629 | | | | (262,266,836 | ) | | | 67,748,319 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $(150 | ) | | | $— | | | | $193,620 | | | | $67,748,319 | |
38
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, 2016, 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, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Global Tactical Allocation Portfolio as of December 31, 2016, 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 15, 2017
39
MFS Global Tactical Allocation Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, 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 53) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 55) | | Trustee | | January 2014 | | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 74) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 65) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council (until 2015); 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 |
| | | | |
Maureen R. Goldfarb (age 61) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Michael Hegarty (age 72) | | Trustee | | December 2004 | | Private investor | | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) |
| | | | |
John P. Kavanaugh (age 62) | | Trustee and Vice Chair of Trustees | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 60) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 59) | | Trustee | | March 2005 | | Private investor | | The Travelers Companies, Director; Dycom Industries, Inc., Director |
| | | |
| OFFICERS | | | | | | |
Christopher R. Bohane (k) (age 43) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 48) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 57) | | 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 |
| | | | |
Ethan D. Corey (k) (age 53) | | 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 48) | | President | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 43) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
40
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) |
Susan A. Pereira (k) (age 46) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 46) | | 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 64) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 72) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 46) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Martin J. Wolin (k) (age 49) | | Chief Compliance Officer | | July 2015 | | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | | N/A |
| | | | |
James O. Yost (k) (age 56) | | 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. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
| (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. Buller and Kavanaugh and Ms. 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, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
41
MFS Global Tactical Allocation Portfolio
Trustees and Officers – continued
The Statement of Additional Information for a 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 Ben Nastou Robert Persons Jonathan Sage Natalie Shapiro Robert Spector Benjamin Stone Erik Weisman | | |
42
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, 2016 (“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 Senior Officer, a 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 Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of 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 Broadridge 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 Broadridge 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, 2015, 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 5th quintile for the one-year period and the 3rd quintile for the five-year period ended December 31, 2015 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.
43
MFS Global Tactical Allocation 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 Broadridge. 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 data provided by Broadridge (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 Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. 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, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate 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 further 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 “management fee waiver rate”). They also noted that MFS has agreed to amend its contractual advisory fee rate schedule to reflect the existing management fee waiver rate effective as of April 28, 2017. 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, 2016.
44
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 mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios”, then “VIT II” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $48,707,000 as capital gain dividends paid during the fiscal year.
45
rev. 3/16
| | | | |
| 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. |
46
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., and MFS Heritage Trust Company. |
| | |
| 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, or 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. |
47
ANNUAL REPORT
December 31, 2016
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 • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Government Securities Portfolio
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
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 | | | 53.1% | |
| U.S. Treasury Securities | | | 30.8% | |
| U.S. Government Agencies | | | 8.8% | |
| Commercial Mortgage-Backed Securities | | | 2.9% | |
| Investment Grade Corporates | | | 2.2% | |
| Collateralized Debt Obligations | | | 0.4% | |
| Municipal Bonds | | | 0.3% | |
| Asset-Backed Securities | | | 0.2% | |
| Emerging Markets Bonds | | | 0.2% | |
| Non-U.S. Government Bonds | | | 0.2% | |
| | | | |
| Composition including fixed income credit quality (a)(i) | |
| AAA | | | 1.9% | |
| AA | | | 1.7% | |
| A | | | 1.0% | |
| BBB | | | 1.2% | |
| BB | | | 0.3% | |
| B | | | 0.3% | |
| U.S. Government | | | 30.8% | |
| Federal Agencies | | | 61.9% | |
| Cash & Cash Equivalents | | | 0.9% | |
| |
| Portfolio facts (i) | | | | |
| Average Duration (d) | | | 5.4 | |
| Average Effective Maturity (m) | | | 7.3 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 or may not have held all of these instruments on this date. 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 & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
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, 2016, Initial Class shares of the MFS Government Securities Portfolio (“fund”) provided a total return of 1.04%, while Service Class shares of the fund provided a total return of 0.68%. These compare with a return of 1.31% over the same period for the fund’s benchmark, the Bloomberg Barclays U.S. Government/Mortgage Bond Index (formerly “Barclays U.S. Government/Mortgage Bond Index”).
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Factors Affecting Performance
Relative to the Bloomberg Barclays U.S. Government/Mortgage Bond Index, the fund’s duration(d) posture in the first half of the year detracted from performance as rates declined and lead to less carry (i.e., the cost or benefit from holding an asset) than the benchmark, which also held back relative results. The fund’s out-of-benchmark exposure to the commercial mortgage-backed securities (CMBS) sector contributed to relative returns, as this market segment outperformed the benchmark during the reporting period. An underweight exposure to the treasury sector also buoyed relative returns. Strong bond selection within the mortgage-backed securities (MBS) agency fixed rate sector was another source of relative strength.
Respectfully,
Geoffrey Schechter
Portfolio Manager
| (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. |
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 12/31/16
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 12/31/16
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class Inception Date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 6/12/85 | | 1.04% | | 1.23% | | 3.81% | | |
| | | Service Class | | 8/24/01 | | 0.68% | | 0.96% | | 3.55% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Bloomberg Barclays U.S. Government/Mortgage Bond Index (f) | | 1.31% | | 1.57% | | 4.04% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Bloomberg Barclays U.S. Government/Mortgage Bond Index (formerly 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, 2016 through December 31, 2016
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, 2016 through December 31, 2016.
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
7/01/16 | | | Ending
Account Value
12/31/16 | | | Expenses Paid
During Period (p)
7/01/16-12/31/16 | |
| Initial Class | | Actual | | | 0.53% | | | | $1,000.00 | | | | $969.99 | | | | $2.62 | |
| | Hypothetical (h) | | | 0.53% | | | | $1,000.00 | | | | $1,022.47 | | | | $2.69 | |
| Service Class | | Actual | | | 0.78% | | | | $1,000.00 | | | | $968.45 | | | | $3.86 | |
| | Hypothetical (h) | | | 0.78% | | | | $1,000.00 | | | | $1,021.22 | | | | $3.96 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.06% (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
5
MFS Government Securities Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – 98.6% | |
| Agency – Other – 4.8% | |
| Financing Corp., 9.4%, 2/08/2018 | | $ | 6,495,000 | | | $ | 7,073,990 | |
| Financing Corp., 9.8%, 4/06/2018 | | | 7,760,000 | | | | 8,581,140 | |
| Financing Corp., 10.35%, 8/03/2018 | | | 3,915,000 | | | | 4,476,401 | |
| Financing Corp., STRIPS, 0%, 11/30/2017 | | | 10,160,000 | | | | 10,059,020 | |
| | | | | | | | |
| | | $ | 30,190,551 | |
| | | | | |
| Asset-Backed & Securitized – 3.5% | | | | | |
| CNH Equipment Trust, 2015-C, “A2B”, FRN, 1.173%, 12/17/2018 | | $ | 455,477 | | | $ | 455,685 | |
| Commercial Mortgage Trust, 2015-DC1, “A5”, 3.35%, 2/10/2048 | | | 1,536,000 | | | | 1,546,265 | |
| Credit Suisse Commercial Mortgage Trust, “A4”, FRN, 5.934%, 9/15/2039 | | | 1,535,050 | | | | 1,557,210 | |
| Credit Suisse Commercial Mortgage Trust, “AM”, FRN, 5.687%, 6/15/2039 | | | 1,983,044 | | | | 2,001,714 | |
| Credit Suisse Commercial Mortgage Trust, “C4”, FRN, 5.934%, 9/15/2039 | | | 1,882,777 | | | | 1,917,839 | |
| CSAIL Commercial Mortgage Trust, 2015-C2, “A4”, 3.504%, 6/15/2057 | | | 144,366 | | | | 147,577 | |
| CWCapital Cobalt Ltd., “A4”, FRN, 5.761%, 5/15/2046 | | | 2,435,003 | | | | 2,462,565 | |
| Dryden XXIII Senior Loan Fund, 2012- 23A, “A1R”, FRN, 2.13%, 7/17/2023 (n) | | | 1,245,329 | | | | 1,245,276 | |
| Ford Credit Floorplan Master Owner Trust, 2015-4, “A2”, FRN, 1.303%, 8/15/2020 | | | 960,000 | | | | 964,119 | |
| Fortress Credit BSL Ltd., 2013-1A, “A”, FRN, 2.057%, 1/19/2025 (n) | | | 1,470,987 | | | | 1,468,102 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., “A4”, FRN, 5.753%, 6/15/2049 | | | 3,259,507 | | | | 3,279,140 | |
| Morgan Stanley Capital I Trust, “AM”, FRN, 5.689%, 4/15/2049 | | | 2,141,000 | | | | 2,097,767 | |
| Wells Fargo Commercial Mortgage Trust, 2015-C28, “A4”, 3.54%, 5/15/2048 | | | 1,937,516 | | | | 1,986,879 | |
| Wells Fargo Commercial Mortgage Trust, 2015-NXS1, “A5”, 3.148%, 5/15/2048 | | | 918,829 | | | | 920,737 | |
| | | | | | | | |
| | | $ | 22,050,875 | |
| | | | | |
| Automotive – 0.4% | | | | | | | | |
| Ford Motor Credit Co. LLC, 2.551%, 10/05/2018 | | $ | 1,014,000 | | | $ | 1,019,511 | |
Hyundai Capital America,
2%, 3/19/2018 (n) | | | 1,115,000 | | | | 1,114,652 | |
| Hyundai Capital America, 2.4%, 10/30/2018 (n) | | | 222,000 | | | | 222,883 | |
| | | | | | | | |
| | | $ | 2,357,046 | |
| | | | | |
| Business Services – 0.2% | | | | | | | | |
| Cisco Systems, Inc., 2.6%, 2/28/2023 | | $ | 1,271,000 | | | $ | 1,260,132 | |
| | | | | | | | |
| Computer Software – 0.1% | | | | | | | | |
| Microsoft Corp., 3.125%, 11/03/2025 | | $ | 541,000 | | | $ | 546,295 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | |
| Computer Software – Systems – 0.3% | | | | | |
| Apple, Inc., 3.25%, 2/23/2026 | | $ | 1,696,000 | | | $ | 1,694,470 | |
| | | | | | | | |
| Consumer Products – 0.2% | | | | | | | | |
| Newell Rubbermaid, Inc., 3.15%, 4/01/2021 | | $ | 1,293,000 | | | $ | 1,314,790 | |
| | | | | | | | |
| Local Authorities – 0.7% | | | | | | | | |
| State of California (Build America Bonds), 7.6%, 11/01/2040 | | $ | 1,935,000 | | | $ | 2,911,904 | |
| University of California Rev. (Build America Bonds), 5.77%, 5/15/2043 | | | 1,345,000 | | | | 1,644,478 | |
| | | | | | | | |
| | | $ | 4,556,382 | |
| | | | | |
| Mortgage-Backed – 52.9% | | | | | | | | |
| Fannie Mae, 6%, 4/01/2017 – 7/01/2037 | | $ | 1,495,901 | | | $ | 1,703,945 | |
Fannie Mae,
5.5%, 8/01/2017 – 3/01/2038 | | | 11,981,623 | | | | 13,377,736 | |
| Fannie Mae, 5.14%, 1/01/2018 | | | 152,534 | | | | 156,356 | |
| Fannie Mae, 3.8%, 2/01/2018 | | | 601,063 | | | | 610,524 | |
| Fannie Mae, 5%, 2/01/2018 – 3/01/2041 | | | 8,869,635 | | | | 9,676,118 | |
| Fannie Mae, 4%, 3/01/2018 – 2/01/2045 | | | 41,235,888 | | | | 43,447,574 | |
| Fannie Mae, 3.99%, 4/01/2018 | | | 600,000 | | | | 612,866 | |
| Fannie Mae, 3.739%, 6/01/2018 | | | 540,243 | | | | 550,660 | |
| Fannie Mae, 5.6%, 1/01/2019 | | | 425,915 | | | | 453,676 | |
| Fannie Mae, 5.1%, 3/01/2019 | | | 178,153 | | | | 188,102 | |
| Fannie Mae, 4.5%, 6/01/2019 – 6/01/2044 | | | 25,920,205 | | | | 27,912,105 | |
| Fannie Mae, 4.84%, 8/01/2019 | | | 1,614,405 | | | | 1,725,417 | |
| Fannie Mae, 5.05%, 8/01/2019 | | | 301,401 | | | | 323,103 | |
| Fannie Mae, 4.67%, 9/01/2019 | | | 510,262 | | | | 543,895 | |
| Fannie Mae, 4.83%, 9/01/2019 | | | 358,200 | | | | 383,090 | |
| Fannie Mae, 1.99%, 10/01/2019 | | | 958,445 | | | | 962,580 | |
| Fannie Mae, 1.97%, 11/01/2019 | | | 369,421 | | | | 370,284 | |
| Fannie Mae, 4.88%, 3/01/2020 | | | 230,572 | | | | 241,731 | |
| Fannie Mae, 4.14%, 8/01/2020 | | | 430,056 | | | | 457,998 | |
| Fannie Mae, 2.56%, 10/01/2021 | | | 235,961 | | | | 235,864 | |
| Fannie Mae, 2.67%, 3/01/2022 | | | 456,919 | | | | 464,003 | |
| Fannie Mae, 2.152%, 1/25/2023 | | | 1,600,000 | | | | 1,567,114 | |
| Fannie Mae, 2.73%, 4/01/2023 | | | 514,540 | | | | 517,804 | |
| Fannie Mae, 2.41%, 5/01/2023 | | | 649,301 | | | | 642,875 | |
| Fannie Mae, 2.55%, 5/01/2023 | | | 559,281 | | | | 558,069 | |
| Fannie Mae, 2.59%, 5/01/2023 | | | 355,856 | | | | 355,828 | |
| Fannie Mae, 4.5%, 5/01/2025 | | | 162,901 | | | | 173,136 | |
| Fannie Mae, 3%, 3/01/2027 – 11/01/2046 | | | 29,305,114 | | | | 29,808,532 | |
Fannie Mae,
6.5%, 9/01/2031 – 10/01/2037 | | | 1,126,262 | | | | 1,296,523 | |
Fannie Mae,
3.5%, 1/01/2042 – 5/01/2046 | | | 19,601,068 | | | | 20,137,578 | |
| Fannie Mae, 4%, 1/01/2043 – 1/01/2044 | | | 3,288,359 | | | | 3,480,015 | |
| Fannie Mae, FRN, 1.106%, 5/25/2018 | | | 1,195,699 | | | | 1,195,731 | |
| Freddie Mac, 3.154%, 2/25/2018 | | | 1,994,868 | | | | 2,024,373 | |
| Freddie Mac, 5%, 9/01/2018 – 6/01/2040 | | | 1,742,784 | | | | 1,894,891 | |
| Freddie Mac, 2.22%, 12/25/2018 | | | 1,500,000 | | | | 1,516,216 | |
6
MFS Government Securities Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | |
| Mortgage-Backed – continued | | | | | | | | |
| Freddie Mac, 2.086%, 3/25/2019 | | $ | 1,800,000 | | | $ | 1,813,425 | |
| Freddie Mac, 1.883%, 5/25/2019 | | | 3,750,000 | | | | 3,767,421 | |
Freddie Mac,
6%, 8/01/2019 – 10/01/2038 | | | 3,912,098 | | | | 4,452,093 | |
| Freddie Mac, 2.456%, 8/25/2019 | | | 1,862,000 | | | | 1,889,371 | |
| Freddie Mac, 4.186%, 8/25/2019 | | | 814,000 | | | | 860,499 | |
| Freddie Mac, 1.869%, 11/25/2019 | | | 3,000,000 | | | | 3,002,239 | |
| Freddie Mac, 4.251%, 1/25/2020 | | | 1,449,000 | | | | 1,533,008 | |
| Freddie Mac, 2.313%, 3/25/2020 | | | 3,022,000 | | | | 3,056,491 | |
| Freddie Mac, 4.224%, 3/25/2020 | | | 1,911,350 | | | | 2,035,845 | |
| Freddie Mac, 3.808%, 8/25/2020 | | | 999,000 | | | | 1,056,958 | |
| Freddie Mac, 3.034%, 10/25/2020 | | | 1,327,000 | | | | 1,373,239 | |
| Freddie Mac, 2.791%, 1/25/2022 | | | 1,400,000 | | | | 1,428,917 | |
Freddie Mac,
5.5%, 5/01/2022 – 6/01/2041 | | | 3,167,824 | | | | 3,543,146 | |
| Freddie Mac, 2.716%, 6/25/2022 | | | 1,616,064 | | | | 1,641,636 | |
| Freddie Mac, 2.682%, 10/25/2022 | | | 1,500,000 | | | | 1,517,816 | |
Freddie Mac,
4.5%, 11/01/2022 – 5/01/2042 | | | 4,177,696 | | | | 4,485,247 | |
| Freddie Mac, 2.51%, 11/25/2022 | | | 2,326,000 | | | | 2,331,843 | |
| Freddie Mac, 3.32%, 2/25/2023 | | | 1,993,000 | | | | 2,084,120 | |
| Freddie Mac, 3.25%, 4/25/2023 | | | 3,500,000 | | | | 3,646,866 | |
Freddie Mac,
3.3%, 4/25/2023 – 10/25/2026 | | | 4,406,044 | | | | 4,561,598 | |
| Freddie Mac, 3.06%, 7/25/2023 | | | 886,000 | | | | 913,245 | |
| Freddie Mac, 2.454%, 8/25/2023 | | | 1,469,000 | | | | 1,456,878 | |
| Freddie Mac, 2.67%, 12/25/2024 | | | 3,924,000 | | | | 3,894,858 | |
| Freddie Mac, 2.811%, 1/25/2025 | | | 3,025,000 | | | | 3,028,425 | |
| Freddie Mac, 3.329%, 5/25/2025 | | | 3,082,000 | | | | 3,189,716 | |
| Freddie Mac, 4%, 7/01/2025 – 9/01/2044 | | | 8,480,524 | | | | 8,902,330 | |
| Freddie Mac, 3.01%, 7/25/2025 | | | 904,000 | | | | 913,356 | |
| Freddie Mac, 2.745%, 1/25/2026 | | | 2,656,000 | | | | 2,618,175 | |
Freddie Mac,
6.5%, 8/01/2032 – 5/01/2037 | | | 726,930 | | | | 836,235 | |
Freddie Mac,
3.5%, 12/01/2041 – 4/01/2046 | | | 30,713,799 | | | | 31,541,738 | |
Freddie Mac,
3%, 4/01/2043 – 11/01/2046 | | | 19,026,563 | | | | 18,957,763 | |
Ginnie Mae,
5.5%, 7/15/2033 – 1/20/2042 | | | 2,504,211 | | | | 2,821,627 | |
Ginnie Mae,
4.5%, 8/15/2039 – 9/20/2041 | | | 5,806,310 | | | | 6,300,708 | |
Ginnie Mae,
4%, 10/15/2039 – 4/20/2041 | | | 1,151,414 | | | | 1,226,494 | |
Ginnie Mae,
3.5%, 12/15/2041 – 5/20/2046 | | | 20,141,003 | | | | 20,984,567 | |
| Ginnie Mae, 3%, 7/20/2043 | | | 3,310,840 | | | | 3,364,087 | |
| Ginnie Mae, 6.286%, 4/20/2058 | | | 80,367 | | | | 84,996 | |
| | | | | | | | |
| | | $ | 330,683,288 | |
| | | | | |
| Municipals – 0.3% | | | | | | | | |
| State of California, 5%, 8/01/2027 | | $ | 1,505,000 | | | $ | 1,810,410 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 0.2% | | | | | |
| Banque Federative du Credit Mutuel S.A., 2.5%, 4/13/2021 (n) | | $ | 1,492,000 | | | $ | 1,481,435 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | |
| Restaurants – 0.1% | | | | | | | | |
| McDonald’s Corp., 2.75%, 12/09/2020 | | $ | 604,000 | | | $ | 612,927 | |
| | | | | | | | |
| Supranational – 0.2% | | | | | | | | |
| Inter-American Development Bank, 4.375%, 1/24/2044 | | $ | 1,093,000 | | | $ | 1,256,038 | |
| | | | | | | | |
| U.S. Government Agencies and Equivalents – 3.9% | |
| AID-Tunisia, 2.452%, 7/24/2021 | | $ | 1,444,000 | | | $ | 1,468,499 | |
| AID-Ukraine, 1.844%, 5/16/2019 | | | 2,527,000 | | | | 2,520,622 | |
| AID-Ukraine, 1.847%, 5/29/2020 | | | 1,135,000 | | | | 1,130,270 | |
| Hashemite Kingdom of Jordan, 1.945%, 6/23/2019 | | | 2,205,000 | | | | 2,228,380 | |
| Hashemite Kingdom of Jordan, 2.503%, 10/30/2020 | | | 2,742,000 | | | | 2,810,739 | |
| Private Export Funding Corp., 2.25%, 3/15/2020 | | | 594,000 | | | | 602,979 | |
| Private Export Funding Corp., 2.3%, 9/15/2020 | | | 770,000 | | | | 784,634 | |
| Private Export Funding Corp., 1.875%, 7/15/2018 | | | 2,300,000 | | | | 2,317,425 | |
| Small Business Administration, 6.35%, 4/01/2021 | | | 99,966 | | | | 106,129 | |
| Small Business Administration, 6.34%, 5/01/2021 | | | 100,129 | | | | 106,252 | |
| Small Business Administration, 6.44%, 6/01/2021 | | | 172,150 | | | | 181,502 | |
| Small Business Administration, 6.625%, 7/01/2021 | | | 212,105 | | | | 225,587 | |
| Small Business Administration, 6.07%, 3/01/2022 | | | 164,210 | | | | 175,200 | |
| Small Business Administration, 4.98%, 11/01/2023 | | | 217,245 | | | | 232,668 | |
| Small Business Administration, 4.77%, 4/01/2024 | | | 474,159 | | | | 498,842 | |
| Small Business Administration, 5.52%, 6/01/2024 | | | 212,675 | | | | 227,006 | |
| Small Business Administration, 4.99%, 9/01/2024 | | | 36,875 | | | | 39,205 | |
| Small Business Administration, 5.11%, 4/01/2025 | | | 332,553 | | | | 355,837 | |
| Small Business Administration, 2.21%, 2/01/2033 | | | 1,082,377 | | | | 1,056,608 | |
| Small Business Administration, 2.22%, 3/01/2033 | | | 1,886,052 | | | | 1,842,825 | |
| Small Business Administration, 3.15%, 7/01/2033 | | | 1,785,729 | | | | 1,825,768 | |
| Small Business Administration, 3.16%, 8/01/2033 | | | 1,009,217 | | | | 1,032,583 | |
| Small Business Administration, 3.62%, 9/01/2033 | | | 632,834 | | | | 664,308 | |
| Tennessee Valley Authority, 1.75%, 10/15/2018 | | | 1,889,000 | | | | 1,904,826 | |
| | | | | | | | |
| | | $ | 24,338,694 | |
| | | | | |
7
MFS Government Securities Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | |
| U.S. Treasury Obligations – 30.6% | | | | | |
| U.S. Treasury Bonds, 7.875%, 2/15/2021 | | $ | 177,000 | | | $ | 219,407 | |
| U.S. Treasury Bonds, 6.25%, 8/15/2023 | | | 2,891,000 | | | | 3,610,024 | |
| U.S. Treasury Bonds, 6%, 2/15/2026 | | | 2,699,000 | | | | 3,485,348 | |
| U.S. Treasury Bonds, 6.75%, 8/15/2026 | | | 1,862,000 | | | | 2,546,341 | |
| U.S. Treasury Bonds, 6.375%, 8/15/2027 | | | 326,000 | | | | 443,145 | |
| U.S. Treasury Bonds, 5.25%, 2/15/2029 | | | 284,000 | | | | 362,411 | |
| U.S. Treasury Bonds, 4.375%, 2/15/2038 | | | 824,000 | | | | 1,022,142 | |
| U.S. Treasury Bonds, 4.5%, 8/15/2039 | | | 12,920,500 | | | | 16,196,428 | |
| U.S. Treasury Bonds, 3.125%, 2/15/2043 | | | 8,176,700 | | | | 8,267,625 | |
| U.S. Treasury Bonds, 2.875%, 5/15/2043 | | | 13,519,500 | | | | 13,030,419 | |
| U.S. Treasury Bonds, 2.5%, 2/15/2045 | | | 16,292,000 | | | | 14,477,772 | |
| U.S. Treasury Notes, 1.75%, 11/30/2021 | | | 11,000,000 | | | | 10,907,006 | |
| U.S. Treasury Notes, 2.625%, 4/30/2018 | | | 3,749,000 | | | | 3,828,153 | |
| U.S. Treasury Notes, 2.75%, 2/15/2019 | | | 13,302,400 | | | | 13,716,690 | |
| U.S. Treasury Notes, 3.125%, 5/15/2019 | | | 4,427,000 | | | | 4,614,196 | |
| U.S. Treasury Notes, 1%, 6/30/2019 | | | 6,347,000 | | | | 6,295,132 | |
| U.S. Treasury Notes, 1.625%, 6/30/2019 | | | 4,454,000 | | | | 4,485,614 | |
| U.S. Treasury Notes, 2.625%, 8/15/2020 | | | 8,002,000 | | | | 8,268,187 | |
| U.S. Treasury Notes, 2%, 11/30/2020 | | | 4,541,000 | | | | 4,584,376 | |
| U.S. Treasury Notes, 3.125%, 5/15/2021 | | | 1,901,000 | | | | 2,001,502 | |
| U.S. Treasury Notes, 1.75%, 5/15/2022 | | | 23,594,000 | | | | 23,222,654 | |
| U.S. Treasury Notes, 2.5%, 8/15/2023 | | | 28,069,000 | | | | 28,532,840 | |
| U.S. Treasury Notes, 2.5%, 5/15/2024 | | | 16,369,000 | | | | 16,592,862 | |
| U.S. Treasury Notes, 2%, 8/15/2025 | | | 438,000 | | | | 423,666 | |
| | | | | | | | |
| | | $ | 191,133,940 | |
| | | | | | | | |
| Utilities – Electric Power – 0.2% | | | | | | | | |
| NextEra Energy Capital Holdings, Inc., 2.056%, 9/01/2017 | | $ | 1,139,000 | | | $ | 1,143,981 | |
| | | | | | | | |
Total Bonds
(Identified Cost, $609,920,974) | | | $ | 616,431,254 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| MONEY MARKET FUNDS – 1.1% | | | | | |
| MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $6,685,259) | | | 6,685,381 | | | $ | 6,685,381 | |
| | | | | | | | |
Total Investments
(Identified Cost, $616,606,233) | | | | | | $ | 623,116,635 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.3% | | | | | | | 2,172,014 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 625,288,649 | |
| | | | | | | | |
| (n) | | Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. At period end, the aggregate value of these securities was $5,532,348, representing 0.9% 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. |
The following abbreviations are used in this report and are defined:
| FRN | | Floating Rate Note. Interest rate resets periodically and the current rate may not be the rate reported at period end. |
| STRIPS | | Separate Trading of Registered Interest and Principal of Securities |
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 12/31/16
| | | | | | | | | | | | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $609,920,974) | | | $616,431,254 | | | | | |
Underlying affiliated funds, at value (identified cost, $6,685,259) | | | 6,685,381 | | | | | |
Total investments, at value (identified cost, $616,606,233) | | | $623,116,635 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 4,010,328 | | | | | |
TBA sale commitments | | | 2,630,894 | | | | | |
Fund shares sold | | | 10,946 | | | | | |
Interest | | | 3,430,205 | | | | | |
Other assets | | | 544 | | | | | |
Total assets | | | | | | | $633,199,552 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | $4,048,101 | | | | | |
TBA purchase commitments | | | 2,677,183 | | | | | |
Fund shares reacquired | | | 1,057,845 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 28,633 | | | | | |
Shareholder servicing costs | | | 82 | | | | | |
Distribution and/or service fees | | | 4,848 | | | | | |
Accrued expenses and other liabilities | | | 94,211 | | | | | |
Total liabilities | | | | | | | $7,910,903 | |
Net assets | | | | | | | $625,288,649 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $624,216,115 | | | | | |
Unrealized appreciation (depreciation) on investments | | | 6,510,402 | | | | | |
Accumulated net realized gain (loss) on investments | | | (23,289,364 | ) | | | | |
Undistributed net investment income | | | 17,851,496 | | | | | |
Net assets | | | | | | | $625,288,649 | |
Shares of beneficial interest outstanding | | | | | | | 50,123,468 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $388,457,348 | | | | 31,062,256 | | | | $12.51 | |
Service Class | | | 236,831,301 | | | | 19,061,212 | | | | 12.42 | |
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 12/31/16 | | | | | |
Net investment income | | | | | |
Income | | | | | | | | |
Interest | | | $19,523,427 | | | | | |
Dividends from underlying affiliated funds | | | 66,198 | | | | | |
Other | | | 8,306 | | | | | |
Total investment income | | | | | | | $19,597,931 | |
Expenses | | | | | | | | |
Management fee | | | $3,639,084 | | | | | |
Distribution and/or service fees | | | 625,622 | | | | | |
Shareholder servicing costs | | | 13,976 | | | | | |
Administrative services fee | | | 112,786 | | | | | |
Independent Trustees’ compensation | | | 18,494 | | | | | |
Custodian fee | | | 49,480 | | | | | |
Reimbursement of custodian expenses | | | (199,585 | ) | | | | |
Shareholder communications | | | 34,658 | | | | | |
Audit and tax fees | | | 60,740 | | | | | |
Legal fees | | | 6,538 | | | | | |
Miscellaneous | | | 30,627 | | | | | |
Total expenses | | | | | | | $4,392,420 | |
Reduction of expenses by investment adviser | | | (47,015 | ) | | | | |
Net expenses | | | | | | | $4,345,405 | |
Net investment income | | | | | | | $15,252,526 | |
Realized and unrealized gain (loss) on investments | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments: | | | | | | | | |
Non-affiliated issuers | | | $3,110,796 | | | | | |
Underlying affiliated funds | | | 30 | | | | | |
Futures contracts | | | (1,149,062 | ) | | | | |
Net realized gain (loss) on investments | | | | | | | $1,961,764 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $(10,041,584 | )�� | | | | |
Futures contracts | | | (31,888 | ) | | | | |
Net unrealized gain (loss) on investments | | | | | | | $(10,073,472 | ) |
Net realized and unrealized gain (loss) on investments | | | | | | | $(8,111,708 | ) |
Change in net assets from operations | | | | | | | $7,140,818 | |
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 | | | 2016 | | | | 2015 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $15,252,526 | | | | $14,821,331 | |
Net realized gain (loss) on investments | | | 1,961,764 | | | | 708,610 | |
Net unrealized gain (loss) on investments | | | (10,073,472 | ) | | | (12,192,370 | ) |
Change in net assets from operations | | | $7,140,818 | | | | $3,337,571 | |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(16,945,290 | ) | | | $(19,475,459 | ) |
Change in net assets from fund share transactions | | | $(45,889,972 | ) | | | $(86,971,604 | ) |
Total change in net assets | | | $(55,694,444 | ) | | | $(103,109,492 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 680,983,093 | | | | 784,092,585 | |
At end of period (including undistributed net investment income of $17,851,496 and
$16,942,202, respectively) | | | $625,288,649 | | | | $680,983,093 | |
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 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $12.72 | | | | $13.02 | | | | $12.73 | | | | $13.49 | | | | $13.72 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.31 | (c) | | | $0.27 | | | | $0.26 | | | | $0.25 | | | | $0.32 | |
Net realized and unrealized gain (loss) on investments | | | (0.17 | ) | | | (0.21 | ) | | | 0.35 | | | | (0.60 | ) | | | 0.03 | (g) |
Total from investment operations | | | $0.14 | | | | $0.06 | | | | $0.61 | | | | $(0.35 | ) | | | $0.35 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.35 | ) | | | $(0.36 | ) | | | $(0.32 | ) | | | $(0.30 | ) | | | $(0.45 | ) |
From net realized gain on investments | | | — | | | | — | | | | — | | | | (0.11 | ) | | | (0.13 | ) |
Total distributions declared to shareholders | | | $(0.35 | ) | | | $(0.36 | ) | | | $(0.32 | ) | | | $(0.41 | ) | | | $(0.58 | ) |
Net asset value, end of period (x) | | | $12.51 | | | | $12.72 | | | | $13.02 | | | | $12.73 | | | | $13.49 | |
Total return (%) (k)(r)(s)(x) | | | 1.04 | (c) | | | 0.47 | | | | 4.86 | | | | (2.59 | ) | | | 2.53 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.57 | (c) | | | 0.60 | | | | 0.60 | | | | 0.60 | | | | 0.60 | |
Expenses after expense reductions (f) | | | 0.56 | (c) | | | 0.59 | | | | 0.59 | | | | 0.59 | | | | 0.60 | |
Net investment income | | | 2.40 | (c) | | | 2.09 | | | | 2.04 | | | | 1.89 | | | | 2.33 | |
Portfolio turnover | | | 48 | | | | 81 | | | | 61 | | | | 130 | | | | 78 | |
Net assets at end of period (000 omitted) | | | $388,457 | | | | $424,025 | | | | $484,573 | | | | $510,317 | | | | $537,397 | |
See Notes to Financial Statements
12
MFS Government Securities Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $12.64 | | | | $12.93 | | | | $12.63 | | | | $13.39 | | | | $13.62 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.28 | (c) | | | $0.24 | | | | $0.23 | | | | $0.21 | | | | $0.29 | |
Net realized and unrealized gain (loss) on investments | | | (0.18 | ) | | | (0.21 | ) | | | 0.36 | | | | (0.60 | ) | | | 0.02 | (g) |
Total from investment operations | | | $0.10 | | | | $0.03 | | | | $0.59 | | | | $(0.39 | ) | | | $0.31 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.32 | ) | | | $(0.32 | ) | | | $(0.29 | ) | | | $(0.26 | ) | | | $(0.41 | ) |
From net realized gain on investments | | | — | | | | — | | | | — | | | | (0.11 | ) | | | (0.13 | ) |
Total distributions declared to shareholders | | | $(0.32 | ) | | | $(0.32 | ) | | | $(0.29 | ) | | | $(0.37 | ) | | | $(0.54 | ) |
Net asset value, end of period (x) | | | $12.42 | | | | $12.64 | | | | $12.93 | | | | $12.63 | | | | $13.39 | |
Total return (%) (k)(r)(s)(x) | | | 0.68 | (c) | | | 0.26 | | | | 4.67 | | | | (2.90 | ) | | | 2.27 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.82 | (c) | | | 0.85 | | | | 0.85 | | | | 0.85 | | | | 0.85 | |
Expenses after expense reductions (f) | | | 0.81 | (c) | | | 0.84 | | | | 0.84 | | | | 0.84 | | | | 0.85 | |
Net investment income | | | 2.15 | (c) | | | 1.84 | | | | 1.79 | | | | 1.63 | | | | 2.16 | |
Portfolio turnover | | | 48 | | | | 81 | | | | 61 | | | | 130 | | | | 78 | |
Net assets at end of period (000 omitted) | | | $236,831 | | | | $256,958 | | | | $299,520 | | | | $348,419 | | | | $404,321 | |
| (c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
| (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. |
| (x) | The net asset values 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 October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
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 on their primary exchange as provided by a third-party pricing service. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation on their primary exchange as 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 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, 2016 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 | | | $— | | | | $245,663,185 | | | | $— | | | | $245,663,185 | |
| Non-U.S. Sovereign Debt | | | — | | | | 1,256,038 | | | | — | | | | 1,256,038 | |
| Municipal Bonds | | | — | | | | 1,810,410 | | | | — | | | | 1,810,410 | |
| U.S. Corporate Bonds | | | — | | | | 12,148,488 | | | | — | | | | 12,148,488 | |
| Residential Mortgage-Backed Securities | | | — | | | | 330,683,288 | | | | — | | | | 330,683,288 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 17,917,693 | | | | — | | | | 17,917,693 | |
| Asset-Backed Securities (including CDOs) | | | — | | | | 4,133,182 | | | | — | | | | 4,133,182 | |
| Foreign Bonds | | | — | | | | 2,818,970 | | | | — | | | | 2,818,970 | |
| Mutual Funds | | | 6,685,381 | | | | — | | | | — | | | | 6,685,381 | |
| Total Investments | | | $6,685,381 | | | | $616,431,254 | | | | $— | | | | $623,116,635 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Inflation-Adjusted Debt Securities – The fund invests in inflation-adjusted debt securities issued by the U.S. Treasury. The 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.
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. At December 31, 2016, 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, 2016 as reported in the Statement of Operations:
| | | | |
| Risk | | Futures Contracts | |
| Interest Rate | | $ | (1,149,062 | ) |
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, 2016 as reported in the Statement of Operations:
| | | | |
| Risk | | Futures Contracts | |
| Interest Rate | | $ | (31,888 | ) |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain, but not all, uncleared 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. 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
15
MFS Government Securities Portfolio
Notes to Financial Statements – continued
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.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the clearing broker and the clearing house for cleared derivatives (e.g., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for uncleared derivatives (e.g., forward foreign currency exchange contracts, uncleared swap agreements, and uncleared options). For derivatives traded under an ISDA Master Agreement, which contains a collateral support annex, 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 fund may be required to make payments of interest on uncovered collateral or margin obligations with the broker. Any such payments are included in “Miscellaneous” expense in the Statement of Operations.
Futures Contracts – The fund entered into futures contracts which may be used to hedge against or obtain broad market exposure, interest rate 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 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.
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. 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-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 that value 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
16
MFS Government Securities Portfolio
Notes to Financial Statements – continued
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.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian 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 and wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/16 | | | 12/31/15 | |
| Ordinary income (including any short-term capital gains) | | | $16,945,290 | | | | $19,475,459 | |
17
MFS Government Securities Portfolio
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/16 | | | | |
| Cost of investments | | | $627,004,834 | |
| Gross appreciation | | | 10,122,765 | |
| Gross depreciation | | | (14,010,964 | ) |
| Net unrealized appreciation (depreciation) | | | $(3,888,199 | ) |
| Undistributed ordinary income | | | 17,851,496 | |
| Capital loss carryforwards | | | (12,822,526 | ) |
| Other temporary differences | | | (68,237 | ) |
As of December 31, 2016, the fund had capital loss carryforwards available to offset future realized gains. These net capital losses may be carried forward indefinitely and their character is retained as short-term and/or long-term losses. Such losses are characterized as follows:
| | | | |
| Short-Term | | | $(4,764,651 | ) |
| Long-Term | | | (8,057,875 | ) |
| Total | | | $(12,822,526 | ) |
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
12/31/16 | | | Year ended
12/31/15 | |
| Initial Class | | | $11,002,252 | | | | $12,503,845 | |
| Service Class | | | 5,943,038 | | | | 6,971,614 | |
| Total | | | $16,945,290 | | | | $19,475,459 | |
| (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, 2016, this management fee reduction amounted to $47,015, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.54% 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, 2018. For the year ended December 31, 2016, 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
18
MFS Government Securities 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, 2016, the fee was $11,246, 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, 2016, these costs amounted to $2,730.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund 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, 2016 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 – 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. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $1,299 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the 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. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, were as follows:
| | | | | | | | |
| | | Purchases | | | Sales | |
| U.S. Government securities | | | $297,007,506 | | | | $324,231,181 | |
| Investments (non-U.S. Government securities) | | | $16,809,942 | | | | $18,608,920 | |
| (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 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 1,030,178 | | | | $13,285,704 | | | | 680,256 | | | | $8,816,297 | |
Service Class | | | 2,283,107 | | | | 29,114,757 | | | | 1,436,688 | | | | 18,475,471 | |
| | | 3,313,285 | | | | $42,400,461 | | | | 2,116,944 | | | | $27,291,768 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 852,227 | | | | $11,002,252 | | | | 979,925 | | | | $12,503,845 | |
Service Class | | | 462,853 | | | | 5,943,038 | | | | 549,812 | | | | 6,971,614 | |
| | | 1,315,080 | | | | $16,945,290 | | | | 1,529,737 | | | | $19,475,459 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (4,143,718 | ) | | | $(53,625,840 | ) | | | (5,545,471 | ) | | | $(71,845,670 | ) |
Service Class | | | (4,014,759 | ) | | | (51,609,883 | ) | | | (4,816,861 | ) | | | (61,893,161 | ) |
| | | (8,158,477 | ) | | | $(105,235,723 | ) | | | (10,362,332 | ) | | | $(133,738,831 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (2,261,313 | ) | | | $(29,337,884 | ) | | | (3,885,290 | ) | | | $(50,525,528 | ) |
Service Class | | | (1,268,799 | ) | | | (16,552,088 | ) | | | (2,830,361 | ) | | | (36,446,076 | ) |
| | | (3,530,112 | ) | | | $(45,889,972 | ) | | | (6,715,651 | ) | | | $(86,971,604 | ) |
19
MFS Government Securities Portfolio
Notes to Financial Statements – continued
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 $1.25 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 Overnight Federal Reserve funds rate or daily 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 Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $4,068 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 | | | 52,758,836 | | | | 161,467,419 | | | | (207,540,874 | ) | | | 6,685,381 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $30 | | | | $— | | | | $66,198 | | | | $6,685,381 | |
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, 2016, 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, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Government Securities Portfolio as of December 31, 2016, 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 15, 2017
21
MFS Government Securities Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, 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 53) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 55) | | Trustee | | January 2014 | | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 74) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 65) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council (until 2015); 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 |
| | | | |
Maureen R. Goldfarb (age 61) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Michael Hegarty (age 72) | | Trustee | | December 2004 | | Private investor | | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) |
| | | | |
John P. Kavanaugh (age 62) | | Trustee and Vice Chair of Trustees | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 60) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 59) | | Trustee | | March 2005 | | Private investor | | The Travelers Companies, Director; Dycom Industries, Inc., Director |
| | | |
| OFFICERS | | | | | | |
Christopher R. Bohane (k) (age 43) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 48) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 57) | | 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 |
| | | | |
Ethan D. Corey (k) (age 53) | | 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 48) | | President | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 43) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | 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) |
Susan A. Pereira (k) (age 46) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 46) | | 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 64) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 72) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 46) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Martin J. Wolin (k) (age 49) | | Chief Compliance Officer | | July 2015 | | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | | N/A |
| | | | |
James O. Yost (k) (age 56) | | 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. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
| (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. Buller and Kavanaugh and Ms. 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, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a 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 | | |
23
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, 2016 (“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 Senior Officer, a 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 Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of 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 Broadridge 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 Broadridge 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, 2015, 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 2nd quintile for the one-year period and the 3rd quintile for the five-year period ended December 31, 2015 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 Government Securities 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 Broadridge. 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 data provided by Broadridge (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 Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. 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, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate 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, 2016.
25
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 mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios”, then “VIT II” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
26
rev. 3/16
| | | | |
| 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., and MFS Heritage Trust Company. |
| | |
| 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, or 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, 2016
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 • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS High Yield Portfolio
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
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) | | | | |
| Medical & Health Technology & Services | | | 7.2% | |
| Midstream | | | 6.1% | |
| Energy-Independent | | | 5.7% | |
| Cable TV | | | 5.5% | |
| Metals & Mining | | | 4.4% | |
| | | | |
| Composition including fixed income credit quality (a)(i) | |
| BBB | | | 2.4% | |
| BB | | | 43.0% | |
| B | | | 38.3% | |
| CCC | | | 13.5% | |
| C | | | 0.1% | |
| D | | | 0.3% | |
| Not Rated | | | 0.5% | |
| Cash & Cash Equivalents | | | 1.9% | |
| Other (o) | | | 0.0% | |
| |
| Portfolio facts (i) | | | | |
| Average Duration (d) | | | 3.8 | |
| 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. The fund may or may not have held all of these instruments on this date. 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 & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Other includes equivalent exposure from currency derivatives and/or any offsets to derivative positions.
Percentages are based on net assets as of 12/31/16.
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, 2016, Initial Class shares of the MFS High Yield Portfolio (“fund”) provided a total return of 13.82%, while Service Class shares of the fund provided a total return of 13.64%. These compare with a return of 17.13% over the same period for the fund’s benchmark, the Bloomberg Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index (formerly “Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index”).
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
Relative to the Bloomberg Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index, the fund’s lesser exposure to both the energy and communications sectors, and an overweight exposure to the capital goods sector, hurt performance. An underweight exposure to “C” rated (r) securities was another detractor from relative performance. Weak bond selection, particularly within the industrial other and energy sectors, also dampened relative returns. Top individual relative detractors for the reporting period included the fund’s overweight positions in logistics firm DH Services (h) (industrial other), independent energy company Bonanza Creek Energy (energy), specialty chemicals manufacturer Chemtura (basic industry) and independent exploration and production company EP Energy (h) (energy), and a position in natural gas transportation and storage firm MPLX (b) (energy). The fund’s allocation to cash also weighed on relative returns. 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 fixed income markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Contributors to Performance
The fund’s shorter relative duration (d) stance supported relative returns, as yields across the curve increased during the reporting period. Top individual relative contributors included the fund’s overweight positions in independent energy company SM Energy (h) (energy), commercial vehicle parts and accessories company Accuride Corp.(h) (consumer cyclical) and semiconductor manufacturer Advanced Micro Devices (h) (technology), a position in oil and natural gas exploration and production firm Chaparral Energy (b)(h) (energy), and an underweight position in telecommunications firm Sprint (communications).
Respectfully,
| | |
William Adams | | David Cole |
Portfolio Manager | | Portfolio Manager |
3
MFS High Yield Portfolio
Management Review – continued
| (b) | Security is not a benchmark constituent. |
| (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. |
| (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.
4
MFS High Yield Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/16
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 12/31/16
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class Inception Date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 6/12/85 | | 13.82% | | 6.51% | | 5.92% | | |
| | | Service Class | | 8/24/01 | | 13.64% | | 6.24% | | 5.66% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Bloomberg Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index (f) | | 17.13% | | 7.36% | | 7.55% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Bloomberg Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index (formerly Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index) – a component of the Bloomberg 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.
5
MFS High Yield Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders during the Period,
July 1, 2016 through December 31, 2016
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, 2016 through December 31, 2016.
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
7/01/16 | | | Ending Account Value 12/31/16 | | | Expenses Paid
During Period (p)
7/01/16-12/31/16 | |
| Initial Class | | Actual | | | 0.67% | | | | $1,000.00 | | | | $1,061.97 | | | | $3.47 | |
| | Hypothetical (h) | | | 0.67% | | | | $1,000.00 | | | | $1,021.77 | | | | $3.40 | |
| Service Class | | Actual | | | 0.92% | | | | $1,000.00 | | | | $1,061.34 | | | | $4.77 | |
| | Hypothetical (h) | | | 0.92% | | | | $1,000.00 | | | | $1,020.51 | | | | $4.67 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.05% (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
6
MFS High Yield Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – 92.6% | | | | | | | | |
| Aerospace – 0.7% | | | | | | | | |
| CPI International, Inc., 8.75%, 2/15/2018 | | $ | 2,104,000 | | | $ | 2,135,526 | |
| TransDigm, Inc., 6%, 7/15/2022 | | | 390,000 | | | | 405,600 | |
| TransDigm, Inc., 6.5%, 7/15/2024 | | | 955,000 | | | | 999,169 | |
| | | | | | | | |
| | | | | | $ | 3,540,295 | |
| | | | | | | | |
| Asset-Backed & Securitized – 0.1% | | | | | | | | |
| Citigroup Commercial Mortgage Trust, FRN, 5.711%, 12/10/2049 | | $ | 2,086,863 | | | $ | 171,749 | |
| Crest Ltd., CDO, 7%, 1/28/2040 (a)(p) | | | 1,570,375 | | | | 189,481 | |
| CWCapital Cobalt Ltd., CDO, “F”, FRN, 2.184%, 4/26/2050 (a)(p)(z) | | | 1,124,098 | | | | 11 | |
| | | | | | | | |
| | | | | | $ | 361,241 | |
| | | | | | | | |
| Automotive – 1.7% | | | | | | | | |
| Allison Transmission, Inc., 5%, 10/01/2024 (n) | | $ | 2,059,000 | | | $ | 2,079,590 | |
| Gates Global LLC, 6%, 7/15/2022 (n) | | | 1,375,000 | | | | 1,344,750 | |
| IHO Verwaltungs GmbH, 4.75%, 9/15/2026 (n) | | | 1,810,000 | | | | 1,746,650 | |
| ZF North America Capital, Inc., 4.5%, 4/29/2022 (n) | | | 1,600,000 | | | | 1,650,000 | |
| ZF North America Capital, Inc., 4.75%, 4/29/2025 (n) | | | 1,045,000 | | | | 1,063,288 | |
| | | | | | | | |
| | | | | | $ | 7,884,278 | |
| | | | | | | | |
| Broadcasting – 2.7% | | | | | | | | |
| AMC Networks, Inc., 5%, 4/01/2024 | | $ | 1,075,000 | | | $ | 1,077,688 | |
| CBS Radio, Inc., 7.25%, 11/01/2024 (n) | | | 1,050,000 | | | | 1,097,250 | |
| Clear Channel Worldwide Holdings, Inc., “A”, 6.5%, 11/15/2022 | | | 975,000 | | | | 975,000 | |
| Clear Channel Worldwide Holdings, Inc., “B”, 6.5%, 11/15/2022 | | | 1,370,000 | | | | 1,400,825 | |
| iHeartMedia, Inc., 9%, 3/01/2021 | | | 939,000 | | | | 694,860 | |
| Liberty Media Corp., 8.5%, 7/15/2029 | | | 1,440,000 | | | | 1,587,600 | |
| Match Group, Inc., 6.375%, 6/01/2024 | | | 1,290,000 | | | | 1,360,950 | |
| Netflix, Inc., 5.375%, 2/01/2021 | | | 1,045,000 | | | | 1,123,375 | |
| Netflix, Inc., 5.875%, 2/15/2025 | | | 875,000 | | | | 943,906 | |
| Netflix, Inc., 4.375%, 11/15/2026 (n) | | | 775,000 | | | | 751,750 | |
| Nexstar Broadcasting, Inc., 6.875%, 11/15/2020 | | | 1,520,000 | | | | 1,573,200 | |
| | | | | | | | |
| | | | | | $ | 12,586,404 | |
| | | | | | | | |
| Building – 3.0% | | | | | | | | |
| Allegion PLC, 5.875%, 9/15/2023 | | $ | 750,000 | | | $ | 795,000 | |
| Allegion U.S. Holding Co., Inc., 5.75%, 10/01/2021 | | | 1,900,000 | | | | 1,985,500 | |
| Beacon Roofing Supply, Inc., 6.375%, 10/01/2023 | | | 1,510,000 | | | | 1,610,989 | |
| Gibraltar Industries, Inc., 6.25%, 2/01/2021 | | | 1,515,000 | | | | 1,560,450 | |
| HD Supply, Inc., 5.75%, 4/15/2024 (n) | | | 1,455,000 | | | | 1,536,044 | |
PriSo Acquisition Corp.,
9%, 5/15/2023 (n) | | | 1,890,000 | | | | 1,890,000 | |
Standard Industries, Inc.,
5.375%, 11/15/2024 (n) | | | 1,470,000 | | | | 1,510,425 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Building – continued | | | | | | | | |
| Standard Industries, Inc., 6%, 10/15/2025 (n) | | $ | 1,055,000 | | | $ | 1,110,388 | |
| Summit Materials LLC/Summit Materials Finance Co., 6.125%, 7/15/2023 | | | 2,370,000 | | | | 2,432,189 | |
| | | | | | | | |
| | | | | | $ | 14,430,985 | |
| | | | | | | | |
| Business Services – 1.6% | | | | | | | | |
| Alliance Data Systems Corp., 5.375%, 8/01/2022 (n) | | $ | 465,000 | | | $ | 448,725 | |
| Alliance Data Systems Corp., 5.875%, 11/01/2021 (n) | | | 1,540,000 | | | | 1,563,100 | |
| Equinix, Inc., 4.875%, 4/01/2020 | | | 1,275,000 | | | | 1,313,250 | |
| Equinix, Inc., 5.375%, 4/01/2023 | | | 1,145,000 | | | | 1,187,938 | |
| Equinix, Inc., 5.375%, 1/01/2022 | | | 320,000 | | | | 336,000 | |
| Equinix, Inc., 5.75%, 1/01/2025 | | | 335,000 | | | | 350,075 | |
| Iron Mountain, Inc., REIT, 6%, 8/15/2023 | | | 1,610,000 | | | | 1,710,625 | |
| Iron Mountain, Inc., REIT, 6%, 10/01/2020 (n) | | | 680,000 | | | | 717,400 | |
| | | | | | | | |
| | | | | | $ | 7,627,113 | |
| | | | | | | | |
| Cable TV – 5.4% | | | | | | | | |
| Altice Financing S.A., 6.625%, 2/15/2023 (n) | | $ | 2,790,000 | | | $ | 2,866,725 | |
| CCO Holdings LLC/CCO Holdings Capital Corp., 5.25%, 9/30/2022 | | | 250,000 | | | | 258,750 | |
| CCO Holdings LLC/CCO Holdings Capital Corp., 5.75%, 1/15/2024 | | | 1,395,000 | | | | 1,457,775 | |
| CCO Holdings LLC/CCO Holdings Capital Corp., 5.125%, 5/01/2023 (n) | | | 2,095,000 | | | | 2,157,850 | |
| CCO Holdings LLC/CCO Holdings Capital Corp., 5.375%, 5/01/2025 (n) | | | 565,000 | | | | 581,950 | |
| CCO Holdings LLC/CCO Holdings Capital Corp., 5.75%, 2/15/2026 (n) | | | 1,090,000 | | | | 1,128,150 | |
| Cequel Communications Holdings, 6.375%, 9/15/2020 (n) | | | 1,125,000 | | | | 1,158,750 | |
| CSC Holdings LLC, 5.5%, 4/15/2027 (n) | | | 1,935,000 | | | | 1,959,188 | |
| DISH DBS Corp., 5%, 3/15/2023 | | | 1,090,000 | | | | 1,084,550 | |
| DISH DBS Corp., 5.875%, 11/15/2024 | | | 985,000 | | | | 1,013,565 | |
| Intelsat Jackson Holdings S.A., 5.5%, 8/01/2023 | | | 1,300,000 | | | | 875,940 | |
| Intelsat Jackson Holdings S.A., 8%, 2/15/2024 (n) | | | 440,000 | | | | 452,100 | |
| Intelsat Jackson Holdings S.A., 7.25%, 4/01/2019 | | | 860,000 | | | | 722,400 | |
| LGE Holdco VI B.V., 7.125%, 5/15/2024 (n) | | EUR | 945,000 | | | | 1,129,047 | |
Lynx II Corp.,
6.375%, 4/15/2023 (n) | | $ | 1,185,000 | | | | 1,230,919 | |
| Sirius XM Radio, Inc., 4.625%, 5/15/2023 (n) | | | 770,000 | | | | 762,300 | |
| Sirius XM Radio, Inc., 6%, 7/15/2024 (n) | | | 1,355,000 | | | | 1,415,975 | |
| Sirius XM Radio, Inc., 5.375%, 4/15/2025 (n) | | | 950,000 | | | | 945,250 | |
| Unitymedia Hessen, 5.5%, 1/15/2023 (n) | | | 1,405,000 | | | | 1,462,956 | |
7
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Cable TV – continued | | | | | | | | |
| Unitymedia KabelBW GmbH, 6.125%, 1/15/2025 (n) | | $ | 835,000 | | | $ | 857,963 | |
| Virgin Media Finance PLC, 5.75%, 1/15/2025 (n) | | | 200,000 | | | | 200,500 | |
| Virgin Media Secured Finance PLC, 5.25%, 1/15/2026 (n) | | | 955,000 | | | | 943,063 | |
| Ziggo Bond Finance B.V., 5.875%, 1/15/2025 (n) | | | 735,000 | | | | 735,000 | |
| | | | | | | | |
| | | | | | $ | 25,400,666 | |
| | | | | | | | |
| Chemicals – 2.4% | | | | | | | | |
| Axalta Coating Systems Co., 4.875%, 8/15/2024 (n) | | $ | 1,350,000 | | | $ | 1,350,000 | |
| Chemours Co., 6.625%, 5/15/2023 | | | 1,120,000 | | | | 1,108,800 | |
| Chemours Co., 7%, 5/15/2025 | | | 525,000 | | | | 517,125 | |
| Consolidated Energy Finance S.A., 6.75%, 10/15/2019 (n) | | | 730,000 | | | | 730,000 | |
| GCP Applied Technologies Co., 9.5%, 2/01/2023 (n) | | | 1,190,000 | | | | 1,365,525 | |
| Hexion U.S. Finance Corp., 6.625%, 4/15/2020 | | | 750,000 | | | | 663,750 | |
| Hexion U.S. Finance Corp./Hexion Nova Scotia Finance, 8.875%, 2/01/2018 | | | 760,000 | | | | 756,200 | |
| Tronox Finance LLC, 6.375%, 8/15/2020 | | | 1,590,000 | | | | 1,486,650 | |
| Tronox Finance LLC, 7.5%, 3/15/2022 (n) | | | 1,380,000 | | | | 1,286,850 | |
| W.R. Grace & Co., 5.125%, 10/01/2021 (n) | | | 1,885,000 | | | | 1,965,113 | |
| | | | | | | | |
| | | | | | $ | 11,230,013 | |
| | | | | | | | |
| Computer Software – 1.2% | | | | | | | | |
| Diamond 1 Finance Corp./Diamond 2 Finance Corp., 6.02%, 6/15/2026 (n) | | $ | 1,440,000 | | | $ | 1,557,922 | |
| Diamond 1 Finance Corp./Diamond 2 Finance Corp., 5.875%, 6/15/2021 (n) | | | 620,000 | | | | 659,439 | |
| Nuance Communications, Inc., 5.625%, 12/15/2026 (n) | | | 1,565,000 | | | | 1,538,786 | |
| VeriSign, Inc., 4.625%, 5/01/2023 | | | 1,895,000 | | | | 1,923,425 | |
| | | | | | | | |
| | | | | | $ | 5,679,572 | |
| | | | | | | | |
| Computer Software – Systems – 1.6% | | | | | |
| CDW LLC/CDW Finance Corp., 6%, 8/15/2022 | | $ | 630,000 | | | $ | 666,225 | |
| CDW LLC/CDW Finance Corp., 5.5%, 12/01/2024 | | | 915,000 | | | | 935,588 | |
| JDA Software Group, Inc., 7.375%, 10/15/2024 (n) | | | 1,690,000 | | | | 1,751,263 | |
| Sabre GLBL, Inc., 5.375%, 4/15/2023 (n) | | | 2,330,000 | | | | 2,376,600 | |
| Western Digital Corp., 10.5%, 4/01/2024 (n) | | | 1,615,000 | | | | 1,909,738 | |
| | | | | | | | |
| | | | | | $ | 7,639,414 | |
| | | | | | | | |
| Conglomerates – 3.0% | | | | | | | | |
| Amsted Industries Co., 5%, 3/15/2022 (n) | | $ | 2,500,000 | | | $ | 2,500,000 | |
| Apex Tool Group, 7%, 2/01/2021 (n) | | | 1,710,000 | | | | 1,530,450 | |
| EnerSys, 5%, 4/30/2023 (n) | | | 2,875,000 | | | | 2,889,375 | |
| Enpro Industries, Inc., 5.875%, 9/15/2022 | | | 1,965,000 | | | | 2,019,038 | |
| Entegris, Inc., 6%, 4/01/2022 (n) | | | 2,032,000 | | | | 2,113,280 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Conglomerates – continued | |
| Gardner Denver, Inc., 6.875%, 8/15/2021 (n) | | $ | 1,535,000 | | | $ | 1,527,325 | |
| SPX FLOW, Inc., 5.625%, 8/15/2024 (n) | | | 1,445,000 | | | | 1,455,838 | |
| | | | | | | | |
| | | | | | $ | 14,035,306 | |
| | | | | | | | |
| Construction – 0.1% | | | | | | | | |
| Empresas ICA S.A.B. de C.V., 8.9%, 2/04/2021 (a)(d) | | $ | 930,000 | | | $ | 177,863 | |
| Empresas ICA S.A.B. de C.V., 8.875%, 5/29/2024 (a)(d)(n) | | | 807,000 | | | | 154,339 | |
| | | | | | | | |
| | | | | | $ | 332,202 | |
| | | | | | | | |
| Consumer Products – 1.0% | | | | | | | | |
| NBTY, Inc., 7.625%, 5/15/2021 (n) | | $ | 1,915,000 | | | $ | 1,982,025 | |
| Prestige Brands, Inc., 5.375%, 12/15/2021 (n) | | | 1,305,000 | | | | 1,344,150 | |
| Spectrum Brands, Inc., 5.75%, 7/15/2025 | | | 1,605,000 | | | | 1,665,188 | |
| | | | | | | | |
| | | | | | $ | 4,991,363 | |
| | | | | | | | |
| Consumer Services – 3.0% | | | | | | | | |
| ADT Corp., 4.125%, 6/15/2023 | | $ | 885,000 | | | $ | 845,175 | |
| ADT Corp., 6.25%, 10/15/2021 | | | 2,235,000 | | | | 2,424,975 | |
| Garda World Security Corp., 7.25%, 11/15/2021 (n) | | | 1,065,000 | | | | 990,450 | |
| Garda World Security Corp., 7.25%, 11/15/2021 (n) | | | 1,445,000 | | | | 1,343,850 | |
| Interval Acquisition Corp., 5.625%, 4/15/2023 | | | 3,045,000 | | | | 3,105,900 | |
| Mobile Mini, Inc., 5.875%, 7/01/2024 | | | 1,725,000 | | | | 1,785,375 | |
| Monitronics International, Inc., 9.125%, 4/01/2020 | | | 1,430,000 | | | | 1,347,775 | |
| Service Corp. International, 5.375%, 5/15/2024 | | | 1,003,000 | | | | 1,045,628 | |
| ServiceMaster Co. LLC, 5.125%, 11/15/2024 (n) | | | 1,235,000 | | | | 1,253,525 | |
| | | | | | | | |
| | | | | | $ | 14,142,653 | |
| | | | | | | | |
| Containers – 3.5% | | | | | | | | |
| Berry Plastics Group, Inc., 5.5%, 5/15/2022 | | $ | 2,200,000 | | | $ | 2,288,000 | |
| Berry Plastics Group, Inc., 6%, 10/15/2022 | | | 500,000 | | | | 528,750 | |
| Crown American LLC, 4.5%, 1/15/2023 | | | 1,657,000 | | | | 1,690,140 | |
| Crown American LLC, 4.25%, 9/30/2026 (n) | | | 870,000 | | | | 819,975 | |
| Multi-Color Corp., 6.125%, 12/01/2022 (n) | | | 1,855,000 | | | | 1,938,475 | |
| Plastipak Holdings, Inc., 6.5%, 10/01/2021 (n) | | | 2,082,000 | | | | 2,175,690 | |
| Reynolds Group, 5.75%, 10/15/2020 | | | 1,265,000 | | | | 1,304,531 | |
| Reynolds Group, 5.125%, 7/15/2023 (n) | | | 840,000 | | | | 853,650 | |
| Reynolds Group, 7%, 7/15/2024 (n) | | | 105,000 | | | | 111,563 | |
| Reynolds Group, 8.25%, 2/15/2021 | | | 717,862 | | | | 741,193 | |
| Sealed Air Corp., 4.875%, 12/01/2022 (n) | | | 1,950,000 | | | | 2,003,625 | |
| Sealed Air Corp., 5.125%, 12/01/2024 (n) | | | 365,000 | | | | 375,038 | |
| Signode Industrial Group, 6.375%, 5/01/2022 (n) | | | 1,705,000 | | | | 1,713,525 | |
| | | | | | | | |
| | | | | | $ | 16,544,155 | |
| | | | | | | | |
| Electronics – 0.8% | | | | | | | | |
| NXP B.V./NXP Funding LLC, 5.75%, 3/15/2023 (n) | | $ | 1,770,000 | | | $ | 1,867,350 | |
8
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Electronics – continued | | | | | | | | |
| Sensata Technologies B.V., 5.625%, 11/01/2024 (n) | | $ | 835,000 | | | $ | 870,488 | |
| Sensata Technologies B.V., 5%, 10/01/2025 (n) | | | 1,255,000 | | | | 1,229,900 | |
| | | | | | | | |
| | | | | | $ | 3,967,738 | |
| | | | | | | | |
| Energy – Independent – 5.6% | | | | | �� | | | |
| Alta Mesa Holdings LP/Alta Mesa Finance Services Corp., 7.875%, 12/15/2024 (z) | | $ | 1,570,000 | | | $ | 1,624,950 | |
| Bonanza Creek Energy, Inc., 6.75%, 4/15/2021 | | | 1,375,000 | | | | 1,024,375 | |
| Carrizo Oil & Gas, Inc., 6.25%, 4/15/2023 | | | 2,120,000 | | | | 2,173,000 | |
| Concho Resources, Inc., 5.5%, 4/01/2023 | | | 1,455,000 | | | | 1,507,817 | |
| Consol Energy, Inc., 5.875%, 4/15/2022 | | | 670,000 | | | | 656,600 | |
| Consol Energy, Inc., 8%, 4/01/2023 | | | 1,965,000 | | | | 2,016,581 | |
| Continental Resources, Inc., 4.5%, 4/15/2023 | | | 2,200,000 | | | | 2,156,000 | |
| Diamondback Energy, Inc., 5.375%, 5/31/2025 (n) | | | 1,410,000 | | | | 1,418,037 | |
| Gulfport Energy Corp., 6%, 10/15/2024 (n) | | | 1,445,000 | | | | 1,470,288 | |
| Gulfport Energy Corp., 6.375%, 5/15/2025 (z) | | | 510,000 | | | | 516,477 | |
| PDC Energy, Inc., 6.125%, 9/15/2024 (n) | | | 2,055,000 | | | | 2,101,238 | |
| QEP Resources, Inc., 5.25%, 5/01/2023 | | | 646,000 | | | | 647,615 | |
| Range Resources Corp., 4.875%, 5/15/2025 | | | 2,250,000 | | | | 2,179,688 | |
| Rice Energy, Inc., 7.25%, 5/01/2023 | | | 1,920,000 | | | | 2,035,200 | |
| Sanchez Energy Corp., 6.125%, 1/15/2023 | | | 2,410,000 | | | | 2,289,500 | |
| Seven Generations Energy, 8.25%, 5/15/2020 (n) | | | 990,000 | | | | 1,049,400 | |
| Whiting Petroleum Corp., 6.25%, 4/01/2023 | | | 1,905,000 | | | | 1,905,000 | |
| | | | | | | | |
| | | | | | $ | 26,771,766 | |
| | | | | | | | |
| Energy – Integrated – 0.3% | | | | | | | | |
| Cenovus Energy, Inc., 6.75%, 11/15/2039 | | $ | 1,124,000 | | | $ | 1,251,335 | |
| | | | | | | | |
| Entertainment – 1.4% | | | | | | | | |
| Cedar Fair LP, 5.25%, 3/15/2021 | | $ | 1,685,000 | | | $ | 1,739,763 | |
| Cedar Fair LP, 5.375%, 6/01/2024 | | | 515,000 | | | | 530,450 | |
| Cinemark USA, Inc., 5.125%, 12/15/2022 | | | 1,205,000 | | | | 1,241,150 | |
| Cinemark USA, Inc., 4.875%, 6/01/2023 | | | 1,035,000 | | | | 1,047,938 | |
| Six Flags Entertainment Corp., 4.875%, 7/31/2024 (z) | | | 525,000 | | | | 518,438 | |
| Six Flags Entertainment Corp., 5.25%, 1/15/2021 (n) | | | 1,500,000 | | | | 1,533,750 | |
| | | | | | | | |
| | | | | | $ | 6,611,489 | |
| | | | | | | | |
| Financial Institutions – 4.4% | | | | | | | | |
| Aircastle Ltd., 4.625%, 12/15/2018 | | $ | 835,000 | | | $ | 871,531 | |
| Aircastle Ltd., 5.125%, 3/15/2021 | | | 1,015,000 | | | | 1,080,975 | |
| Aircastle Ltd., 5.5%, 2/15/2022 | | | 1,820,000 | | | | 1,929,200 | |
| CIT Group, Inc., 6.625%, 4/01/2018 (n) | | | 1,925,000 | | | | 2,028,469 | |
| CIT Group, Inc., 5.5%, 2/15/2019 (n) | | | 1,223,000 | | | | 1,290,265 | |
| CIT Group, Inc., 5.25%, 3/15/2018 | | | 785,000 | | | | 813,456 | |
| Credit Acceptance Corp., 6.125%, 2/15/2021 | | | 236,000 | | | | 238,360 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Financial Institutions – continued | | | | | | | | |
| Credit Acceptance Corp., 7.375%, 3/15/2023 | | $ | 1,475,000 | | | $ | 1,515,563 | |
| Nationstar Mortgage LLC/Capital Corp., 7.875%, 10/01/2020 | | | 2,330,000 | | | | 2,411,550 | |
| Nationstar Mortgage LLC/Capital Corp., 6.5%, 8/01/2018 | | | 820,000 | | | | 833,325 | |
| Nationstar Mortgage LLC/Capital Corp., 6.5%, 7/01/2021 | | | 715,000 | | | | 723,938 | |
| Navient Corp., 6.125%, 3/25/2024 | | | 1,055,000 | | | | 1,024,669 | |
| Navient Corp., 5.875%, 3/25/2021 | | | 230,000 | | | | 238,625 | |
| Navient Corp., 7.25%, 9/25/2023 | | | 775,000 | | | | 796,313 | |
| Navient Corp., 8%, 3/25/2020 | | | 2,230,000 | | | | 2,473,962 | |
| Navient Corp., 7.25%, 1/25/2022 | | | 2,395,000 | | | | 2,535,706 | |
| | | | | | | | |
| | | | | | $ | 20,805,907 | |
| | | | | | | | |
| Food & Beverages – 2.2% | | | | | | | | |
| Aramark Services, Inc., 4.75%, 6/01/2026 (z) | | $ | 525,000 | | | $ | 519,750 | |
| JBS Investments GmbH, 7.25%, 4/03/2024 | | | 925,000 | | | | 966,625 | |
| JBS USA LLC/JBS USA Finance, Inc., 5.875%, 7/15/2024 (n) | | | 2,205,000 | | | | 2,276,663 | |
| Lamb Weston Holdings, Inc., 4.625%, 11/01/2024 (n) | | | 860,000 | | | | 862,150 | |
| Lamb Weston Holdings, Inc., 4.875%, 11/01/2026 (n) | | | 400,000 | | | | 395,750 | |
| Pinnacle Foods Finance LLC/Pinnacle Foods Finance Corp., 5.875%, 1/15/2024 | | | 1,555,000 | | | | 1,648,300 | |
| Sun Merger Sub, Inc., 5.875%, 8/01/2021 (n) | | | 1,675,000 | | | | 1,746,188 | |
| U.S. Foods Holding Corp., 5.875%, 6/15/2024 (n) | | | 1,875,000 | | | | 1,935,938 | |
| | | | | | | | |
| | | | | | $ | 10,351,364 | |
| | | | | | | | |
| Forest & Paper Products – 0.1% | | | | | | | | |
| Appvion, Inc., 9%, 6/01/2020 (n) | | $ | 1,305,000 | | | $ | 730,800 | |
| | | | | | | | |
| Gaming & Lodging – 3.1% | | | | | | | | |
| CCM Merger, Inc., 9.125%, 5/01/2019 (n) | | $ | 1,167,000 | | | $ | 1,213,680 | |
| GLP Capital LP/GLP Financing II, Inc., 5.375%, 11/01/2023 | | | 1,685,000 | | | | 1,802,950 | |
| GLP Capital LP/GLP Financing II, Inc., 5.375%, 4/15/2026 | | | 260,000 | | | | 271,154 | |
| Greektown Holdings LLC, 8.875%, 3/15/2019 (n) | | | 1,470,000 | | | | 1,545,338 | |
| Hilton Worldwide Finance LLC/Hilton Worldwide Finance Corp., 5.625%, 10/15/2021 | | | 1,775,000 | | | | 1,833,575 | |
| Isle of Capri Casinos, Inc., 5.875%, 3/15/2021 | | | 1,560,000 | | | | 1,614,600 | |
| Isle of Capri Casinos, Inc., 8.875%, 6/15/2020 | | | 620,000 | | | | 651,000 | |
| MGM Resorts International, 6%, 3/15/2023 | | | 1,080,000 | | | | 1,166,400 | |
| MGM Resorts International, 6.625%, 12/15/2021 | | | 1,655,000 | | | | 1,849,463 | |
| Ryman Hospitality Properties, Inc., REIT, 5%, 4/15/2021 | | | 1,940,000 | | | | 1,969,100 | |
9
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Gaming & Lodging – continued | | | | | | | | |
| Ryman Hospitality Properties, Inc., REIT, 5%, 4/15/2023 | | $ | 710,000 | | | $ | 717,100 | |
| | | | | | | | |
| | | | | | $ | 14,634,360 | |
| | | | | | | | |
| Industrial – 0.4% | | | | | | | | |
| Howard Hughes Corp., 6.875%, 10/01/2021 (n) | | $ | 1,835,000 | | | $ | 1,933,723 | |
| | | | | | | | |
| Insurance – Health – 0.5% | | | | | | | | |
| Centene Corp., 5.625%, 2/15/2021 | | $ | 925,000 | | | $ | 972,545 | |
| Centene Corp., 6.125%, 2/15/2024 | | | 1,240,000 | | | | 1,306,650 | |
| | | | | | | | |
| | | | | | $ | 2,279,195 | |
| | | | | | | | |
| Machinery & Tools – 1.6% | | | | | | | | |
| Ashtead Capital, Inc., 5.625%, 10/01/2024 (n) | | $ | 1,650,000 | | | $ | 1,728,375 | |
| CNH Industrial Capital LLC, 4.375%, 11/06/2020 | | | 2,345,000 | | | | 2,406,556 | |
| CNH Industrial N.V., 4.5%, 8/15/2023 | | | 1,015,000 | | | | 1,002,313 | |
| H&E Equipment Services Co., 7%, 9/01/2022 | | | 1,965,000 | | | | 2,068,163 | |
| Light Tower Rentals, Inc., 8.125%, 8/01/2019 (a)(d)(n) | | | 1,115,000 | | | | 501,750 | |
| | | | | | | | |
| | | | | | $ | 7,707,157 | |
| | | | | | | | |
| Major Banks – 1.4% | | | | | | | | |
| Bank of America Corp., FRN, 6.1%, 12/29/2049 | | $ | 2,720,000 | | | $ | 2,734,960 | |
| JPMorgan Chase & Co., 6% to 8/01/2023, FRN to 12/29/2049 | | | 2,195,000 | | | | 2,203,231 | |
| Royal Bank of Scotland Group PLC, 7.5% to 8/10/2020, FRN to 12/29/2049 | | | 795,000 | | | | 753,263 | |
| Royal Bank of Scotland Group PLC, 8.625% to 8/15/2021, FRN to 12/29/2049 | | | 915,000 | | | | 933,300 | |
| | | | | | | | |
| | | | | | $ | 6,624,754 | |
| | | | | | | | |
| Medical & Health Technology & Services – 6.8% | |
| AmSurg Corp., 5.625%, 7/15/2022 | | $ | 1,600,000 | | | $ | 1,649,600 | |
| CHS/Community Health Systems, Inc., 6.875%, 2/01/2022 | | | 1,980,000 | | | | 1,376,100 | |
| DaVita, Inc., 5.125%, 7/15/2024 | | | 335,000 | | | | 334,163 | |
| DaVita, Inc., 5%, 5/01/2025 | | | 1,435,000 | | | | 1,411,681 | |
| Envision Healthcare Corp., 6.25%, 12/01/2024 (n) | | | 725,000 | | | | 764,875 | |
| HCA, Inc., 5%, 3/15/2024 | | | 1,980,000 | | | | 2,036,925 | |
| HCA, Inc., 4.25%, 10/15/2019 | | | 805,000 | | | | 837,200 | |
| HCA, Inc., 5.375%, 2/01/2025 | | | 1,710,000 | | | | 1,714,275 | |
| HCA, Inc., 5.875%, 2/15/2026 | | | 880,000 | | | | 906,400 | |
| HCA, Inc., 7.5%, 2/15/2022 | | | 2,345,000 | | | | 2,661,575 | |
| HCA, Inc., 5.875%, 3/15/2022 | | | 1,900,000 | | | | 2,047,250 | |
| HCA, Inc., 4.75%, 5/01/2023 | | | 200,000 | | | | 204,750 | |
| HealthSouth Corp., 5.125%, 3/15/2023 | | | 1,760,000 | | | | 1,742,400 | |
| HealthSouth Corp., 5.75%, 11/01/2024 | | | 1,360,000 | | | | 1,377,000 | |
| LifePoint Health, Inc., 5.375%, 5/01/2024 (n) | | | 1,365,000 | | | | 1,337,018 | |
| MEDNAX, Inc., 5.25%, 12/01/2023 (n) | | | 1,555,000 | | | | 1,601,650 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Medical & Health Technology & Services – continued | |
| Quintiles IMS Holdings, Inc., 5%, 10/15/2026 (n) | | $ | 1,450,000 | | | $ | 1,453,625 | |
| Quorum Health Corp., 11.625%, 4/15/2023 (n) | | | 1,580,000 | | | | 1,323,250 | |
| Tenet Healthcare Corp., 8%, 8/01/2020 | | | 2,300,000 | | | | 2,265,500 | |
| Tenet Healthcare Corp., 8.125%, 4/01/2022 | | | 2,300,000 | | | | 2,170,050 | |
| Tenet Healthcare Corp., 6.75%, 6/15/2023 | | | 1,635,000 | | | | 1,438,800 | |
| Universal Health Services, Inc., 7.625%, 8/15/2020 | | | 1,515,000 | | | | 1,499,850 | |
| | | | | | | | |
| | | | | | $ | 32,153,937 | |
| | | | | | | | |
| Medical Equipment – 0.8% | | | | | | | | |
| Hologic, Inc., 5.25%, 7/15/2022 (n) | | $ | 1,755,000 | | | $ | 1,847,138 | |
| Teleflex, Inc., 5.25%, 6/15/2024 | | | 1,250,000 | | | | 1,282,813 | |
| Teleflex, Inc., 4.875%, 6/01/2026 | | | 855,000 | | | | 846,450 | |
| | | | | | | | |
| | | | | | $ | 3,976,401 | |
| | | | | | | | |
| Metals & Mining – 4.3% | | | | | | | | |
| Century Aluminum Co., 7.5%, 6/01/2021 (n) | | $ | 1,245,000 | | | $ | 1,171,856 | |
| Commercial Metals Co., 4.875%, 5/15/2023 | | | 1,353,000 | | | | 1,359,765 | |
First Quantum Minerals Ltd.,
7%, 2/15/2021 (n) | | | 755,000 | | | | 750,923 | |
| First Quantum Minerals Ltd., 7.25%, 5/15/2022 (n) | | | 652,000 | | | | 642,220 | |
| First Quantum Minerals Ltd., 7.25%, 10/15/2019 (n) | | | 832,000 | | | | 840,320 | |
| Freeport-McMoRan, Inc., 3.875%, 3/15/2023 | | | 1,620,000 | | | | 1,486,350 | |
| Freeport-McMoRan, Inc., 6.5%, 11/15/2020 | | | 285,000 | | | | 292,838 | |
| Freeport-McMoRan, Inc., 6.875%, 2/15/2023 | | | 1,334,000 | | | | 1,400,700 | |
| Freeport-McMoRan, Inc., 5.45%, 3/15/2043 | | | 790,000 | | | | 653,741 | |
| GrafTech International Co., 6.375%, 11/15/2020 | | | 1,575,000 | | | | 1,285,673 | |
| HudBay Minerals, Inc., 7.25%, 1/15/2023 (z) | | | 245,000 | | | | 253,575 | |
| HudBay Minerals, Inc., 7.625%, 1/15/2025 (z) | | | 490,000 | | | | 509,296 | |
| Kaiser Aluminum Corp., 5.875%, 5/15/2024 | | | 1,400,000 | | | | 1,449,000 | |
| Kinross Gold Corp., 5.125%, 9/01/2021 | | | 875,000 | | | | 888,668 | |
| Kinross Gold Corp., 5.95%, 3/15/2024 | | | 700,000 | | | | 708,750 | |
| Lundin Mining Corp., 7.5%, 11/01/2020 (n) | | | 710,000 | | | | 755,263 | |
| Lundin Mining Corp., 7.875%, 11/01/2022 (n) | | | 840,000 | | | | 913,500 | |
| Steel Dynamics, Inc., 5.25%, 4/15/2023 | | | 465,000 | | | | 487,088 | |
| Steel Dynamics, Inc., 5.125%, 10/01/2021 | | | 975,000 | | | | 1,016,867 | |
| Steel Dynamics, Inc., 5.5%, 10/01/2024 | | | 475,000 | | | | 503,500 | |
| Suncoke Energy Partners LP/Suncoke Energy Partners Finance Corp., 7.375%, 2/01/2020 | | | 1,590,000 | | | | 1,582,050 | |
| Suncoke Energy, Inc., 7.625%, 8/01/2019 | | | 301,000 | | | | 297,238 | |
| TMS International Corp., 7.625%, 10/15/2021 (n) | | | 1,185,000 | | | | 1,131,675 | |
| | | | | | | | |
| | | | | | $ | 20,380,856 | |
| | | | | | | | |
10
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Midstream – 6.0% | | | | | | | | |
| Blue Racer Midstream LLC/Blue Racer Finance Corp., 6.125%, 11/15/2022 (n) | | $ | 2,055,000 | | | $ | 2,055,000 | |
| Crestwood Midstream Partners LP, 6%, 12/15/2020 | | | 1,110,000 | | | | 1,137,750 | |
| Crestwood Midstream Partners LP, 6.125%, 3/01/2022 | | | 705,000 | | | | 722,625 | |
| Energy Transfer Equity LP, 7.5%, 10/15/2020 | | | 2,520,000 | | | | 2,809,800 | |
| EnLink Midstream Partners LP, 4.4%, 4/01/2024 | | | 1,875,000 | | | | 1,860,889 | |
| Ferrellgas LP/Ferrellgas Finance Corp., 6.75%, 1/15/2022 | | | 1,610,000 | | | | 1,593,900 | |
| Ferrellgas LP/Ferrellgas Finance Corp., 6.5%, 5/01/2021 | | | 590,000 | | | | 584,100 | |
| Kinder Morgan (Delaware), Inc., 7.75%, 1/15/2032 | | | 1,970,000 | | | | 2,411,310 | |
| MPLX LP, 5.5%, 2/15/2023 | | | 1,465,000 | | | | 1,523,957 | |
| ONEOK, Inc., 7.5%, 9/01/2023 | | | 245,000 | | | | 281,750 | |
| Sabine Pass Liquefaction LLC, 5.625%, 4/15/2023 | | | 1,880,000 | | | | 1,997,500 | |
| Sabine Pass Liquefaction LLC, 5.625%, 2/01/2021 | | | 1,935,000 | | | | 2,070,450 | |
| Sabine Pass Liquefaction LLC, 5.75%, 5/15/2024 | | | 1,055,000 | | | | 1,131,488 | |
| Sabine Pass Liquefaction LLC, 5.625%, 3/01/2025 | | | 1,291,000 | | | | 1,381,370 | |
| Sabine Pass Liquefaction LLC, 5.875%, 6/30/2026 (n) | | | 765,000 | | | | 824,288 | |
| Targa Resources Partners LP/Targa Resources Finance Corp., 5.25%, 5/01/2023 | | | 915,000 | | | | 924,150 | |
| Targa Resources Partners LP/Targa Resources Finance Corp., 4.125%, 11/15/2019 | | | 830,000 | | | | 840,375 | |
| Targa Resources Partners LP/Targa Resources Finance Corp., 5.375%, 2/01/2027 (n) | | | 2,035,000 | | | | 2,014,650 | |
| Williams Cos., Inc., 4.55%, 6/24/2024 | | | 2,245,000 | | | | 2,228,163 | |
| | | | | | | | |
| | | | | | $ | 28,393,515 | |
| | | | | | | | |
| Network & Telecom – 1.6% | | | | | | | | |
| Centurylink, Inc., 6.45%, 6/15/2021 | | $ | 885,000 | | | $ | 931,463 | |
| Centurylink, Inc., 7.65%, 3/15/2042 | | | 1,970,000 | | | | 1,723,750 | |
| Frontier Communications Corp., 6.25%, 9/15/2021 | | | 960,000 | | | | 909,600 | |
| Frontier Communications Corp., 7.125%, 1/15/2023 | | | 1,280,000 | | | | 1,158,400 | |
| Frontier Communications Corp., 9%, 8/15/2031 | | | 1,155,000 | | | | 984,638 | |
| Telecom Italia Capital, 6%, 9/30/2034 | | | 530,000 | | | | 488,925 | |
| Telecom Italia S.p.A., 5.303%, 5/30/2024 (n) | | | 1,310,000 | | | | 1,277,250 | |
| | | | | | | | |
| | | | | | $ | 7,474,026 | |
| | | | | | | | |
| Oil Services – 0.6% | | | | | | | | |
| Bristow Group, Inc., 6.25%, 10/15/2022 | | $ | 933,000 | | | $ | 793,050 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Oil Services – continued | | | | | | | | |
| Weatherford International Ltd., 8.25%, 6/15/2023 | | $ | 2,065,000 | | | $ | 2,101,138 | |
| | | | | | | | |
| | | | | | $ | 2,894,188 | |
| | | | | | | | |
| Oils – 0.6% | | | | | | | | |
| CITGO Holding, Inc., 10.75%, 2/15/2020 (n) | | $ | 1,130,000 | | | $ | 1,211,925 | |
| CITGO Petroleum Corp., 6.25%, 8/15/2022 (n) | | | 1,750,000 | | | | 1,820,000 | |
| | | | | | | | |
| | | | | | $ | 3,031,925 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 0.8% | | | | | |
| Groupe BPCE S.A., 12.5% to 9/30/2019, FRN to 8/29/2049 (n) | | $ | 1,447,000 | | | $ | 1,766,469 | |
| UBS Group AG, 6.875%, 12/29/2049 | | | 2,245,000 | | | | 2,218,527 | |
| | | | | | | | |
| | | | | | $ | 3,984,996 | |
| | | | | | | | |
| Pharmaceuticals – 1.6% | | | | | | | | |
| Endo Finance LLC/Endo Finco, Inc., 7.25%, 1/15/2022 (n) | | $ | 1,895,000 | | | $ | 1,743,400 | |
| Mallinckrodt International Finance S.A., 5.75%, 8/01/2022 (n) | | | 1,055,000 | | | | 1,015,438 | |
| Mallinckrodt International Finance S.A., 5.5%, 4/15/2025 (n) | | | 1,490,000 | | | | 1,333,550 | |
| Valeant Pharmaceuticals International, Inc., 7.5%, 7/15/2021 (n) | | | 720,000 | | | | 610,200 | |
| Valeant Pharmaceuticals International, Inc., 7%, 10/01/2020 (n) | | | 2,270,000 | | | | 1,956,456 | |
| Valeant Pharmaceuticals International, Inc., 7.25%, 7/15/2022 (n) | | | 1,135,000 | | | | 927,863 | |
| | | | | | | | |
| | | | | | $ | 7,586,907 | |
| | | | | | | | |
| Precious Metals & Minerals – 0.9% | | | | | | | | |
| Eldorado Gold Corp., 6.125%, 12/15/2020 (n) | | $ | 1,865,000 | | | $ | 1,892,975 | |
| Teck Resources Ltd., 8%, 6/01/2021 (n) | | | 790,000 | | | | 869,000 | |
| Teck Resources Ltd., 4.5%, 1/15/2021 | | | 875,000 | | | | 879,375 | |
| Teck Resources Ltd., 3.75%, 2/01/2023 | | | 525,000 | | | | 496,125 | |
| | | | | | | | |
| | | | | | $ | 4,137,475 | |
| | | | | | | | |
| Printing & Publishing – 1.4% | | | | | | | | |
| Nielsen Finance LLC, 5%, 4/15/2022 (n) | | $ | 2,590,000 | | | $ | 2,635,325 | |
| Outdoor Americas Capital LLC/Outfront Media Capital Corp., 5.625%, 2/15/2024 | | | 1,320,000 | | | | 1,376,100 | |
| TEGNA, Inc., 5.125%, 7/15/2020 | | | 515,000 | | | | 534,313 | |
| TEGNA, Inc., 4.875%, 9/15/2021 (n) | | | 620,000 | | | | 630,850 | |
| TEGNA, Inc., 6.375%, 10/15/2023 | | | 1,190,000 | | | | 1,259,199 | |
| | | | | | | | |
| | | | | | $ | 6,435,787 | |
| | | | | | | | |
| Real Estate – Healthcare – 0.7% | | | | | | | | |
| MPT Operating Partnership LP, REIT, 5.25%, 8/01/2026 | | $ | 1,705,000 | | | $ | 1,670,900 | |
| MPT Operating Partnership LP, REIT, 6.375%, 2/15/2022 | | | 1,510,000 | | | | 1,564,738 | |
| | | | | | | | |
| | | | | | $ | 3,235,638 | |
| | | | | | | | |
11
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Real Estate – Other – 1.1% | | | | | | | | |
| DuPont Fabros Technology LP, REIT, 5.875%, 9/15/2021 | | $ | 2,305,000 | | | $ | 2,411,606 | |
| Felcor Lodging LP, REIT, 5.625%, 3/01/2023 | | | 1,645,000 | | | | 1,677,900 | |
| Starwood Property Trust, Inc., REIT, 5%, 12/15/2021 (n) | | | 945,000 | | | | 957,663 | |
| | | | | | | | |
| | | | | | $ | 5,047,169 | |
| | | | | | | | |
| Restaurants – 0.2% | | | | | | | | |
| KFC Holding Co./Pizza Hut Holdings LLC/Taco Bell of America LLC, 5.25%, 6/01/2026 (n) | | $ | 1,125,000 | | | $ | 1,141,875 | |
| | | | | | | | |
| Retailers – 1.8% | | | | | | | | |
| Dollar Tree, Inc., 5.75%, 3/01/2023 | | $ | 2,190,000 | | | $ | 2,318,816 | |
| DriveTime Automotive Group, Inc./DT Acceptance Corp., 8%, 6/01/2021 (n) | | | 1,315,000 | | | | 1,273,906 | |
| Hanesbrands, Inc., 4.875%, 5/15/2026 (n) | | | 1,510,000 | | | | 1,476,025 | |
| Rite Aid Corp., 6.75%, 6/15/2021 | | | 605,000 | | | | 635,250 | |
| Rite Aid Corp., 6.125%, 4/01/2023 (n) | | | 845,000 | | | | 908,375 | |
| Rite Aid Corp., 9.25%, 3/15/2020 | | | 755,000 | | | | 783,313 | |
| Sally Beauty Holdings, Inc., 5.625%, 12/01/2025 | | | 1,050,000 | | | | 1,092,000 | |
| | | | | | | | |
| | | | | | $ | 8,487,685 | |
| | | | | | | | |
| Specialty Chemicals – 1.2% | | | | | | | | |
| A Schulman, Inc., 6.875%, 6/01/2023 (z) | | $ | 1,055,000 | | | $ | 1,102,475 | |
| Chemtura Corp., 5.75%, 7/15/2021 | | | 2,150,000 | | | | 2,236,000 | |
| Univar USA, Inc., 6.75%, 7/15/2023 (n) | | | 2,120,000 | | | | 2,188,900 | |
| | | | | | | | |
| | | | | | $ | 5,527,375 | |
| | | | | | | | |
| Specialty Stores – 1.1% | | | | | | | | |
| Argos Merger Sub, Inc., 7.125%, 3/15/2023 (n) | | $ | 1,885,000 | | | $ | 1,922,700 | |
| Group 1 Automotive, Inc., 5%, 6/01/2022 | | | 1,960,000 | | | | 1,935,500 | |
| Michaels Stores, Inc., 5.875%, 12/15/2020 (n) | | | 1,465,000 | | | | 1,508,950 | |
| | | | | | | | |
| | | | | | $ | 5,367,150 | |
| | | | | | | | |
| Supermarkets – 0.5% | | | | | | | | |
| Albertsons Cos. LLC/Safeway, Inc., 6.625%, 6/15/2024 (n) | | $ | 2,105,000 | | | $ | 2,194,463 | |
| | | | | | | | |
| Telecommunications – Wireless – 4.3% | |
| Altice Luxembourg S.A., 7.75%, 5/15/2022 (n) | | $ | 1,230,000 | | | $ | 1,313,025 | |
| Altice Luxembourg S.A., 7.625%, 2/15/2025 (n) | | | 1,420,000 | | | | 1,491,000 | |
| Digicel Group Ltd., 7.125%, 4/01/2022 (n) | | | 802,000 | | | | 622,047 | |
| Digicel Group Ltd., 6.75%, 3/01/2023 (n) | | | 2,206,000 | | | | 1,988,996 | |
| Digicel Group Ltd., 8.25%, 9/30/2020 (n) | | | 704,000 | | | | 604,011 | |
| SFR Group S.A., 7.375%, 5/01/2026 (n) | | | 1,575,000 | | | | 1,608,469 | |
| Sprint Capital Corp., 6.875%, 11/15/2028 | | | 1,615,000 | | | | 1,594,813 | |
| Sprint Corp., 7.875%, 9/15/2023 | | | 710,000 | | | | 757,925 | |
| Sprint Corp., 7.125%, 6/15/2024 | | | 2,860,000 | | | | 2,945,800 | |
| Sprint Nextel Corp., 6%, 11/15/2022 | | | 635,000 | | | | 639,763 | |
| Sprint Nextel Corp., 9%, 11/15/2018 (n) | | | 705,000 | | | | 777,263 | |
| T-Mobile USA, Inc., 6.125%, 1/15/2022 | | | 300,000 | | | | 316,500 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | | | | |
| Telecommunications – Wireless – continued | |
| T-Mobile USA, Inc., 6.5%, 1/15/2024 | | $ | 695,000 | | | $ | 745,388 | |
| T-Mobile USA, Inc., 6.633%, 4/28/2021 | | | 1,185,000 | | | | 1,236,844 | |
| T-Mobile USA, Inc., 6.25%, 4/01/2021 | | | 1,970,000 | | | | 2,048,800 | |
| T-Mobile USA, Inc., 6.5%, 1/15/2026 | | | 1,380,000 | | | | 1,492,125 | |
| | | | | | | | |
| | | | | | $ | 20,182,769 | |
| | | | | | | | |
| Telephone Services – 0.5% | | | | | | | | |
| Level 3 Financing, Inc., 5.375%, 5/01/2025 | | $ | 1,840,000 | | | $ | 1,876,800 | |
| Level 3 Financing, Inc., 5.375%, 1/15/2024 | | | 715,000 | | | | 722,150 | |
| | | | | | | | |
| | | | | | $ | 2,598,950 | |
| | | | | | | | |
| Transportation – Services – 0.7% | |
| Navios Maritime Acquisition Corp., 8.125%, 11/15/2021 (n) | | $ | 1,404,000 | | | $ | 1,193,400 | |
| Navios Maritime Holding, Inc., 7.375%, 1/15/2022 (n) | | | 1,525,000 | | | | 915,000 | |
| Navios South American Logistics, Inc./Navios Logistics Finance (U.S.), Inc., 7.25%, 5/01/2022 | | | 395,000 | | | | 373,275 | |
| Syncreon Group BV/Syncre, 8.625%, 11/01/2021 (n) | | | 1,005,000 | | | | 733,650 | |
| Ultrapetrol (Bahamas) Ltd., 8.875%, 6/15/2021 (a)(d) | | | 585,000 | | | | 111,150 | |
| | | | | | | | |
| | | | | | $ | 3,326,475 | |
| | | | | | | | |
| Utilities – Electric Power – 2.3% | | | | | | | | |
| Calpine Corp., 5.5%, 2/01/2024 | | $ | 1,185,000 | | | $ | 1,143,525 | |
| Calpine Corp., 5.75%, 1/15/2025 | | | 1,325,000 | | | | 1,278,625 | |
| Covanta Holding Corp., 5.875%, 3/01/2024 | | | 1,305,000 | | | | 1,256,063 | |
| Covanta Holding Corp., 7.25%, 12/01/2020 | | | 1,570,000 | | | | 1,603,755 | |
| Covanta Holding Corp., 6.375%, 10/01/2022 | | | 400,000 | | | | 405,876 | |
| Dynegy, Inc., 7.375%, 11/01/2022 | | | 2,085,000 | | | | 1,991,175 | |
| Dynegy, Inc., 8%, 1/15/2025 (n) | | | 525,000 | | | | 489,563 | |
| NRG Energy, Inc., 6.625%, 3/15/2023 | | | 1,360,000 | | | | 1,363,400 | |
| NRG Energy, Inc., 7.25%, 5/15/2026 (n) | | | 1,415,000 | | | | 1,407,925 | |
| | | | | | | | |
| | | | | | $ | 10,939,907 | |
| | | | | | | | |
Total Bonds
(Identified Cost, $444,061,551) | | | | | | $ | 438,594,717 | |
| | | | | | | | |
|
| FLOATING RATE LOANS (g)(r) – 3.9% | |
| Aerospace – 0.3% | | | | | | | | |
| TransDigm, Inc., Term Loan C, 3.75%, 2/28/2020 | | $ | 1,427,489 | | | $ | 1,437,996 | |
| | | | | | | | |
| Broadcasting – 0.1% | | | | | | | | |
| Nexstar Broadcasting, Inc., Term Loan B, 9/23/2023 (o) | | $ | 656,967 | | | $ | 661,895 | |
| | | | | | | | |
| Building – 0.5% | | | | | | | | |
| ABC Supply Co., Inc., Term Loan B, 3.5%, 10/31/2023 | | $ | 1,512,616 | | | $ | 1,525,851 | |
| HD Supply, Inc., Term Loan B, 3.63%, 8/13/2021 | | | 807,532 | | | | 810,964 | |
| | | | | | | | |
| | | | | | $ | 2,336,815 | |
| | | | | | | | |
12
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| FLOATING RATE LOANS (g)(r) – continued | |
| Chemicals – 0.1% | | | | | | | | |
| GCP Applied Technologies, Inc., Term Loan B, 4%, 2/03/2022 | | $ | 639,976 | | | $ | 644,775 | |
| | | | | | | | |
| Computer Software – Systems – 0.3% | |
| CDW LLC, Term Loan B, 3%, 8/17/2023 | | $ | 807,542 | | | $ | 811,705 | |
| Sabre, Inc., Term Loan B, 4%, 2/19/2019 | | | 615,700 | | | | 620,703 | |
| | | | | | | | |
| | | | | | $ | 1,432,408 | |
| | | | | | | | |
| Conglomerates – 0.2% | | | | | | | | |
| Entegris, Inc., Term Loan B, 3.5%, 4/30/2021 | | $ | 1,049,197 | | | $ | 1,058,815 | |
| | | | | | | | |
| Consumer Products – 0.1% | | | | | | | | |
| Spectrum Brands Inc. Term Loan, 3.25%, 6/23/2022 | | $ | 580,937 | | | $ | 586,954 | |
| | | | | | | | |
| Entertainment – 0.3% | | | | | | | | |
| Cedar Fair LP, Term Loan B, 3.25%, 3/06/2020 | | $ | 595,510 | | | $ | 598,860 | |
| Six Flags Theme Parks, Inc., Term Loan B, 6/30/2022 (o) | | | 615,700 | | | | 620,126 | |
| | | | | | | | |
| | | | | | $ | 1,218,986 | |
| | | | | | | | |
| Food & Beverages – 0.1% | | | | | | | | |
| Pinnacle Foods Finance LLC, Term Loan I, 2.75%, 1/13/2023 (o) | | $ | 612,606 | | | $ | 620,008 | |
| | | | | | | | |
| Gaming & Lodging – 0.2% | | | | | | | | |
| Hilton Worldwide Finance LLC, Term Loan B1, 3.5%, 10/25/2020 | | $ | 827,215 | | | $ | 833,419 | |
| | | | | | | | |
| Medical & Health Technology & Services – 0.3% | |
DaVita HealthCare Partners, Inc.,
Term Loan B, 3.5%, 6/24/2021 | | $ | 1,440,831 | | | $ | 1,452,238 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| FLOATING RATE LOANS (g)(r) – continued | |
| Printing & Publishing – 0.2% | | | | | | | | |
| CBS Outdoor Americas Capital LLC, Term Loan B, 3%, 1/31/2021 | | $ | 899,545 | | | $ | 900,295 | |
| | | | | | | | |
| Retailers – 0.1% | | | | | | | | |
| Rite Aid Corp., Second Lien Term Loan, 4.87%, 6/21/2021 | | $ | 360,499 | | | $ | 361,250 | |
| | | | | | | | |
| Telephone Services – 0.2% | | | | | | | | |
| Level 3 Financing, Inc., Term Loan B, 4%, 1/15/2020 | | $ | 744,000 | | | $ | 753,300 | |
| | | | | | | | |
| Transportation – Services – 0.5% | |
| Commercial Barge Line Co., First Lien Term Loan, 9.75%, 11/12/2020 | | $ | 2,377,640 | | | $ | 2,234,982 | |
| | | | | | | | |
| Utilities – Electric Power – 0.4% | | | | | | | | |
| Calpine Construction Finance Co. LP, Term Loan B1, 3%, 5/03/2020 | | $ | 1,777,659 | | | $ | 1,773,771 | |
| | | | | | | | |
Total Floating Rate Loans
(Identified Cost, $18,301,665) | | | | | | $ | 18,307,907 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 2.1% | | | | | |
| MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $9,942,926) | | | 9,942,926 | | | $ | 9,942,926 | |
| | | | | | | | |
Total Investments
(Identified Cost, $472,306,142) | | | | | | $ | 466,845,550 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 1.4% | | | | | | | 6,461,745 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 473,307,295 | |
| | | | | | | | |
| (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 $179,629,128, representing 37.95% 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, no interest income was received in additional securities and/or cash. |
| (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. |
13
MFS High Yield Portfolio
Portfolio of Investments – continued
| (z) | | Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The fund holds the following restricted securities: |
| | | | | | | | | | |
| Restricted Securities | | Acquisition
Date | | Cost | | | Value | |
| A Schulman, Inc., 6.875%, 6/01/2023 | | 12/02/16-12/22/16 | | | $1,105,494 | | | | $1,102,475 | |
| Alta Mesa Holdings LP/Alta Mesa Finance Services Corp., 7.875%, 12/15/2024 | | 12/02/16-12/5/16 | | | 1,582,964 | | | | 1,624,950 | |
| Aramark Services, Inc., 4.75%, 6/01/2026 | | 12/20/16-12/21/16 | | | 515,960 | | | | 519,750 | |
| CWCapital Cobalt Ltd., CDO, “F”, FRN, 2.184%, 4/26/2050 | | 4/12/06 | | | 1,080,058 | | | | 11 | |
| Gulfport Energy Corp., 6.375%, 5/15/2025 | | 12/15/16 | | | 510,000 | | | | 516,477 | |
| HudBay Minerals, Inc., 7.25%, 1/15/2023 | | 12/01/16 | | | 245,000 | | | | 253,575 | |
| HudBay Minerals, Inc., 7.625%, 1/15/2025 | | 12/01/16 | | | 490,000 | | | | 509,296 | |
| Six Flags Entertainment Corp., 4.875%, 7/31/2024 | | 12/08/16-12/22/16 | | | 519,113 | | | | 518,438 | |
| Total Restricted Securities | | | | $5,044,972 | |
| % of Net assets | | | | 1.1% | |
The following abbreviations are used in this report and are defined:
| CDO | | Collateralized Debt Obligation |
| FRN | | Floating Rate Note. Interest rate resets periodically and the current rate 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 12/31/16
Forward Foreign Currency Exchange Contracts at 12/31/16
| | | | | | | | | | | | | | | | | | | | |
| Type | | Currency | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | | Contracts
at Value | | | Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives | | | | | | | | | | | | | | |
| SELL | | EUR | | Citibank N.A. | | 1,106,021 | | 3/10/17 | | | $1,190,484 | | | $ | 1,167,955 | | | $ | 22,529 | |
| | | | | | | | | | | | | | | | | | | | |
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 12/31/16 | | | | | | | | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $462,363,216) | | | $456,902,624 | | | | | |
Underlying affiliated funds, at value (identified cost, $9,942,926) | | | 9,942,926 | | | | | |
Total investments, at value (identified cost, $472,306,142) | | | $466,845,550 | | | | | |
Cash | | | 1,492,755 | | | | | |
Receivables for | | | | | | | | |
Forward foreign currency exchange contracts | | | 22,529 | | | | | |
Fund shares sold | | | 88,724 | | | | | |
Interest | | | 7,127,546 | | | | | |
Receivable from investment adviser | | | 53,720 | | | | | |
Other assets | | | 407 | | | | | |
Total assets | | | | | | | $475,631,231 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | $1,591,491 | | | | | |
Fund shares reacquired | | | 588,227 | | | | | |
Payable to affiliates | | | | | | | | |
Shareholder servicing costs | | | 132 | | | | | |
Distribution and/or service fees | | | 1,418 | | | | | |
Payable for independent Trustees’ compensation | | | 54 | | | | | |
Accrued expenses and other liabilities | | | 142,614 | | | | | |
Total liabilities | | | | | | | $2,323,936 | |
Net assets | | | | | | | $473,307,295 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $495,251,048 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | (5,438,098 | ) | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (45,259,693 | ) | | | | |
Undistributed net investment income | | | 28,754,038 | | | | | |
Net assets | | | | | | | $473,307,295 | |
Shares of beneficial interest outstanding | | | | | | | 81,957,459 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $404,118,411 | | | | 69,860,573 | | | | $5.78 | |
Service Class | | | 69,188,884 | | | | 12,096,886 | | | | 5.72 | |
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 12/31/16 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Interest | | | $30,517,765 | | | | | |
Dividends | | | 80,836 | | | | | |
Dividends from underlying affiliated funds | | | 41,483 | | | | | |
Other | | | 9,842 | | | | | |
Total investment income | | | | | | | $30,649,926 | |
Expenses | | | | | | | | |
Management fee | | | $3,405,379 | | | | | |
Distribution and/or service fees | | | 168,335 | | | | | |
Shareholder servicing costs | | | 21,999 | | | | | |
Administrative services fee | | | 85,449 | | | | | |
Independent Trustees’ compensation | | | 11,265 | | | | | |
Custodian fee | | | 41,966 | | | | | |
Reimbursement of custodian expenses | | | (120,155 | ) | | | | |
Shareholder communications | | | 61,031 | | | | | |
Audit and tax fees | | | 75,760 | | | | | |
Legal fees | | | 100,249 | | | | | |
Miscellaneous | | | 34,934 | | | | | |
Total expenses | | | | | | | $3,886,212 | |
Reduction of expenses by investment adviser | | | (329,887 | ) | | | | |
Net expenses | | | | | | | $3,556,325 | |
Net investment income | | | | | | | $27,093,601 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments: | | | | | | | | |
Non-affiliated issuers | | | $(19,202,749 | ) | | | | |
Underlying affiliated funds | | | 354 | | | | | |
Futures contracts | | | 88,464 | | | | | |
Foreign currency | | | 76,065 | | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $(19,037,866 | ) |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $56,114,195 | | | | | |
Futures contracts | | | (28,597 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | (23,208 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $56,062,390 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $37,024,524 | |
Change in net assets from operations | | | | | | | $64,118,125 | |
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 | | | 2016 | | | | 2015 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $27,093,601 | | | | $30,550,985 | |
Net realized gain (loss) on investments and foreign currency | | | (19,037,866 | ) | | | (8,153,847 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | | 56,062,390 | | | | (43,299,527 | ) |
Change in net assets from operations | | | $64,118,125 | | | | $(20,902,389 | ) |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(32,514,884 | ) | | | $(38,420,241 | ) |
Change in net assets from fund share transactions | | | $(49,191,127 | ) | | | $(48,143,205 | ) |
Total change in net assets | | | $(17,587,886 | ) | | | $(107,465,835 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 490,895,181 | | | | 598,361,016 | |
At end of period (including undistributed net investment income of $28,754,038 and
$32,372,394, respectively) | | | $473,307,295 | | | | $490,895,181 | |
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 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $5.43 | | | | $6.11 | | | | $6.28 | | | | $6.05 | | | | $5.64 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.32 | (c) | | | $0.33 | | | | $0.35 | | | | $0.36 | | | | $0.40 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.42 | | | | (0.57 | ) | | | (0.17 | ) | | | 0.02 | | | | 0.42 | |
Total from investment operations | | | $0.74 | | | | $(0.24 | ) | | | $0.18 | | | | $0.38 | | | | $0.82 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.39 | ) | | | $(0.44 | ) | | | $(0.35 | ) | | | $(0.15 | ) | | | $(0.41 | ) |
Net asset value, end of period (x) | | | $5.78 | | | | $5.43 | | | | $6.11 | | | | $6.28 | | | | $6.05 | |
Total return (%) (k)(r)(s)(x) | | | 13.82 | (c) | | | (4.22 | ) | | | 2.81 | | | | 6.42 | | | | 14.91 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.76 | (c) | | | 0.77 | | | | 0.77 | | | | 0.76 | | | | 0.81 | |
Expenses after expense reductions (f) | | | 0.70 | (c) | | | 0.72 | | | | 0.74 | | | | 0.75 | | | | 0.79 | |
Net investment income | | | 5.60 | (c) | | | 5.43 | | | | 5.44 | | | | 5.79 | | | | 6.65 | |
Portfolio turnover | | | 41 | | | | 33 | | | | 43 | | | | 52 | | | | 48 | |
Net assets at end of period (000 omitted) | | | $404,118 | | | | $419,474 | | | | $514,089 | | | | $600,994 | | | | $368,899 | |
See Notes to Financial Statements
18
MFS High Yield Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $5.37 | | | | $6.04 | | | | $6.21 | | | | $5.99 | | | | $5.59 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.30 | (c) | | | $0.31 | | | | $0.33 | | | | $0.34 | | | | $0.38 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.43 | | | | (0.56 | ) | | | (0.16 | ) | | | 0.02 | | | | 0.41 | |
Total from investment operations | | | $0.73 | | | | $(0.25 | ) | | | $0.17 | | | | $0.36 | | | | $0.79 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.38 | ) | | | $(0.42 | ) | | | $(0.34 | ) | | | $(0.14 | ) | | | $(0.39 | ) |
Net asset value, end of period (x) | | | $5.72 | | | | $5.37 | | | | $6.04 | | | | $6.21 | | | | $5.99 | |
Total return (%) (k)(r)(s)(x) | | | 13.64 | (c) | | | (4.42 | ) | | | 2.53 | | | | 6.10 | | | | 14.54 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.02 | (c) | | | 1.02 | | | | 1.02 | | | | 1.01 | | | | 1.06 | |
Expenses after expense reductions (f) | | | 0.95 | (c) | | | 0.97 | | | | 0.99 | | | | 1.00 | | | | 1.04 | |
Net investment income | | | 5.36 | (c) | | | 5.18 | | | | 5.19 | | | | 5.56 | | | | 6.46 | |
Portfolio turnover | | | 41 | | | | 33 | | | | 43 | | | | 52 | | | | 48 | |
Net assets at end of period (000 omitted) | | | $69,189 | | | | $71,421 | | | | $84,272 | | | | $102,616 | | | | $110,426 | |
| (c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
| (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 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 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 October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
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 on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange as provided by a third-party pricing service. 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 on their primary exchange as provided by a third-party pricing service. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation on their primary exchange as provided by a third-party pricing service. 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 on their primary exchange as provided by a third-party pricing service. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation on their primary exchange as provided by a third-party pricing service. 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
20
MFS High Yield Portfolio
Notes to Financial Statements – continued
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 forward foreign currency exchange contracts. The following is a summary of the levels used as of December 31, 2016 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| U.S. Corporate Bonds | | | $— | | | | $379,739,420 | | | | $— | | | | $379,739,420 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 171,749 | | | | — | | | | 171,749 | |
| Asset-Backed Securities (including CDOs) | | | — | | | | 189,493 | | | | — | | | | 189,493 | |
| Foreign Bonds | | | — | | | | 58,494,055 | | | | — | | | | 58,494,055 | |
| Floating Rate Loans | | | — | | | | 18,307,907 | | | | — | | | | 18,307,907 | |
| Mutual Funds | | | 9,942,926 | | | | — | | | | — | | | | 9,942,926 | |
| Total Investments | | | $9,942,926 | | | | $456,902,624 | | | | $— | | | | $466,845,550 | |
| | | | |
| Other Financial Instruments | | | | | | | | | | | | |
| Forward Foreign Currency Exchange Contracts – Assets | | | $— | | | | $22,529 | | | | $— | | | | $22,529 | |
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 purchased options, future 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.
21
MFS High Yield Portfolio
Notes to Financial Statements – continued
The following table presents, by major type of derivative contract, the fair value, on a gross basis, of the asset and liability components of derivatives held by the fund at December 31, 2016 as reported in the Statement of Assets and Liabilities:
| | | | | | |
| | | | | Fair Value | |
| Risk | | Derivative Contracts | | Asset Derivatives | |
| Foreign Exchange | | Forward Foreign Currency Exchange | | | $22,529 | |
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, 2016 as reported in the Statement of Operations:
| | | | | | | | | | | | |
| Risk | | Futures Contracts | | | Foreign Currency | | | Investments
(Purchased Options) | |
| Interest Rate | | | $88,464 | | | | $— | | | | $— | |
| Foreign Exchange | | | — | | | | 76,883 | | | | — | |
| Equity | | | — | | | | — | | | | (35,203 | ) |
| Total | | | $88,464 | | | | $76,883 | | | | $(35,203 | ) |
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, 2016 as reported in the Statement of Operations:
| | | | | | | | |
| Risk | | Future Contracts | | | Translation of
Assets and
Liabilities in
Foreign Currencies | |
| Interest Rate | | | $(28,597 | ) | | | $— | |
| Foreign Exchange | | | — | | | | (23,126 | ) |
| Total | | | $(28,597 | ) | | | $(23,126 | ) |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain, but not all, uncleared 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. 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 agreement 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.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the clearing broker and the clearing house for cleared derivatives (e.g., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for uncleared derivatives (e.g., forward foreign currency exchange contracts, uncleared swap agreements, and uncleared options). For derivatives traded under an ISDA Master Agreement, which contains a collateral support annex, 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 fund may be required to make payments of interest on uncovered collateral or margin obligations with the broker. Any such payments are included in “Miscellaneous” expense in the Statement of Operations.
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.
22
MFS High Yield Portfolio
Notes to Financial Statements – continued
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 uncleared 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, where applicable, 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.
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, a multicurrency cash settlement system for the centralized settlement of foreign transactions. 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, where applicable, 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.
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. 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. 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.
23
MFS High Yield Portfolio
Notes to Financial Statements – continued
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.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian 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 defaulted bonds, expiration of capital loss carryforwards, and amortization and accretion of debt securities.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/16 | | | 12/31/15 | |
| Ordinary income (including any short-term capital gains) | | | $32,514,884 | | | | $38,420,241 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/16 | | | | |
| Cost of investments | | | $475,142,440 | |
| Gross appreciation | | | 8,899,810 | |
| Gross depreciation | | | (17,196,700 | ) |
| Net unrealized appreciation (depreciation) | | | $(8,296,890 | ) |
| Undistributed ordinary income | | | 29,243,392 | |
| Capital loss carryforwards | | | (42,423,395 | ) |
| Other temporary differences | | | (466,860 | ) |
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, 2016, the fund had capital loss carryforwards available to offset future realized gains as follows:
| | | | |
| Pre-enactment losses which expire as follows: | | | | |
| 12/31/17 | | | $(11,194,472 | ) |
| | | | |
| Post-enactment losses which are characterized as follows: | | | | |
| Short-Term | | | $(1,082,212 | ) |
| Long-Term | | | (30,146,711 | ) |
| Total | | | $(31,228,923 | ) |
24
MFS High Yield Portfolio
Notes to Financial Statements – continued
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/16 | | | Year ended
12/31/15 | |
| Initial Class | | | $28,222,296 | | | | $33,239,093 | |
| Service Class | | | 4,292,588 | | | | 5,181,148 | |
| Total | | | $32,514,884 | | | | $38,420,241 | |
| (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, 2016, this management fee reduction amounted to $34,534, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 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 0.72% 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, 2018. For the year ended December 31, 2016, this reduction amounted to $295,353, 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, 2016, the fee was $18,622, which equated to 0.0038% 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, 2016, these costs amounted to $3,377.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund 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, 2016 was equivalent to an annual effective rate of 0.0176% 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.
25
MFS High Yield Portfolio
Notes to Financial Statements – continued
Other – 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. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $959 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the 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. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in sale transactions pursuant to this policy, which amounted to $1,983,625. The sales transactions resulted in net realized gains (losses) of $106,781.
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, aggregated $192,017,127 and $245,789,112, 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 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 7,689,531 | | | | $43,152,094 | | | | 7,272,617 | | | | $43,207,018 | |
Service Class | | | 3,290,862 | | | | 17,996,925 | | | | 6,839,974 | | | | 39,829,157 | |
| | | 10,980,393 | | | | $61,149,019 | | | | 14,112,591 | | | | $83,036,175 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 4,977,477 | | | | $28,222,296 | | | | 5,903,924 | | | | $33,239,093 | |
Service Class | | | 765,167 | | | | 4,292,588 | | | | 928,521 | | | | 5,181,148 | |
| | | 5,742,644 | | | | $32,514,884 | | | | 6,832,445 | | | | $38,420,241 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (20,093,516 | ) | | | $(113,826,568 | ) | | | (20,061,056 | ) | | | $(119,929,306 | ) |
Service Class | | | (5,265,339 | ) | | | (29,028,462 | ) | | | (8,414,478 | ) | | | (49,670,315 | ) |
| | | (25,358,855 | ) | | | $(142,855,030 | ) | | | (28,475,534 | ) | | | $(169,599,621 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (7,426,508 | ) | | | $(42,452,178 | ) | | | (6,884,515 | ) | | | $(43,483,195 | ) |
Service Class | | | (1,209,310 | ) | | | (6,738,949 | ) | | | (645,983 | ) | | | (4,660,010 | ) |
| | | (8,635,818 | ) | | | $(49,191,127 | ) | | | (7,530,498 | ) | | | $(48,143,205 | ) |
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%, 6%, 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 $1.25 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 Overnight Federal Reserve funds rate or daily 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 Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $3,004 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
26
MFS High Yield 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 | | | 9,842,222 | | | | 157,343,836 | | | | (157,243,132 | ) | | | 9,942,926 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $354 | | | | $— | | | | $41,483 | | | | $9,942,926 | |
In May 2015, the Motors Liquidation Company Avoidance Action Trust (hereafter, “AAT”) served upon the fund a complaint in an adversary proceeding in the U.S. Bankruptcy Court for the Southern District of New York, captioned Motors Liquidation Company Avoidance Action Trust v. JPMorgan Chase Bank, N.A., et al. (No. 09-00504 (REG)). The complaint, which was originally filed in 2009 but not served on the fund until 2015, names as defendants over 500 entities (including the fund) that held an interest in a $1.5 billion General Motors (GM) term loan in 2009, when GM filed for bankruptcy. The AAT alleges that the fund and the other term loan lenders were improperly treated as secured lenders with respect to the term loan shortly before and immediately after GM’s bankruptcy, receiving full principal and interest payments under the loan. The AAT alleges that the fund and other term loan lenders should have been treated as unsecured (or partially unsecured) creditors because the main lien securing the collateral was allegedly not perfected at the time of GM’s bankruptcy due to an erroneous filing in October 2008 that terminated the financing statement perfecting the lien. The AAT seeks to claw back payments made to the fund and the other term loan lenders after, and during the 90 days before, GM’s June 2009 bankruptcy petition. During that time period, the fund received term loan payments of approximately $3,720,000. The fund cannot predict the outcome of this proceeding. Among other things, it is unclear whether the AAT’s claims will succeed; what the fund would be entitled to as an unsecured (or partially unsecured) creditor, given the existence of other collateral not impacted by the erroneous October 2008 filing; whether third parties responsible for the erroneous October 2008 filing would bear some or all of any liability; and the degree to which the fund may be entitled to indemnification from a third party for any amount required to be disgorged. The fund has and will continue to incur legal expenses associated with the defense of this action and in related claims against third parties.
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, 2016, 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, 2016, by correspondence with the custodian, brokers, and agent banks when replies were not received from brokers or agent banks, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS High Yield Portfolio as of December 31, 2016, 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 15, 2017
28
MFS High Yield Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, 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 53) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 55) | | Trustee | | January 2014 | | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 74) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 65) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council (until 2015); 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 |
| | | | |
Maureen R. Goldfarb (age 61) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Michael Hegarty (age 72) | | Trustee | | December 2004 | | Private investor | | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) |
| | | | |
John P. Kavanaugh (age 62) | | Trustee and Vice Chair of Trustees | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 60) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 59) | | Trustee | | March 2005 | | Private investor | | The Travelers Companies, Director; Dycom Industries, Inc., Director |
| | | |
| OFFICERS | | | | | | |
Christopher R. Bohane (k) (age 43) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 48) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 57) | | 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 |
| | | | |
Ethan D. Corey (k) (age 53) | | 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 48) | | President | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 43) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | 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) |
Susan A. Pereira (k) (age 46) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 46) | | 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 64) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 72) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 46) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Martin J. Wolin (k) (age 49) | | Chief Compliance Officer | | July 2015 | | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | | N/A |
| | | | |
James O. Yost (k) (age 56) | | 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. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
| (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. Buller and Kavanaugh and Ms. 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, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a 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 | | |
30
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, 2016 (“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 Senior Officer, a 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 Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of 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 Broadridge 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 Broadridge 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, 2015, 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, 2015 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.
31
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 Broadridge. 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 data provided by Broadridge (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 Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. 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, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate 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, 2016.
32
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 mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios”, then “VIT II” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
33
rev. 3/16
| | | | |
| 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. |
34
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., and MFS Heritage Trust Company. |
| | |
| 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, or 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. |
35
ANNUAL REPORT
December 31, 2016
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 • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS International Growth Portfolio
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
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. | | | 3.9% | |
| Roche Holding AG | | | 3.6% | |
| Accenture PLC, “A” | | | 2.6% | |
| Danone S.A. | | | 2.6% | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 2.6% | |
| LVMH Moet Hennessy Louis Vuitton SE | | | 2.5% | |
| Canadian National Railway Co. | | | 2.5% | |
| AIA Group Ltd. | | | 2.5% | |
| SAP AG | | | 2.5% | |
| Novartis AG | | | 2.4% | |
| |
| Equity sectors | | | | |
| Consumer Staples | | | 18.4% | |
| Health Care | | | 14.6% | |
| Technology | | | 13.0% | |
| Financial Services | | | 12.6% | |
| Industrial Goods & Services | | | 8.6% | |
| Special Products & Services | | | 8.2% | |
| Basic Materials | | | 6.7% | |
| Retailing | | | 6.1% | |
| Leisure | | | 4.6% | |
| Transportation | | | 2.8% | |
| Energy | | | 1.5% | |
| Autos & Housing | | | 0.9% | |
| Utilities & Communications | | | 0.9% | |
| | | | |
| Issuer country weightings (x) | | | | |
| France | | | 17.5% | |
| United Kingdom | | | 13.9% | |
| Switzerland | | | 13.4% | |
| Germany | | | 10.4% | |
| Japan | | | 9.3% | |
| United States | | | 5.8% | |
| Canada | | | 4.1% | |
| China | | | 3.1% | |
| Taiwan | | | 3.0% | |
| Other Countries | | | 19.5% | |
| |
| Currency exposure weightings (y) | | | | |
| Euro | | | 31.4% | |
| British Pound Sterling | | | 15.0% | |
| Swiss Franc | | | 13.4% | |
| United States Dollar | | | 9.7% | |
| Japanese Yen | | | 9.3% | |
| Taiwan Dollar | | | 3.0% | |
| Chinese Renminbi | | | 2.8% | |
| Indian Rupee | | | 2.7% | |
| Hong Kong Dollar | | | 2.5% | |
| Other Currencies | | | 10.2% | |
| (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 & Cash Equivalents. |
| (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 & Cash Equivalents. |
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
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, 2016, Initial Class shares of the MFS International Growth Portfolio (“fund”) provided a total return of 2.49%, while Service Class shares of the fund provided a total return of 2.15%. These compare with a return of 0.50% over the same period for the fund’s benchmark, the MSCI All Country World (ex-US) Growth Index.
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Contributors to Performance
Stock selection and, to a lesser extent, an overweight position in the industrial goods & services sector contributed to performance relative to the MSCI All Country World (ex-U.S.) Growth Index. Within this sector, an overweight position in engineering company Weir Group (United Kingdom), and the fund’s positions in precision instruments manufacturer Mettler-Toledo International (b) and electrical distribution equipment manufacturer Schneider Electric SA (b) (France), supported relative results. Shares of Weir Group rose after the company reported profits that were ahead of management’s expectations on the back of responsive cost cutting and better demand in the company’s Minerals division.
Security selection in the retailing sector also benefited relative returns. The fund’s overweight positions in luxury goods company LVMH Moet Hennessy Louis Vuitton SE (France) and luxury goods and athletic shoes manufacturer Kering (France) aided relative performance. Shares of LVMH outpaced the benchmark as the company reported strong earnings results throughout the period, driven by better-than-anticipated organic growth and higher margins in the company’s key Fashion & Leather segment.
Stock selection in the special products & services sector further contributed to relative performance. Here, the fund’s position in management consulting firm Accenture (b) bolstered relative results.
Other top relative contributors during the period included overweight positions in railroad company Canadian National Railway (Canada), semiconductor manufacturer Taiwan Semiconductor (Taiwan) and financial services firm Credicorp (Peru). Not holding a position in specialty pharmaceutical company Valeant Pharmaceuticals International (Canada) further benefited relative performance.
Detractors from Performance
Security selection in the technology sector weighed on relative performance. The fund’s position in telecommunications equipment provider Ericsson (b)(h) (Sweden), and not holding shares of electronics manufacturer Samsung Electronics (South Korea) and online and mobile games advertising firm Tencent Holdings (China), held back relative results. Shares of Ericsson traded lower during the reporting period on the back of weaker-than-expected sales and gross margin results.
3
MFS International Growth Portfolio
Management Review – continued
Elsewhere, overweight positions in hotel and restaurant operator Whitbread (United Kingdom), diagnostics and pharmaceutical company Roche Holding (Switzerland), investment management and banking firm UBS (Switzerland), pharmaceutical firm Novartis (Switzerland) and gaming company Paddy Power Betfair (Ireland) held back relative performance. Shares of Whitbread traded lower after the UK Referendum vote to leave the European Union appeared to have negatively impacted market sentiment in the hotel and leisure sectors. Additionally, an underweight position in strong-performing commercial banking and financial services firm Sberbank (h) (Russia), and not holding a position in shoes, clothing and accessories company Adidas (Germany), hindered relative results.
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 a detractor from relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our portfolios to have different currency exposure than the benchmark.
Respectfully,
| | | | |
| David Antonelli | | Matthew Barrett | | Kevin Dwan |
| Portfolio Manager | | 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 12/31/16
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 12/31/16
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class Inception Date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 6/03/96 | | 2.49% | | 5.94% | | 2.86% | | |
| | | Service Class | | 8/24/01 | | 2.15% | | 5.67% | | 2.60% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | MSCI All Country World (ex-US) Growth Index (f) | | 0.50% | | 5.71% | | 1.86% | | |
| (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, 2016 through December 31, 2016
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, 2016 through December 31, 2016.
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
7/01/16 | | | Ending
Account Value
12/31/16 | | | Expenses Paid
During Period (p)
7/01/16-12/31/16 | |
| Initial Class | | Actual | | | 0.78% | | | | $1,000.00 | | | | $1,005.71 | | | | $3.93 | |
| | Hypothetical (h) | | | 0.78% | | | | $1,000.00 | | | | $1,021.22 | | | | $3.96 | |
| Service Class | | Actual | | | 1.03% | | | | $1,000.00 | | | | $1,003.83 | | | | $5.19 | |
| | Hypothetical (h) | | | 1.03% | | | | $1,000.00 | | | | $1,019.96 | | | | $5.23 | |
| (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 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian during the six month period. Had this one-time Reimbursement of Expenses by Custodian not occurred during the 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 1.02%, $5.14 and $5.18 for Initial Class and 1.27%, $6.40 and $6.44 for Service Class, respectively. See Note 2 in the Notes to Financial Statements for additional information.
6
MFS International Growth Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 98.9% | | | | | |
| Aerospace – 0.8% | | | | | |
| Rolls-Royce Holdings PLC | | | 154,303 | | | $ | 1,268,965 | |
| | | | | | | | |
| Alcoholic Beverages – 5.1% | | | | | |
| AmBev S.A., ADR | | | 160,759 | | | $ | 789,327 | |
| Carlsberg A.S., “B” | | | 15,077 | | | | 1,301,158 | |
| Diageo PLC | | | 84,222 | | | | 2,178,915 | |
| Pernod Ricard S.A. | | | 32,148 | | | | 3,483,890 | |
| | | | | | | | |
| | | | | | $ | 7,753,290 | |
| | | | | | | | |
| Apparel Manufacturers – 4.6% | | | | | |
| Burberry Group PLC | | | 66,410 | | | $ | 1,225,200 | |
| Kering S.A. | | | 8,956 | | | | 2,007,799 | |
| LVMH Moet Hennessy Louis Vuitton SE | | | 19,898 | | | | 3,794,098 | |
| | | | | | | | |
| | | | | | $ | 7,027,097 | |
| | | | | | | | |
| Broadcasting – 2.0% | | | | | |
| Publicis Groupe S.A. | | | 17,123 | | | $ | 1,181,508 | |
| WPP PLC | | | 85,525 | | | | 1,914,082 | |
| | | | | | | | |
| | | | | | $ | 3,095,590 | |
| | | | | | | | |
| Business Services – 8.2% | | | | | |
| Accenture PLC, “A” | | | 33,697 | | | $ | 3,946,930 | |
| Amadeus IT Holding S.A. | | | 49,281 | | | | 2,239,472 | |
| Brenntag AG | | | 27,503 | | | | 1,524,051 | |
| Compass Group PLC | | | 115,822 | | | | 2,134,868 | |
| Experian Group Ltd. | | | 57,004 | | | | 1,103,380 | |
| Intertek Group PLC | | | 34,366 | | | | 1,466,212 | |
| | | | | | | | |
| | | | | | $ | 12,414,913 | |
| | | | | | | | |
| Computer Software – 4.2% | | | | | |
| Dassault Systems S.A. | | | 20,873 | | | $ | 1,590,551 | |
| OBIC Co. Ltd. | | | 22,600 | | | | 985,748 | |
| SAP AG | | | 42,690 | | | | 3,730,899 | |
| | | | | | | | |
| | | | | | $ | 6,307,198 | |
| | | | | | | | |
| Computer Software – Systems – 1.7% | | | | | |
| NICE Systems Ltd., ADR | | | 37,273 | | | $ | 2,562,891 | |
| | | | | | | | |
| Construction – 0.9% | | | | | |
| Toto Ltd. | | | 34,400 | | | $ | 1,357,586 | |
| | | | | | | | |
| Consumer Products – 5.1% | | | | | |
| L’Oréal | | | 17,567 | | | $ | 3,206,497 | |
| Reckitt Benckiser Group PLC | | | 33,802 | | | | 2,857,428 | |
| Shiseido Co. Ltd. | | | 29,000 | | | | 732,607 | |
| Uni-Charm Corp. | | | 41,600 | | | | 908,539 | |
| | | | | | | | |
| | | | | | $ | 7,705,071 | |
| | | | | | | | |
| Containers – 0.8% | | | | | |
| Brambles Ltd. | | | 135,978 | | | $ | 1,212,943 | |
| | | | | | | | |
| Electrical Equipment – 5.7% | | | | | |
| Keyence Corp. | | | 1,500 | | | $ | 1,027,768 | |
| Legrand S.A. | | | 15,876 | | | | 899,095 | |
| Mettler-Toledo International, Inc. (a) | | | 6,718 | | | | 2,811,886 | |
| Prysmian S.p.A. | | | 52,228 | | | | 1,341,459 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Electrical Equipment – continued | | | | | |
| Schneider Electric S.A. | | | 37,617 | | | $ | 2,613,917 | |
| | | | | | | | |
| | | | | | $ | 8,694,125 | |
| | | | | | | | |
| Electronics – 3.2% | | | | | |
| MediaTek, Inc. | | | 94,000 | | | $ | 627,004 | |
| Mellanox Technologies Ltd. (a) | | | 8,873 | | | | 362,906 | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 135,672 | | | | 3,900,570 | |
| | | | | | | | |
| | | | | | $ | 4,890,480 | |
| | | | | | | | |
| Energy – Independent – 0.7% | | | | | |
| Oil Search Ltd. | | | 190,970 | | | $ | 988,123 | |
| | | | | | | | |
| Energy – Integrated – 0.9% | | | | | |
| Suncor Energy, Inc. | | | 40,685 | | | $ | 1,330,258 | |
| | | | | | | | |
| Food & Beverages – 6.5% | | | | | |
| Danone S.A. | | | 62,257 | | | $ | 3,940,579 | |
| Nestle S.A. | | | 82,363 | | | | 5,908,492 | |
| | | | | | | | |
| | | | | | $ | 9,849,071 | |
| | | | | | | | |
| Food & Drug Stores – 1.5% | | | | | |
| Dairy Farm International Holdings Ltd. | | | 59,400 | | | $ | 426,217 | |
| Sundrug Co. Ltd. | | | 25,900 | | | | 1,792,779 | |
| | | | | | | | |
| | | | | | $ | 2,218,996 | |
| | | | | | | | |
| Gaming & Lodging – 1.1% | | | | | |
| Paddy Power Betfair PLC | | | 15,489 | | | $ | 1,675,028 | |
| | | | | | | | |
| Insurance – 2.5% | | | | | |
| AIA Group Ltd. | | | 672,200 | | | $ | 3,761,809 | |
| | | | | | | | |
| Internet – 3.2% | | | | | |
| Alibaba Group Holding Ltd., ADR (a) | | | 31,557 | | | $ | 2,771,020 | |
| Baidu, Inc., ADR (a) | | | 8,652 | | | | 1,422,475 | |
| NAVER Corp. (a) | | | 1,112 | | | | 712,205 | |
| | | | | | | | |
| | | | | | $ | 4,905,700 | |
| | | | | | | | |
| Machinery & Tools – 2.1% | | | | | |
| Atlas Copco AB, “A” | | | 12,618 | | | $ | 383,556 | |
| GEA Group AG | | | 29,903 | | | | 1,198,613 | |
| Ritchie Bros. Auctioneers, Inc. | | | 16,469 | | | | 558,718 | |
| Weir Group PLC | | | 43,443 | | | | 1,006,527 | |
| | | | | | | | |
| | | | | | $ | 3,147,414 | |
| | | | | | | | |
| Major Banks – 1.4% | | | | | |
| HSBC Holdings PLC | | | 261,701 | | | $ | 2,118,636 | |
| | | | | | | | |
| Medical & Health Technology & Services – 1.4% | | | | | |
| Fresenius Medical Care AG & Co. KGaA | | | 25,924 | | | $ | 2,197,915 | |
| | | | | | | | |
| Medical Equipment – 4.5% | | | | | |
| Essilor International S.A. | | | 14,496 | | | $ | 1,638,077 | |
| QIAGEN N.V. (a) | | | 35,057 | | | | 984,566 | |
| Smith & Nephew PLC | | | 77,673 | | | | 1,157,222 | |
| Sonova Holding AG | | | 7,550 | | | | 913,480 | |
| Terumo Corp. | | | 57,500 | | | | 2,118,411 | |
| | | | | | | | |
| | | | | | $ | 6,811,756 | |
| | | | | | | | |
7
MFS International Growth Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Network & Telecom – 0.7% | | | | | |
| LM Ericsson Telephone Co., “B” | | | 192,670 | | | $ | 1,123,187 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 8.7% | |
| Aeon Credit Service Co. Ltd. | | | 56,800 | | | $ | 1,004,696 | |
| Credicorp Ltd. | | | 7,608 | | | | 1,200,999 | |
| DBS Group Holdings Ltd. | | | 136,400 | | | | 1,627,353 | |
| Element Fleet Management Corp. | | | 66,220 | | | | 614,532 | |
| Grupo Financiero Banorte S.A. de C.V. | | | 181,458 | | | | 895,488 | |
| Grupo Financiero Inbursa S.A. de C.V. | | | 188,618 | | | | 285,434 | |
| HDFC Bank Ltd. | | | 164,234 | | | | 3,202,769 | |
| Julius Baer Group Ltd. | | | 32,596 | | | | 1,447,822 | |
| UBS AG | | | 192,188 | | | | 3,010,310 | |
| | | | | | | | |
| | | | | | $ | 13,289,403 | |
| | | | | | | | |
| Pharmaceuticals – 8.6% | | | | | | | | |
| Bayer AG | | | 27,001 | | | $ | 2,817,534 | |
| Novartis AG | | | 50,966 | | | | 3,708,711 | |
| Novo Nordisk A.S., “B” | | | 32,204 | | | | 1,156,752 | |
| Roche Holding AG | | | 23,893 | | | | 5,444,097 | |
| | | | | | | | |
| | | | | | $ | 13,127,094 | |
| | | | | | | | |
| Railroad & Shipping – 2.5% | | | | | | | | |
| Canadian National Railway Co. | | | 55,863 | | | $ | 3,765,166 | |
| | | | | | | | |
| Restaurants – 1.4% | | | | | | | | |
| Whitbread PLC | | | 34,879 | | | $ | 1,621,328 | |
| Yum China Holdings, Inc. (a) | | | 19,719 | | | | 515,060 | |
| | | | | | | | |
| | | | | | $ | 2,136,388 | |
| | | | | | | | |
| Specialty Chemicals – 5.9% | | | | | | | | |
| Akzo Nobel N.V. | | | 28,533 | | | $ | 1,781,927 | |
| Croda International PLC | | | 27,213 | | | | 1,067,551 | |
| L’Air Liquide S.A. | | | 19,934 | | | | 2,212,933 | |
| Linde AG | | | 10,919 | | | | 1,790,434 | |
| Nippon Paint Holdings Co. Ltd. | | | 24,000 | | | | 650,450 | |
| Symrise AG | | | 24,874 | | | | 1,514,199 | |
| | | | | | | | |
| | | | | | $ | 9,017,494 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Telecommunications – Wireless – 0.9% | | | | | |
| SoftBank Corp. | | | 20,500 | | | $ | 1,353,356 | |
| | | | | | | | |
| Tobacco – 1.7% | | | | | | | | |
| ITC Ltd. | | | 263,987 | | | $ | 937,774 | |
| Japan Tobacco, Inc. | | | 51,500 | | | | 1,693,827 | |
| | | | | | | | |
| | | | | | $ | 2,631,601 | |
| | | | | | | | |
| Trucking – 0.4% | | | | | | | | |
| Yamato Holdings Co. Ltd. | | | 26,600 | | | $ | 539,229 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $115,658,297) | | | | | | $ | 150,277,773 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 1.0% | | | | | |
| MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $1,508,294) | | | 1,508,315 | | | $ | 1,508,315 | |
| | | | | | | | |
Total Investments
(Identified Cost, $117,166,591) | | | | | | $ | 151,786,088 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.1% | | | | 158,519 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | $ | 151,944,607 | |
| | | | | | | | |
| (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 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 12/31/16 | | | | | | | | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $115,658,297) | | | $150,277,773 | | | | | |
Underlying affiliated funds, at value (identified cost, $1,508,294) | | | 1,508,315 | | | | | |
Total investments, at value (identified cost, $117,166,591) | | | $151,786,088 | | | | | |
Foreign currency, at value (identified cost, $57,037) | | | 57,689 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 44,092 | | | | | |
Fund shares sold | | | 20,836 | | | | | |
Interest and dividends | | | 397,957 | | | | | |
Other assets | | | 126 | | | | | |
Total assets | | | | | | | $152,306,788 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | $135,999 | | | | | |
Fund shares reacquired | | | 74,898 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 11,337 | | | | | |
Shareholder servicing costs | | | 40 | | | | | |
Distribution and/or service fees | | | 517 | | | | | |
Payable for independent Trustees’ compensation | | | 54 | | | | | |
Deferred country tax expense payable | | | 55,795 | | | | | |
Accrued expenses and other liabilities | | | 83,541 | | | | | |
Total liabilities | | | | | | | $362,181 | |
Net assets | | | | | | | $151,944,607 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $113,494,384 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies
(net of $55,795 deferred country tax) | | | 34,538,524 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | 1,891,336 | | | | | |
Undistributed net investment income | | | 2,020,363 | | | | | |
Net assets | | | | | | | $151,944,607 | |
Shares of beneficial interest outstanding | | | | | | | 12,542,801 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $126,667,855 | | | | 10,442,342 | | | | $12.13 | |
Service Class | | | 25,276,752 | | | | 2,100,459 | | | | 12.03 | |
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 12/31/16 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $3,834,926 | | | | | |
Interest | | | 21,104 | | | | | |
Dividends from underlying affiliated funds | | | 4,172 | | | | | |
Other | | | 17,226 | | | | | |
Foreign taxes withheld | | | (327,810 | ) | | | | |
Total investment income | | | | | | | $3,549,618 | |
Expenses | | | | | | | | |
Management fee | | | $1,430,385 | | | | | |
Distribution and/or service fees | | | 65,113 | | | | | |
Shareholder servicing costs | | | 7,190 | | | | | |
Administrative services fee | | | 34,471 | | | | | |
Independent Trustees’ compensation | | | 5,424 | | | | | |
Custodian fee | | | 73,543 | | | | | |
Reimbursement of custodian expenses | | | (193,440 | ) | | | | |
Shareholder communications | | | 9,948 | | | | | |
Audit and tax fees | | | 65,007 | | | | | |
Legal fees | | | 1,623 | | | | | |
Miscellaneous | | | 18,000 | | | | | |
Total expenses | | | | | | | $1,517,264 | |
Reduction of expenses by investment adviser | | | (11,283 | ) | | | | |
Net expenses | | | | | | | $1,505,981 | |
Net investment income | | | | | | | $2,043,637 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments: | | | | | | | | |
Non-affiliated issuers | | | $3,774,895 | | | | | |
Underlying affiliated funds | | | 24 | | | | | |
Foreign currency | | | (18,459 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $3,756,460 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments (net of $55,795 increase in deferred country tax) | | | $(1,448,432 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | (3,559 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $(1,451,991 | ) |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $2,304,469 | |
Change in net assets from operations | | | | | | | $4,348,106 | |
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 | | | 2016 | | | | 2015 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $2,043,637 | | | | $1,780,159 | |
Net realized gain (loss) on investments and foreign currency | | | 3,756,460 | | | | 8,311,345 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | (1,451,991 | ) | | | (8,218,852 | ) |
Change in net assets from operations | | | $4,348,106 | | | | $1,872,652 | |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(1,741,896 | ) | | | $(2,816,463 | ) |
From net realized gain on investments | | | (7,952,532 | ) | | | (6,958,032 | ) |
Total distributions declared to shareholders | | | $(9,694,428 | ) | | | $(9,774,495 | ) |
Change in net assets from fund share transactions | | | $(7,335,231 | ) | | | $(22,561,179 | ) |
Total change in net assets | | | $(12,681,553 | ) | | | $(30,463,022 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 164,626,160 | | | | 195,089,182 | |
At end of period (including undistributed net investment income of $2,020,363 and
$1,738,404, respectively) | | | $151,944,607 | | | | $164,626,160 | |
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 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| | | | | | | | | | | | | | | | | | | | |
Net asset value, beginning of period | | | $12.57 | | | | $13.29 | | | | $14.77 | | | | $13.13 | | | | $11.08 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.17 | (c) | | | $0.13 | | | | $0.21 | | | | $0.14 | | | | $0.15 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.19 | | | | (0.11 | )(g) | | | (0.90 | ) | | | 1.70 | | | | 2.02 | |
Total from investment operations | | | $0.36 | | | | $0.02 | | | | $(0.69 | ) | | | $1.84 | | | | $2.17 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.15 | ) | | | $(0.22 | ) | | | $(0.13 | ) | | | $(0.19 | ) | | | $(0.12 | ) |
From net realized gain on investments | | | (0.65 | ) | | | (0.52 | ) | | | (0.66 | ) | | | (0.01 | ) | | | — | |
Total distributions declared to shareholders | | | $(0.80 | ) | | | $(0.74 | ) | | | $(0.79 | ) | | | $(0.20 | ) | | | $(0.12 | ) |
Net asset value, end of period (x) | | | $12.13 | | | | $12.57 | | | | $13.29 | | | | $14.77 | | | | $13.13 | |
Total return (%) (k)(r)(s)(x) | | | 2.49 | (c) | | | 0.32 | | | | (4.98 | ) | | | 14.09 | | | | 19.71 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.91 | (c) | | | 1.03 | | | | 1.02 | | | | 1.03 | | | | 1.04 | |
Expenses after expense reductions (f) | | | 0.91 | (c) | | | 1.03 | | | | 1.01 | | | | 1.03 | | | | 1.04 | |
Net investment income | | | 1.33 | (c) | | | 0.99 | | | | 1.44 | | | | 0.98 | | | | 1.23 | |
Portfolio turnover | | | 15 | | | | 22 | | | | 22 | | | | 26 | | | | 49 | |
Net assets at end of period (000 omitted) | | | $126,668 | | | | $138,482 | | | | $164,724 | | | | $186,566 | | | | $175,946 | |
See Notes to Financial Statements
12
MFS International Growth Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $12.48 | | | | $13.19 | | | �� | $14.66 | | | | $13.04 | | | | $11.00 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.13 | (c) | | | $0.10 | | | | $0.17 | | | | $0.10 | | | | $0.12 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.18 | | | | (0.11 | )(g) | | | (0.88 | ) | | | 1.68 | | | | 2.01 | |
Total from investment operations | | | $0.31 | | | | $(0.01 | ) | | | $(0.71 | ) | | | $1.78 | | | | $2.13 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.11 | ) | | | $(0.18 | ) | | | $(0.10 | ) | | | $(0.15 | ) | | | $(0.09 | ) |
From net realized gain on investments | | | (0.65 | ) | | | (0.52 | ) | | | (0.66 | ) | | | (0.01 | ) | | | — | |
Total distributions declared to shareholders | | | $(0.76 | ) | | | $(0.70 | ) | | | $(0.76 | ) | | | $(0.16 | ) | | | $(0.09 | ) |
Net asset value, end of period (x) | | | $12.03 | | | | $12.48 | | | | $13.19 | | | | $14.66 | | | | $13.04 | |
Total return (%) (k)(r)(s)(x) | | | 2.15 | (c) | | | 0.10 | | | | (5.19 | ) | | | 13.76 | | | | 19.45 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.16 | (c) | | | 1.28 | | | | 1.27 | | | | 1.28 | | | | 1.29 | |
Expenses after expense reductions (f) | | | 1.16 | (c) | | | 1.28 | | | | 1.26 | | | | 1.28 | | | | 1.29 | |
Net investment income | | | 1.08 | (c) | | | 0.72 | | | | 1.19 | | | | 0.72 | | | | 0.98 | |
Portfolio turnover | | | 15 | | | | 22 | | | | 22 | | | | 26 | | | | 49 | |
Net assets at end of period (000 omitted) | | | $25,277 | | | | $26,144 | | | | $30,365 | | | | $33,065 | | | | $28,781 | |
| (c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
| (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. |
| (x) | The net asset values 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 October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
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 on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange 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. 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
14
MFS International Growth Portfolio
Notes to Financial Statements – continued
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, 2016 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
France | | | $11,100,523 | | | | $15,468,421 | | | | $— | | | | $26,568,944 | |
United Kingdom | | | 5,257,918 | | | | 15,862,396 | | | | — | | | | 21,120,314 | |
Switzerland | | | 14,075,335 | | | | 6,357,577 | | | | — | | | | 20,432,912 | |
Germany | | | 5,316,299 | | | | 10,441,912 | | | | — | | | | 15,758,211 | |
Japan | | | 3,486,606 | | | | 10,678,390 | | | | — | | | | 14,164,996 | |
United States | | | 7,121,722 | | | | — | | | | — | | | | 7,121,722 | |
Canada | | | 6,268,674 | | | | — | | | | — | | | | 6,268,674 | |
China | | | 4,708,555 | | | | — | | | | — | | | | 4,708,555 | |
Taiwan | | | 3,900,570 | | | | 627,004 | | | | — | | | | 4,527,574 | |
Other Countries | | | 16,482,148 | | | | 13,123,723 | | | | — | | | | 29,605,871 | |
| Mutual Funds | | | 1,508,315 | | | | — | | | | — | | | | 1,508,315 | |
| Total Investments | | | $79,226,665 | | | | $72,559,423 | | | | $— | | | | $151,786,088 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $8,048,212 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $44,914,831 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. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. 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
15
MFS International Growth Portfolio
Notes to Financial Statements – continued
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, 2016, 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.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian 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:
| | | | | | | | |
| | | 12/31/16 | | | 12/31/15 | |
| Ordinary income (including any short-term capital gains) | | | $2,239,503 | | | | $3,792,943 | |
| Long-term capital gains | | | 7,454,925 | | | | 5,981,552 | |
| Total distributions | | | $9,694,428 | | | | $9,774,495 | |
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 12/31/16 | | | | |
| Cost of investments | | | $118,932,085 | |
| Gross appreciation | | | 39,161,334 | |
| Gross depreciation | | | (6,307,331 | ) |
| Net unrealized appreciation (depreciation) | | | $32,854,003 | |
| Undistributed ordinary income | | | 2,623,323 | |
| Undistributed long-term capital gain | | | 3,060,178 | |
| Other temporary differences | | | (87,281 | ) |
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
12/31/16 | | | Year ended
12/31/15 | | | Year ended
12/31/16 | | | Year ended
12/31/15 | |
| Initial Class | | | $1,510,832 | | | | $2,442,309 | | | | $6,620,188 | | | | $5,869,477 | |
| Service Class | | | 231,064 | | | | 374,154 | | | | 1,332,344 | | | | 1,088,555 | |
| Total | | | $1,741,896 | | | | $2,816,463 | | | | $7,952,532 | | | | $6,958,032 | |
| (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, 2016, this management fee reduction amounted to $11,283, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.89% 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, 2016, the fee was $5,732, 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, 2016, these costs amounted to $1,458.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund 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, 2016 was equivalent to an annual effective rate of 0.0217% of the fund’s average daily net assets.
17
MFS International Growth 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 – 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. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $325 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the 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. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $703,485 and $532,639, respectively. The sales transactions resulted in net realized gains (losses) of $38,484.
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, aggregated $24,154,624 and $46,550,569, 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 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 268,714 | | | | $3,352,327 | | | | 409,918 | | | | $5,405,490 | |
Service Class | | | 280,668 | | | | 3,412,366 | | | | 267,923 | | | | 3,514,834 | |
| | | 549,382 | | | | $6,764,693 | | | | 677,841 | | | | $8,920,324 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 632,272 | | | | $8,131,020 | | | | 677,960 | | | | $8,311,786 | |
Service Class | | | 122,428 | | | | 1,563,408 | | | | 120,190 | | | | 1,462,709 | |
| | | 754,700 | | | | $9,694,428 | | | | 798,150 | | | | $9,774,495 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (1,473,003 | ) | | | $(18,852,761 | ) | | | (2,470,200 | ) | | | $(33,334,768 | ) |
Service Class | | | (398,059 | ) | | | (4,941,591 | ) | | | (595,518 | ) | | | (7,921,230 | ) |
| | | (1,871,062 | ) | | | $(23,794,352 | ) | | | (3,065,718 | ) | | | $(41,255,998 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (572,017 | ) | | | $(7,369,414 | ) | | | (1,382,322 | ) | | | $(19,617,492 | ) |
Service Class | | | 5,037 | | | | 34,183 | | | | (207,405 | ) | | | (2,943,687 | ) |
| | | (566,980 | ) | | | $(7,335,231 | ) | | | (1,589,727 | ) | | | $(22,561,179 | ) |
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 34%, 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 $1.25 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 Overnight Federal Reserve funds rate or daily one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused
18
MFS International Growth Portfolio
Notes to Financial Statements – continued
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 Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $990 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 | | | 894,493 | | | | 19,818,337 | | | | (19,204,515 | ) | | | 1,508,315 | |
| | | | |
| Underlying Affiliated Fund | | Realized Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $24 | | | | $— | | | | $4,172 | | | | $1,508,315 | |
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, 2016, 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, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS International Growth Portfolio as of December 31, 2016, 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 15, 2017
20
MFS International Growth Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, 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 53) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 55) | | Trustee | | January 2014 | | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 74) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 65) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council (until 2015); 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 |
| | | | |
Maureen R. Goldfarb (age 61) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Michael Hegarty (age 72) | | Trustee | | December 2004 | | Private investor | | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) |
| | | | |
John P. Kavanaugh (age 62) | | Trustee and Vice Chair of Trustees | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 60) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 59) | | Trustee | | March 2005 | | Private investor | | The Travelers Companies, Director; Dycom Industries, Inc., Director |
| | | |
| OFFICERS | | | | | | |
Christopher R. Bohane (k) (age 43) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 48) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 57) | | 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 |
| | | | |
Ethan D. Corey (k) (age 53) | | 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 48) | | President | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 43) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | 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) |
Susan A. Pereira (k) (age 46) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 46) | | 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 64) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 72) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 46) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Martin J. Wolin (k) (age 49) | | Chief Compliance Officer | | July 2015 | | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | | N/A |
| | | | |
James O. Yost (k) (age 56) | | 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. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
| (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. Buller and Kavanaugh and Ms. 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, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a 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 Matthew Barrett Kevin Dwan | | |
22
MFS International Growth Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the 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, 2016 (“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 Senior Officer, a 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 Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of 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 Broadridge 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 Broadridge 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, 2015, 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 3rd quintile for the one-year period and the 4th quintile for the five-year period ended December 31, 2015 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 and the Fund’s retail counterpart, MFS International 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, 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 and the Fund’s
23
MFS International Growth Portfolio
Board Review of Investment Advisory Agreement – continued
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 Broadridge. The Trustees considered that, according to the data provided by Broadridge (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 Broadridge expense group median and the Fund’s total expense ratio was approximately at the Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. 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, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate 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, 2016.
24
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 mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios”, then “VIT II” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $8,201,000 as capital gain dividends paid during the fiscal year.
Income derived from foreign sources was $3,250,803. The fund intends to pass through foreign tax credits of $258,245 for the fiscal year.
25
rev. 3/16
| | | | |
| 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., and MFS Heritage Trust Company. |
| | |
| 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, or 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, 2016
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 • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS International Value Portfolio
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
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
| | | | |
| Top ten holdings | | | | |
| Nestle S.A. | | | 4.5% | |
| Reckitt Benckiser Group PLC | | | 3.3% | |
| Danone S.A. | | | 3.3% | |
| Brambles Ltd. | | | 3.0% | |
| Compass Group PLC | | | 2.5% | |
| Henkel AG & Co. KGaA | | | 2.5% | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 2.2% | |
| Pernod Ricard S.A. | | | 2.0% | |
| NVIDIA Corp. | | | 2.0% | |
| Fairfax Financial Holdings Ltd. | | | 2.0% | |
| |
| Equity sectors | | | | |
| Consumer Staples | | | 28.5% | |
| Financial Services | | | 14.9% | |
| Technology | | | 13.6% | |
| Special Products & Services | | | 11.6% | |
| Industrial Goods & Services | | | 9.3% | |
| Basic Materials | | | 7.0% | |
| Health Care | | | 4.4% | |
| Utilities & Communications | | | 1.9% | |
| Transportation | | | 1.6% | |
| Energy | | | 1.0% | |
| Retailing | | | 1.0% | |
| Leisure | | | 0.9% | |
| Autos & Housing | | | 0.6% | |
| | | | |
| Issuer country weightings (x) | | | | |
| Japan | | | 22.1% | |
| United Kingdom | | | 14.4% | |
| United States | | | 13.2% | |
| Switzerland | | | 11.8% | |
| Germany | | | 11.6% | |
| France | | | 9.0% | |
| Australia | | | 3.5% | |
| Netherlands | | | 3.5% | |
| Taiwan | | | 2.2% | |
| Other Countries | | | 8.7% | |
| |
| Currency exposure weightings (y) | | | | |
| Euro | | | 28.2% | |
| Japanese Yen | | | 18.7% | |
| United States Dollar | | | 16.2% | |
| British Pound Sterling | | | 14.4% | |
| Swiss Franc | | | 11.8% | |
| Australian Dollar | | | 3.5% | |
| Taiwan Dollar | | | 2.2% | |
| Canadian Dollar | | | 2.0% | |
| Swedish Krona | | | 1.6% | |
| Other Currencies | | | 1.4% | |
| (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 & Cash Equivalents and 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 & Cash Equivalents and Other. |
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Other includes equivalent exposure from currency derivatives and/or any offsets to derivative positions.
Percentages are based on net assets as of 12/31/16.
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, 2016, Initial Class shares of the MFS International Value Portfolio (“fund”) provided a total return of 4.05%, while Service Class shares of the fund provided a total return of 3.84%. These compare with a return of 5.68% over the same period for the fund’s benchmark, the MSCI EAFE Value Index.
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
Stock selection in the basic materials sector weakened performance relative to the MSCI EAFE Value Index. Within this sector, not holding shares of mining companies BHP Billiton (United Kingdom) and Glencore (United Kingdom) weighed on relative returns. Shares of both companies outpaced the benchmark during the reporting period, benefiting from a recovery in global commodity markets.
A combination of the fund’s overweight position and security selection in the consumer staples sector also hurt relative results. Holding shares of household products manufacturer Reckitt Benckiser Group (b) (United Kingdom) and food processing company Danone (b) (France), along with the fund’s overweight position in global food company Nestle (Switzerland), held back relative performance. Shares of Reckitt Benckiser Group declined in the second half of the reporting period on weakness from the company’s Scholl brand.
An underweight allocation to the strong-performing energy sector further dampened relative performance. Not owning shares of global energy and petrochemicals company Royal Dutch Shell (United Kingdom) and integrated oil company BP (United Kingdom) hurt relative returns as shares advanced, with a rise in global oil prices, during the reporting period.
Elsewhere, the fund’s overweight position in aerospace and defense technology systems developer Cobham (United Kingdom), and not owning shares of German electronics and electrical engineering company Siemens, also detracted from relative results.
The fund’s cash and/or cash equivalents position during the period was also a detractor 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.
3
MFS International Value Portfolio
Management Review – continued
Contributors to Performance
Strong security selection in the technology sector lifted relative returns. Within this sector, holding shares of computer graphics processors maker NVIDIA (b), electronic equipment and circuit company Analog Devices (b), Taiwanese semiconductor manufacturer Taiwan Semiconductor Manufacturing (b) and electrical circuit component manufacturer Texas Instruments (b) boosted relative performance. Shares of NVIDIA benefited from strong demand for the company’s graphical processing units, in both the gaming and deep learning data center segments, which helped drive record results.
The fund’s underweight allocation to both the utilities & communications and financial services sectors also helped strengthen relative performance. Within the utilities & communications sector, an underweight position in poor-performing Vodafone Group (h) (United Kingdom) supported relative results as shares declined later in the period over what appeared to have been concerns of increased competition in India and high capital expenditures. Within the financial services sector, not owning shares of Lloyds Banking Group (United Kingdom) and Credit Suisse (Switzerland) aided relative returns.
Stocks in other sectors that supported relative performance included owning shares of adhesives and coating manufacturer Nordson (b) and not owning shares of pharmaceutical firms AstraZeneca (United Kingdom) and Teva Pharmaceuticals (Israel).
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 a positive factor aiding 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,
| | |
| Pablo De La Mata | | Benjamin Stone |
| 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 Value Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/16
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 12/31/16
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class Inception Date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 10/02/95 | | 4.05% | | 10.83% | | 5.19% | | |
| | | Service Class | | 8/24/01 | | 3.84% | | 10.56% | | 4.93% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | MSCI EAFE Value Index (f) | | 5.68% | | 6.87% | | 0.35% | | |
| (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, 2016 through December 31, 2016
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, 2016 through December 31, 2016.
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
7/01/16 | | | Ending
Account Value
12/31/16 | | | Expenses Paid
During Period (p)
7/01/16-12/31/16 | |
| Initial Class | | Actual | | | 0.88% | | | | $1,000.00 | | | | $993.61 | | | | $4.41 | |
| | Hypothetical (h) | | | 0.88% | | | | $1,000.00 | | | | $1,020.71 | | | | $4.47 | |
| Service Class | | Actual | | | 1.13% | | | | $1,000.00 | | | | $992.66 | | | | $5.66 | |
| | Hypothetical (h) | | | 1.13% | | | | $1,000.00 | | | | $1,019.46 | | | | $5.74 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.02% (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
6
MFS International Value Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – 93.8% | | | | | |
| Aerospace – 0.2% | | | | | | | | |
| Cobham PLC | | | 1,515,518 | | | $ | 3,057,464 | |
| | | | | | | | |
| Alcoholic Beverages – 3.5% | | | | | | | | |
| Heineken N.V. | | | 299,672 | | | $ | 22,446,407 | |
| Pernod Ricard S.A. | | | 282,782 | | | | 30,645,187 | |
| | | | | | | | |
| | | $ | 53,091,594 | |
| | | | | | | | |
| Apparel Manufacturers – 0.7% | | | | | | | | |
| Compagnie Financiere Richemont S.A. | | | 154,254 | | | $ | 10,217,453 | |
| | | | | | | | |
| Automotive – 0.3% | | | | | | | | |
| USS Co. Ltd. | | | 252,500 | | | $ | 4,014,172 | |
| | | | | | | | |
| Brokerage & Asset Managers – 0.7% | | | | | |
| Daiwa Securities Group, Inc. | | | 989,000 | | | $ | 6,075,490 | |
| IG Group Holdings PLC | | | 694,882 | | | | 4,231,336 | |
| | | | | | | | |
| | | $ | 10,306,826 | |
| | | | | | | | |
| Business Services – 11.6% | | | | | | | | |
| Amadeus IT Holding S.A. | | | 587,660 | | | $ | 26,704,985 | |
| Brenntag AG | | | 210,615 | | | | 11,671,015 | |
| Bunzl PLC | | | 888,544 | | | | 22,993,363 | |
| Compass Group PLC | | | 2,074,725 | | | | 38,241,992 | |
| Experian Group Ltd. | | | 216,658 | | | | 4,193,673 | |
| Intertek Group PLC | | | 193,988 | | | | 8,276,424 | |
| Nomura Research, Inc. | | | 773,960 | | | | 23,527,165 | |
| Rentokil Initial PLC | | | 864,254 | | | | 2,366,667 | |
| Secom Co. Ltd. | | | 262,200 | | | | 19,134,107 | |
| SGS S.A. | | | 8,808 | | | | 17,887,072 | |
| | | | | | | | |
| | | $ | 174,996,463 | |
| | | | | | | | |
| Chemicals – 2.8% | | | | | | | | |
| Givaudan S.A. | | | 14,544 | | | $ | 26,651,384 | |
| Orica Ltd. | | | 626,700 | | | | 7,960,678 | |
| Syngenta AG (a) | | | 19,261 | | | | 7,631,200 | |
| | | | | | | | |
| | | $ | 42,243,262 | |
| | | | | | | | |
| Computer Software – 3.8% | | | | | | | | |
| ANSYS, Inc. (a) | | | 88,416 | | | $ | 8,177,596 | |
| Cadence Design Systems, Inc. (a) | | | 906,254 | | | | 22,855,726 | |
| Check Point Software Technologies Ltd. (a) | | | 84,676 | | | | 7,151,735 | |
| Dassault Systems S.A. | | | 137,608 | | | | 10,485,917 | |
| OBIC Co. Ltd. | | | 212,800 | | | | 9,281,733 | |
| | | | | | | | |
| | | $ | 57,952,707 | |
| | | | | | | | |
| Construction – 0.3% | | | | | | | | |
| Geberit AG | | | 12,334 | | | $ | 4,935,977 | |
| | | | | | | | |
| Consumer Products – 8.5% | | | | | | | | |
| Colgate-Palmolive Co. | | | 462,863 | | | $ | 30,289,755 | |
| Kao Corp. | | | 636,200 | | | | 30,100,594 | |
| Kobayashi Pharmaceutical Co. Ltd. | | | 270,600 | | | | 11,556,964 | |
| KOSE Corp. | | | 26,900 | | | | 2,234,858 | |
| Reckitt Benckiser Group PLC | | | 586,293 | | | | 49,561,862 | |
| ROHTO Pharmaceutical Co. Ltd. | | | 312,000 | | | | 4,882,504 | |
| | | | | | | | |
| | | $ | 128,626,537 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – continued | | | | | |
| Containers – 3.0% | | | | | | | | |
| Brambles Ltd. | | | 5,043,819 | | | $ | 44,991,572 | |
| | | | | | | | |
| Electrical Equipment – 5.0% | | | | | | | | |
| IMI PLC | | | 1,062,244 | | | $ | 13,546,268 | |
| Legrand S.A. | | | 317,938 | | | | 18,005,569 | |
| OMRON Corp. | | | 285,600 | | | | 10,930,392 | |
| Schneider Electric S.A. | | | 280,836 | | | | 19,514,635 | |
| Spectris PLC | | | 280,187 | | | | 7,977,244 | |
| Yokogawa Electric Corp. | | | 362,000 | | | | 5,227,040 | |
| | | | | | | | |
| | | $ | 75,201,148 | |
| | | | | | | | |
| Electronics – 9.6% | | | | | | | | |
| Analog Devices, Inc. | | | 213,390 | | | $ | 15,496,382 | |
| ASM International N.V. | | | 92,202 | | | | 4,132,996 | |
| Halma PLC | | | 977,582 | | | | 10,774,723 | |
| Hirose Electric Co. Ltd. | | | 123,300 | | | | 15,247,414 | |
| Infineon Technologies AG | | | 996,976 | | | | 17,279,437 | |
| NVIDIA Corp. | | | 285,890 | | | | 30,515,899 | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 1,162,775 | | | | 33,429,781 | |
| Texas Instruments, Inc. | | | 243,798 | | | | 17,789,940 | |
| | | | | | | | |
| | | $ | 144,666,572 | |
| | | | | | | | |
| Energy – Independent – 0.6% | | | | | | | | |
| Cairn Energy PLC (a) | | | 1,032,965 | | | $ | 2,993,254 | |
| INPEX Corp. | | | 654,900 | | | | 6,538,307 | |
| | | | | | | | |
| | | $ | 9,531,561 | |
| | | | | | | | |
| Food & Beverages – 10.3% | | | | | | | | |
| Danone S.A. | | | 777,529 | | | $ | 49,213,970 | |
| ITO EN Ltd. | | | 369,900 | | | | 12,295,713 | |
| Kerry Group PLC | | | 195,861 | | | | 13,999,158 | |
| Nestle S.A. | | | 942,922 | | | | 67,642,593 | |
| Toyo Suisan Kaisha Ltd. | | | 350,700 | | | | 12,684,971 | |
| | | | | | | | |
| | | $ | 155,836,405 | |
| | | | | | | | |
| Insurance – 3.0% | | | | | | | | |
| Euler Hermes Group | | | 42,256 | | | $ | 3,714,146 | |
| Fairfax Financial Holdings Ltd. | | | 62,867 | | | | 30,364,763 | |
| Hiscox Ltd. | | | 502,434 | | | | 6,290,767 | |
| Jardine Lloyd Thompson Group PLC | | | 368,139 | | | | 4,466,622 | |
| | | | | | | | |
| | | $ | 44,836,298 | |
| | | | | | | | |
| Leisure & Toys – 0.3% | | | | | | | | |
| Yamaha Corp. | | | 142,300 | | | $ | 4,336,760 | |
| | | | | | | | |
| Machinery & Tools – 4.1% | | | | | | | | |
| GEA Group AG | | | 426,839 | | | $ | 17,109,151 | |
| Glory Ltd. | | | 104,500 | | | | 3,292,808 | |
| Misumi Group, Inc. | | | 253,400 | | | | 4,158,727 | |
| Neopost S.A. | | | 126,281 | | | | 3,950,672 | |
| Nordson Corp. | | | 120,732 | | | | 13,528,021 | |
| Schindler Holding AG | | | 33,358 | | | | 5,874,117 | |
| Spirax Sarco Engineering PLC | | | 222,994 | | | | 11,452,209 | |
| Wartsila Corp. | | | 62,234 | | | | 2,795,994 | |
| | | | | | | | |
| | | $ | 62,161,699 | |
| | | | | | | | |
7
MFS International Value Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – continued | | | | | |
| Major Banks – 2.5% | | | | | | | | |
| Bank of Ireland (a) | | | 17,029,987 | | | $ | 4,194,830 | |
| Sumitomo Mitsui Financial Group, Inc. | | | 352,800 | | | | 13,374,668 | |
| Svenska Handelsbanken AB, “A” | | | 1,482,017 | | | | 20,593,962 | |
| | | | | | | | |
| | | $ | 38,163,460 | |
| | | | | | | | |
| Medical Equipment – 1.5% | | | | | | | | |
| Nihon Kohden Corp. | | | 490,900 | | | $ | 10,833,062 | |
| Terumo Corp. | | | 319,000 | | | | 11,752,573 | |
| | | | | | | | |
| | | $ | 22,585,635 | |
| | | | | | | | |
| Network & Telecom – 0.3% | | | | | | | | |
| LM Ericsson Telephone Co., “B” | | | 659,756 | | | $ | 3,846,106 | |
| | | | | | | | |
| Oil Services – 0.4% | | | | | | | | |
| Core Laboratories N.V. | | | 45,571 | | | $ | 5,470,343 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 4.8% | |
| Chiba Bank Ltd. | | | 745,000 | | | $ | 4,553,590 | |
| DnB NOR A.S.A. | | | 578,962 | | | | 8,608,652 | |
| Hachijuni Bank Ltd. | | | 732,000 | | | | 4,232,752 | |
| ING Groep N.V. | | | 1,193,032 | | | | 16,790,656 | |
| Julius Baer Group Ltd. | | | 89,322 | | | | 3,967,430 | |
| Jyske Bank A.S. | | | 92,830 | | | | 4,417,399 | |
| Mebuki Financial Group, Inc. | | | 1,230,300 | | | | 4,546,162 | |
| North Pacific Bank Ltd. | | | 1,096,200 | | | | 4,507,517 | |
| Sydbank A.S. | | | 123,090 | | | | 3,810,998 | |
| UBS AG | | | 1,139,341 | | | | 17,845,909 | |
| | | | | | | | |
| | | $ | 73,281,065 | |
| | | | | | | | |
| Pharmaceuticals – 2.9% | | | | | | | | |
| Bayer AG | | | 154,960 | | | $ | 16,169,958 | |
| Roche Holding AG | | | 67,343 | | | | 15,344,318 | |
| Santen Pharmaceutical Co. Ltd. | | | 1,067,400 | | | | 13,035,609 | |
| | | | | | | | |
| | | $ | 44,549,885 | |
| | | | | | | | |
| Printing & Publishing – 0.6% | | | | | | | | |
| RELX N.V. | | | 523,268 | | | $ | 8,795,870 | |
| | | | | | | | |
| Real Estate – 3.8% | | | | | | | | |
| Deutsche Wohnen AG | | | 692,602 | | | $ | 21,719,443 | |
| LEG Immobilien AG | | | 102,167 | | | | 7,925,761 | |
| TAG Immobilien AG | | | 390,822 | | | | 5,137,439 | |
| Vonovia SE | | | 717,939 | | | | 23,356,107 | |
| | | | | | | | |
| | | $ | 58,138,750 | |
| | | | | | | | |
| Specialty Chemicals – 1.2% | | | | | | | | |
| Symrise AG | | | 300,033 | | | $ | 18,264,441 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – continued | | | | | |
| Specialty Stores – 0.3% | | | | | | | | |
| Esprit Holdings Ltd. (a) | | | 5,836,758 | | | $ | 4,553,693 | |
| | | | | | | | |
| Telecommunications – Wireless – 1.9% | | | | | |
| KDDI Corp. | | | 1,160,100 | | | $ | 29,290,099 | |
| | | | | | | | |
| Tobacco – 3.7% | | | | | | | | |
| British American Tobacco PLC | | | 478,790 | | | $ | 27,185,174 | |
| Japan Tobacco, Inc. | | | 861,600 | | | | 28,337,886 | |
| | | | | | | | |
| | | $ | 55,523,060 | |
| | | | | | | | |
| Trucking – 1.6% | | | | | | | | |
| Yamato Holdings Co. Ltd. | | | 1,226,000 | | | $ | 24,853,195 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $1,170,794,098) | | | $ | 1,418,320,072 | |
| | | | | | | | |
| |
| PREFERRED STOCKS – 2.5% | | | | | |
| Consumer Products – 2.5% | | | | | | | | |
| Henkel AG & Co. KGaA (Identified Cost, $25,436,013) | | | 313,736 | | | $ | 37,401,303 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 3.0% | | | | | |
| MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $45,992,544) | | | 45,993,076 | | | $ | 45,993,076 | |
| | | | | | | | |
Total Investments
(Identified Cost, $1,242,222,655) | | | | | | $ | 1,501,714,451 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.7% | | | | 10,212,046 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | $ | 1,511,926,497 | |
| | | | | | | | |
| (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:
8
MFS International Value Portfolio
Portfolio of Investments – continued
Derivative Contracts at 12/31/16
Forward Foreign Currency Exchange Contracts at 12/31/16
| | | | | | | | | | | | | | | | | | | | | | | | |
| Type | | Currency | | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | | Contracts
at Value | | | Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives | | | | | | | | | | | | | | |
| SELL | | | | | JPY | | | BNP Paribas S.A. | | 207,998,000 | | 3/27/17 | | $ | 2,080,542 | | | $ | 1,787,008 | | | $ | 293,534 | |
| SELL | | | | | JPY | | | Citibank N.A. | | 103,999,000 | | 3/27/17 | | | 1,040,483 | | | | 893,503 | | | | 146,980 | |
| SELL | | | | | JPY | | | Deutsche Bank AG | | 1,526,040,000 | | 3/27/17 | | | 15,260,362 | | | | 13,110,917 | | | | 2,149,445 | |
| SELL | | | | | JPY | | | HSBC Bank | | 339,558,000 | | 3/27/17 | | | 3,396,719 | | | | 2,917,300 | | | | 479,419 | |
| SELL | | | | | JPY | | | JPMorgan Chase Bank N.A. | | 1,826,389,000 | | 3/27/17 | | | 18,264,621 | | | | 15,691,356 | | | | 2,573,265 | |
| SELL | | | | | JPY | | | Merrill Lynch International | | 753,996,000 | | 3/27/17 | | | 7,531,578 | | | | 6,477,930 | | | | 1,053,648 | |
| SELL | | | | | JPY | | | Morgan Stanley Capital Services, Inc. | | 1,065,995,000 | | 3/27/17 | | | 10,663,174 | | | | 9,158,458 | | | | 1,504,716 | |
| SELL | | | | | JPY | | | UBS AG | | 338,959,000 | | 3/27/17 | | | 3,391,119 | | | | 2,912,154 | | | | 478,965 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | $ | 8,679,972 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| Liability Derivatives | | | | | | | | | | | | | | |
| BUY | | | | | EUR | | | Barclays Bank PLC | | 468,000 | | 3/27/17 | | $ | 529,755 | | | $ | 494,716 | | | $ | (35,039 | ) |
| BUY | | | | | EUR | | | BNP Paribas S.A. | | 1,196,000 | | 3/27/17 | | | 1,354,797 | | | | 1,264,276 | | | | (90,521 | ) |
| BUY | | | | | EUR | | | Citibank N.A. | | 624,000 | | 3/27/17 | | | 707,235 | | | | 659,622 | | | | (47,613 | ) |
| BUY | | | | | EUR | | | Deutsche Bank AG | | 2,839,000 | | 3/27/17 | | | 3,214,876 | | | | 3,001,069 | | | | (213,807 | ) |
| BUY | | | | | EUR | | | HSBC Bank | | 2,132,000 | | 3/27/17 | | | 2,415,008 | | | | 2,253,709 | | | | (161,299 | ) |
| BUY | | | | | EUR | | | JPMorgan Chase Bank N.A. | | 2,184,000 | | 3/27/17 | | | 2,475,006 | | | | 2,308,677 | | | | (166,329 | ) |
| BUY | | | | | EUR | | | Merrill Lynch International | | 1,976,000 | | 3/27/17 | | | 2,233,364 | | | | 2,088,803 | | | | (144,561 | ) |
| BUY | | | | | EUR | | | Morgan Stanley Capital Services, Inc. | | 1,508,000 | | 3/27/17 | | | 1,704,820 | | | | 1,594,087 | | | | (110,733 | ) |
| BUY | | | | | EUR | | | UBS AG | | 780,000 | | 3/27/17 | | | 884,255 | | | | 824,528 | | | | (59,727 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | $ | (1,029,629 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
See Notes to Financial Statements
9
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 12/31/16 | | | | | | | | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $1,196,230,111) | | | $1,455,721,375 | | | | | |
Underlying affiliated funds, at value (identified cost, $45,992,544) | | | 45,993,076 | | | | | |
Total investments, at value (identified cost, $1,242,222,655) | | | $1,501,714,451 | | | | | |
Foreign currency, at value (identified cost, $32,210) | | | 32,487 | | | | | |
Receivables for | | | | | | | | |
Forward foreign currency exchange contracts | | | 8,679,972 | | | | | |
Investments sold | | | 1,316 | | | | | |
Fund shares sold | | | 869,451 | | | | | |
Interest and dividends | | | 3,175,046 | | | | | |
Other assets | | | 1,262 | | | | | |
Total assets | | | | | | | $1,514,473,985 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Forward foreign currency exchange contracts | | | $1,029,629 | | | | | |
Investments purchased | | | 159,257 | | | | | |
Fund shares reacquired | | | 1,051,856 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 87,114 | | | | | |
Shareholder servicing costs | | | 358 | | | | | |
Distribution and/or service fees | | | 26,030 | | | | | |
Payable for independent Trustees’ compensation | | | 64 | | | | | |
Accrued expenses and other liabilities | | | 193,180 | | | | | |
Total liabilities | | | | | | | $2,547,488 | |
Net assets | | | | | | | $1,511,926,497 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $1,239,798,062 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 266,958,462 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (11,346,284 | ) | | | | |
Undistributed net investment income | | | 16,516,257 | | | | | |
Net assets | | | | | | | $1,511,926,497 | |
Shares of beneficial interest outstanding | | | | | | | 67,856,213 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $238,191,659 | | | | 10,553,120 | | | | $22.57 | |
Service Class | | | 1,273,734,838 | | | | 57,303,093 | | | | 22.23 | |
See Notes to Financial Statements
10
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 12/31/16 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $35,210,028 | | | | | |
Interest | | | 317,972 | | | | | |
Dividends from underlying affiliated funds | | | 184,210 | | | | | |
Other | | | 14,411 | | | | | |
Foreign taxes withheld | | | (2,852,871 | ) | | | | |
Total investment income | | | | | | | $32,873,750 | |
Expenses | | | | | | | | |
Management fee | | | $12,409,072 | | | | | |
Distribution and/or service fees | | | 3,009,907 | | | | | |
Shareholder servicing costs | | | 50,933 | | | | | |
Administrative services fee | | | 231,464 | | | | | |
Independent Trustees’ compensation | | | 29,615 | | | | | |
Custodian fee | | | 259,632 | | | | | |
Reimbursement of custodian expenses | | | (135,091 | ) | | | | |
Shareholder communications | | | 69,275 | | | | | |
Audit and tax fees | | | 52,383 | | | | | |
Legal fees | | | 13,963 | | | | | |
Miscellaneous | | | 38,431 | | | | | |
Total expenses | | | | | | | $16,029,584 | |
Reduction of expenses by investment adviser | | | (320,782 | ) | | | | |
Net expenses | | | | | | | $15,708,802 | |
Net investment income | | | | | | | $17,164,948 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments: | | | | | | | | |
Non-affiliated issuers | | | $674,199 | | | | | |
Underlying affiliated funds | | | (255 | ) | | | | |
Foreign currency | | | (495,461 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $178,483 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $25,620,162 | | | | | |
Translation of assets and liabilities in foreign currencies | | | 7,616,897 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $33,237,059 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $33,415,542 | |
Change in net assets from operations | | | | | | | $50,580,490 | |
See Notes to Financial Statements
11
MFS International Value Portfolio
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | | | |
For years ended 12/31 | | | 2016 | | | | 2015 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $17,164,948 | | | | $15,222,367 | |
Net realized gain (loss) on investments and foreign currency | | | 178,483 | | | | 31,857,098 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 33,237,059 | | | | 26,713,569 | |
Change in net assets from operations | | | $50,580,490 | | | | $73,793,034 | |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(16,932,485 | ) | | | $(24,480,728 | ) |
From net realized gain on investments | | | (33,264,964 | ) | | | (13,747,597 | ) |
Total distributions declared to shareholders | | | $(50,197,449 | ) | | | $(38,228,325 | ) |
Change in net assets from fund share transactions | | | $157,060,932 | | | | $115,818,005 | |
Total change in net assets | | | $157,443,973 | | | | $151,382,714 | |
Net assets | | | | | | | | |
At beginning of period | | | 1,354,482,524 | | | | 1,203,099,810 | |
At end of period (including undistributed net investment income of $16,516,257 and
$16,868,576, respectively) | | | $1,511,926,497 | | | | $1,354,482,524 | |
See Notes to Financial Statements
12
MFS International Value Portfolio
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $22.46 | | | | $21.73 | | | | $21.86 | | | | $17.34 | | | | $15.16 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.32 | (c) | | | $0.30 | | | | $0.57 | | | | $0.40 | | | | $0.38 | |
Net realized and unrealized gain (loss) on investments and
foreign currency | | | 0.64 | | | | 1.11 | | | | (0.27 | ) | | | 4.42 | | | | 2.05 | |
Total from investment operations | | | $0.96 | | | | $1.41 | | | | $0.30 | | | | $4.82 | | | | $2.43 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.32 | ) | | | $(0.45 | ) | | | $(0.43 | ) | | | $(0.30 | ) | | | $(0.25 | ) |
From net realized gain on investments | | | (0.53 | ) | | | (0.23 | ) | | | — | | | | — | | | | — | |
Total distributions declared to shareholders | | | $(0.85 | ) | | | $(0.68 | ) | | | $(0.43 | ) | | | $(0.30 | ) | | | $(0.25 | ) |
Net asset value, end of period (x) | | | $22.57 | | | | $22.46 | | | | $21.73 | | | | $21.86 | | | | $17.34 | |
Total return (%) (k)(r)(s)(x) | | | 4.05 | (c) | | | 6.65 | | | | 1.34 | | | | 27.98 | | | | 16.16 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.91 | (c) | | | 0.93 | | | | 0.95 | | | | 0.96 | | | | 0.98 | |
Expenses after expense reductions (f) | | | 0.89 | (c) | | | 0.91 | | | | 0.94 | | | | 0.96 | | | | 0.98 | |
Net investment income | | | 1.41 | (c) | | | 1.33 | | | | 2.58 | | | | 2.00 | | | | 2.33 | |
Portfolio turnover | | | 17 | | | | 24 | | | | 22 | | | | 11 | | | | 16 | |
Net assets at end of period (000 omitted) | | | $238,192 | | | | $230,349 | | | | $218,258 | | | | $223,444 | | | | $182,382 | |
See Notes to Financial Statements
13
MFS International Value Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $22.13 | | | | $21.44 | | | | $21.58 | | | | $17.14 | | | | $14.99 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.26 | (c) | | | $0.25 | | | | $0.49 | | | | $0.33 | | | | $0.38 | |
Net realized and unrealized gain (loss) on investments and
foreign currency | | | 0.63 | | | | 1.07 | | | | (0.24 | ) | | | 4.38 | | | | 2.00 | |
Total from investment operations | | | $0.89 | | | | $1.32 | | | | $0.25 | | | | $4.71 | | | | $2.38 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.26 | ) | | | $(0.40 | ) | | | $(0.39 | ) | | | $(0.27 | ) | | | $(0.23 | ) |
From net realized gain on investments | | | (0.53 | ) | | | (0.23 | ) | | | — | | | | — | | | | — | |
Total distributions declared to shareholders | | | $(0.79 | ) | | | $(0.63 | ) | | | $(0.39 | ) | | | $(0.27 | ) | | | $(0.23 | ) |
Net asset value, end of period (x) | | | $22.23 | | | | $22.13 | | | | $21.44 | | | | $21.58 | | | | $17.14 | |
Total return (%) (k)(r)(s)(x) | | | 3.84 | (c) | | | 6.32 | | | | 1.13 | | | | 27.63 | | | | 15.93 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.16 | (c) | | | 1.18 | | | | 1.20 | | | | 1.21 | | | | 1.23 | |
Expenses after expense reductions (f) | | | 1.14 | (c) | | | 1.16 | | | | 1.19 | | | | 1.21 | | | | 1.23 | |
Net investment income | | | 1.17 | (c) | | | 1.10 | | | | 2.25 | | | | 1.68 | | | | 2.35 | |
Portfolio turnover | | | 17 | | | | 24 | | | | 22 | | | | 11 | | | | 16 | |
Net assets at end of period (000 omitted) | | | $1,273,735 | | | | $1,124,133 | | | | $984,842 | | | | $876,862 | | | | $541,427 | |
| (c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
| (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 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 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 October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
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 on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange 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. 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
15
MFS International Value Portfolio
Notes to Financial Statements – continued
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 forward foreign currency exchange contracts. The following is a summary of the levels used as of December 31, 2016 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
Japan | | | $42,868,457 | | | | $291,968,376 | | | | $— | | | | $334,836,833 | |
United Kingdom | | | 14,122,089 | | | | 203,486,953 | | | | — | | | | 217,609,042 | |
Switzerland | | | 133,955,968 | | | | 44,041,484 | | | | — | | | | 177,997,452 | |
Germany | | | 95,191,809 | | | | 80,842,246 | | | | — | | | | 176,034,055 | |
United States | | | 144,123,660 | | | | — | | | | — | | | | 144,123,660 | |
France | | | 48,795,923 | | | | 86,734,174 | | | | — | | | | 135,530,097 | |
Australia | | | — | | | | 52,952,250 | | | | — | | | | 52,952,250 | |
Netherlands | | | 16,790,656 | | | | 35,375,273 | | | | — | | | | 52,165,929 | |
Taiwan | | | 33,429,781 | | | | — | | | | — | | | | 33,429,781 | |
Other Countries | | | 114,414,080 | | | | 16,628,196 | | | | — | | | | 131,042,276 | |
| Mutual Funds | | | 45,993,076 | | | | — | | | | — | | | | 45,993,076 | |
| Total Investments | | | $689,685,499 | | | | $812,028,952 | | | | $— | | | | $1,501,714,451 | |
| | | | |
| Other Financial Instruments | | | | | | | | | | | | |
| Forward Foreign Currency Exchange Contracts – Assets | | | $— | | | | $8,679,972 | | | | $— | | | | $8,679,972 | |
| Forward Foreign Currency Exchange Contracts – Liabilities | | | — | | | | (1,029,629 | ) | | | — | | | | (1,029,629 | ) |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $88,846,964 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $361,291,080 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 International Value 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 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, 2016 as reported in the Statement of Assets and Liabilities:
| | | | | | | | | | |
| | | | | Fair Value | |
| Risk | | Derivative Contracts | | Asset Derivatives | | | Liability Derivatives | |
| Foreign Exchange | | Forward Foreign Currency Exchange | | | $8,679,972 | | | | $(1,029,629 | ) |
There is no realized gain (loss) from derivative transactions during the period.
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, 2016 as reported in the Statement of Operations:
| | | | |
| Risk | | Translation of
Assets and Liabilities in Foreign Currencies | |
| Foreign Exchange | | | $7,650,343 | |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain, but not all, uncleared 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. 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 agreement 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.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the clearing broker and the clearing house for cleared derivatives (e.g., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for uncleared derivatives (e.g., forward foreign currency exchange contracts, uncleared swap agreements, and uncleared options). For derivatives traded under an ISDA Master Agreement, which contains a collateral support annex, 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 fund may be required to make payments of interest on uncovered collateral or margin obligations with the broker. Any such payments are included in “Miscellaneous” expense in the Statement of Operations.
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, a multicurrency cash settlement system for the centralized settlement of foreign transactions. This risk is mitigated in cases where there is an ISDA Master Agreement between the
17
MFS International Value Portfolio
Notes to Financial Statements – continued
fund and the counterparty providing for netting as described above and, where applicable, 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.
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. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. 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, 2016, 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.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian 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.
18
MFS International Value Portfolio
Notes to Financial Statements – continued
Book/tax differences primarily relate to passive foreign investment companies, wash sale loss deferrals, and derivative transactions.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/16 | | | 12/31/15 | |
| Ordinary income (including any short-term capital gains) | | | $26,673,586 | | | | $25,040,220 | |
| Long-term capital gains | | | 23,523,863 | | | | 13,188,105 | |
| Total distributions | | | $50,197,449 | | | | $38,228,325 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/16 | | | | |
| Cost of investments | | | $1,255,298,624 | |
| Gross appreciation | | | 275,570,872 | |
| Gross depreciation | | | (29,155,045 | ) |
| Net unrealized appreciation (depreciation) | | | $246,415,827 | |
| Undistributed ordinary income | | | 25,980,651 | |
| Other temporary differences | | | (268,043 | ) |
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
12/31/16 | | | Year ended
12/31/15 | | | Year ended
12/31/16 | | | Year ended
12/31/15 | |
| Initial Class | | | $2,909,505 | | | | $4,321,620 | | | | $4,912,177 | | | | $2,212,272 | |
| Service Class | | | 14,022,980 | | | | 20,159,108 | | | | 28,352,787 | | | | 11,535,325 | |
| Total | | | $16,932,485 | | | | $24,480,728 | | | | $33,264,964 | | | | $13,747,597 | |
| (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, 2016, this management fee reduction amounted to $101,191, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.86% 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, 2018. For the year ended December 31, 2016, this reduction amounted to $219,591, 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.
19
MFS International Value 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, 2016, the fee was $47,983, which equated to 0.0034% 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, 2016, these costs amounted to $2,950.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund 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, 2016 was equivalent to an annual effective rate of 0.0162% 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 – 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. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $2,810 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the 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. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $2,938,599 and $2,363,606, respectively. The sales transactions resulted in net realized gains (losses) of $377,630.
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, aggregated $343,203,213 and $236,237,938, 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 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 2,753,086 | | | | $63,775,327 | | | | 2,321,834 | | | | $52,027,363 | |
Service Class | | | 9,676,777 | | | | 217,248,988 | | | | 14,103,950 | | | | 317,119,215 | |
| | | 12,429,863 | | | | $281,024,315 | | | | 16,425,784 | | | | $369,146,578 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 317,784 | | | | $7,601,398 | | | | 297,300 | | | | $6,338,445 | |
Service Class | | | 1,797,106 | | | | 42,375,767 | | | | 1,507,106 | | | | 31,694,433 | |
| | | 2,114,890 | | | | $49,977,165 | | | | 1,804,406 | | | | $38,032,878 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (2,775,226 | ) | | | $(62,971,360 | ) | | | (2,404,464 | ) | | | $(54,958,343 | ) |
Service Class | | | (4,956,583 | ) | | | (110,969,188 | ) | | | (10,766,120 | ) | | | (236,403,108 | ) |
| | | (7,731,809 | ) | | | $(173,940,548 | ) | | | (13,170,584 | ) | | | $(291,361,451 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | 295,644 | | | | $8,405,365 | | | | 214,670 | | | | $3,407,465 | |
Service Class | | | 6,517,300 | | | | 148,655,567 | | | | 4,844,936 | | | | 112,410,540 | |
| | | 6,812,944 | | | | $157,060,932 | | | | 5,059,606 | | | | $115,818,005 | |
20
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 3%, 1%, 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 $1.25 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 Overnight Federal Reserve funds rate or daily 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 Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $8,841 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 | | | 38,566,019 | | | | 226,427,644 | | | | (219,000,587 | ) | | | 45,993,076 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending Value | |
| MFS Institutional Money Market Portfolio | | | $(255 | ) | | | $— | | | | $184,210 | | | | $45,993,076 | |
21
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, 2016, 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, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS International Value Portfolio as of December 31, 2016, 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 15, 2017
22
MFS International Value Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, 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 53) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 55) | | Trustee | | January 2014 | | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 74) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 65) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council (until 2015); 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 |
| | | | |
Maureen R. Goldfarb (age 61) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Michael Hegarty (age 72) | | Trustee | | December 2004 | | Private investor | | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) |
| | | | |
John P. Kavanaugh (age 62) | | Trustee and Vice Chair of Trustees | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 60) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 59) | | Trustee | | March 2005 | | Private investor | | The Travelers Companies, Director; Dycom Industries, Inc., Director |
| | | |
| OFFICERS | | | | | | |
Christopher R. Bohane (k) (age 43) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 48) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 57) | | 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 |
| | | | |
Ethan D. Corey (k) (age 53) | | 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 48) | | President | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 43) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
23
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) |
Susan A. Pereira (k) (age 46) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 46) | | 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 64) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 72) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 46) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Martin J. Wolin (k) (age 49) | | Chief Compliance Officer | | July 2015 | | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | | N/A |
| | | | |
James O. Yost (k) (age 56) | | 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. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
| (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. Buller and Kavanaugh and Ms. 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, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a 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 | | |
24
MFS International Value Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the 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, 2016 (“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 Senior Officer, a 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 Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of 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 Broadridge 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 Broadridge 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, 2015, 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, 2015 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 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 Broadridge. 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 data provided by Broadridge (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 Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. 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, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate 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, 2016.
26
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 mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios”, then “VIT II” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $25,877,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 6.91% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
Income derived from foreign sources was $28,370,691. The fund intends to pass through foreign tax credits of $2,129,745 for the fiscal year.
27
rev. 3/16
| | | | |
| 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., and MFS Heritage Trust Company. |
| | |
| 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, or 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, 2016
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 • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Massachusetts Investors Growth Stock Portfolio
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
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 | | | | |
| Alphabet, Inc., “A” | | | 6.1% | |
| Accenture PLC, “A” | | | 4.1% | |
| Thermo Fisher Scientific, Inc. | | | 3.5% | |
| Visa, Inc., “A” | | | 3.1% | |
| Colgate-Palmolive Co. | | | 2.7% | |
| Abbott Laboratories | | | 2.6% | |
| Ecolab, Inc. | | | 2.5% | |
| NIKE, Inc., “B” | | | 2.5% | |
| Cognizant Technology Solutions Corp., “A” | | | 2.5% | |
| Zoetis, Inc. | | | 2.4% | |
| | | | |
| Equity sectors | | | | |
| Health Care | | | 17.8% | |
| Consumer Staples | | | 12.7% | |
| Special Products & Services | | | 12.1% | |
| Technology | | | 11.4% | |
| Retailing | | | 11.0% | |
| Financial Services | | | 9.6% | |
| Industrial Goods & Services | | | 7.5% | |
| Basic Materials | | | 6.9% | |
| Leisure | | | 6.1% | |
| Autos & Housing | | | 2.0% | |
| Transportation | | | 1.6% | |
| Energy | | | 0.6% | |
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
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, 2016, Initial Class shares of the MFS Massachusetts Investors Growth Stock Portfolio (“fund”) provided a total return of 6.08%, while Service Class shares of the fund provided a total return of 5.84%. These compare with a return of 7.08% over the same period for the fund’s benchmark, the Russell 1000® Growth Index.
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
Weak stock selection within the consumer staples sector detracted from the fund’s performance relative to the Russell 1000® Growth Index. Overweight positions in pediatric nutrition producer Mead Johnson Nutrition and beauty products manufacturer Coty dampened relative results. Shares of Mead Johnson Nutrition depreciated, towards the second half of the reporting period, as disappointing sales figures and a reduced sales and earnings outlook from management appeared to have weighed on investor sentiment.
Not holding a position in the utilities & communications sector also hurt relative performance. Not holding shares of telecommunications company Verizon Communications held back relative results as the stock outperformed the benchmark during the reporting period.
Elsewhere, not owning shares of strong-performing software giant Microsoft, health insurance provider UnitedHealth Group and computer graphics company NVIDIA detracted from relative performance. Shares of Microsoft appreciated during the reporting period after the company delivered strong earnings results that beat market expectations, driven by solid performance across all divisions. The fund’s holdings of pharmaceutical and medical products maker Abbott Laboratories (b) and diagnostics and pharmaceutical company Roche Holding (b) (Switzerland), and overweight positions in athletic footwear and apparel equipment company NIKE and pharmacy benefits management company Express Scripts Holding, further weighed on relative results.
Contributors to Performance
Security selection in the health care sector contributed to relative returns. Not holding a position in biotech firm Gilead Sciences, and an overweight position in vision and surgical medical device company Cooper Cos., benefited relative performance. Shares of Gilead Sciences declined during the reporting period due to continued industry pressure on drug pricing as well as lower than expected volumes for its key U.S. hepatitis drug franchise.
Stock selection and, to a lesser extent, an overweight position in the industrial goods & services sector also aided relative results. The fund’s position in shares of industrial machinery company Colfax Corp. (b) bolstered relative performance.
3
MFS Massachusetts Investors Growth Stock Portfolio
Management Review – continued
Security selection in the special products & services sector further contributed to relative performance. Here, overweight positions in management consulting firm Accenture and global banking and payment technologies provider Fidelity National Information Services benefited relative results. Shares of Accenture appreciated during the reporting period after the company reported robust revenues, driven by strong results in the company’s consulting segment.
Individual stocks that contributed to relative performance included overweight positions in semiconductor company Texas Instruments, railroad franchise Union Pacific and financial services firm Charles Schwab. The fund’s position in shares of semiconductor manufacturer Taiwan Semiconductor Manufacturing (b) (Taiwan) and luxury goods company LVMH Moet Hennessy Louis Vuitton SE (b) (France) further aided relative performance.
Respectfully,
Jeffrey Constantino
Portfolio Manager
| (b) | Security is not a benchmark constituent. |
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 12/31/16
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 12/31/16
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class Inception Date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 5/06/98 | | 6.08% | | 12.55% | | 7.29% | | |
| | | Service Class | | 8/24/01 | | 5.84% | | 12.28% | | 7.03% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Russell 1000® Growth Index (f) | | 7.08% | | 14.50% | | 8.33% | | |
| (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. The Russell 1000® Growth Index is a trademark/service mark of the Frank Russell Company. Russell® is a trademark of the Frank Russell Company.
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, 2016 through December 31, 2016
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, 2016 through December 31, 2016.
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
7/01/16 | | | Ending
Account Value
12/31/16 | | | Expenses Paid
During Period (p)
7/01/16-12/31/16 | |
| Initial Class | | Actual | | | 0.74% | | | | $1,000.00 | | | | $1,019.67 | | | | $3.76 | |
| | Hypothetical (h) | | | 0.74% | | | | $1,000.00 | | | | $1,021.42 | | | | $3.76 | |
| Service Class | | Actual | | | 0.99% | | | | $1,000.00 | | | | $1,018.24 | | | | $5.02 | |
| | Hypothetical (h) | | | 0.99% | | | | $1,000.00 | | | | $1,020.16 | | | | $5.03 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.05% (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
6
MFS Massachusetts Investors Growth Stock Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 99.3% | | | | | | | | |
| Aerospace – 1.0% | | | | | | | | |
| United Technologies Corp. | | | 79,067 | | | $ | 8,667,321 | |
| | | | | | | | |
| Alcoholic Beverages – 1.7% | | | | | | | | |
| AmBev S.A., ADR | | | 1,239,706 | | | $ | 6,086,956 | |
| Pernod Ricard S.A. | | | 71,497 | | | | 7,748,156 | |
| | | | | | | | |
| | | | | | $ | 13,835,112 | |
| | | | | | | | |
| Apparel Manufacturers – 5.7% | | | | | | | | |
| LVMH Moet Hennessy Louis Vuitton SE | | | 81,796 | | | $ | 15,596,644 | |
| NIKE, Inc., “B” | | | 403,950 | | | | 20,532,779 | |
| VF Corp. | | | 208,725 | | | | 11,135,479 | |
| | | | | | | | |
| | | | | | $ | 47,264,902 | |
| | | | | | | | |
| Broadcasting – 3.4% | | | | | | | | |
| Omnicom Group, Inc. | | | 40,123 | | | $ | 3,414,869 | |
| Time Warner, Inc. | | | 55,733 | | | | 5,379,906 | |
| Twenty-First Century Fox, Inc. | | | 544,029 | | | | 15,254,573 | |
| Walt Disney Co. | | | 40,149 | | | | 4,184,329 | |
| | | | | | | | |
| | | | | | $ | 28,233,677 | |
| | | | | | | | |
| Brokerage & Asset Managers – 3.6% | | | | | | | | |
| Blackstone Group LP | | | 544,866 | | | $ | 14,727,728 | |
| Charles Schwab Corp. | | | 252,615 | | | | 9,970,714 | |
| CME Group, Inc. | | | 42,373 | | | | 4,887,726 | |
| | | | | | | | |
| | | | | | $ | 29,586,168 | |
| | | | | | | | |
| Business Services – 12.0% | | | | | | | | |
| Accenture PLC, “A” | | | 287,352 | | | $ | 33,657,540 | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 364,369 | | | | 20,415,595 | |
| Compass Group PLC | | | 286,911 | | | | 5,288,435 | |
| Equifax, Inc. | | | 115,151 | | | | 13,614,303 | |
| Fidelity National Information Services, Inc. | | | 219,131 | | | | 16,575,069 | |
| Fiserv, Inc. (a) | | | 98,694 | | | | 10,489,198 | |
| | | | | | | | |
| | | | | | $ | 100,040,140 | |
| | | | | | | | |
| Chemicals – 4.0% | | | | | | | | |
| LyondellBasell Industries N.V., “A” | | | 35,727 | | | $ | 3,064,662 | |
| Monsanto Co. | | | 169,661 | | | | 17,850,034 | |
| PPG Industries, Inc. | | | 134,664 | | | | 12,760,761 | |
| | | | | | | | |
| | | | | | $ | 33,675,457 | |
| | | | | | | | |
| Computer Software – Systems – 2.3% | | | | | |
| Apple, Inc. | | | 163,494 | | | $ | 18,935,875 | |
| | | | | | | | |
| Construction – 2.0% | | | | | | | | |
| Sherwin-Williams Co. | | | 60,960 | | | $ | 16,382,390 | |
| | | | | | | | |
| Consumer Products – 7.3% | | | | | | | | |
| Church & Dwight Co., Inc. | | | 135,428 | | | $ | 5,984,563 | |
| Colgate-Palmolive Co. | | | 337,784 | | | | 22,104,585 | |
| Coty, Inc., “A” | | | 686,059 | | | | 12,561,740 | |
| Estee Lauder Cos., Inc., “A” | | | 167,791 | | | | 12,834,334 | |
| L’Oréal | | | 38,238 | | | | 6,979,566 | |
| | | | | | | | |
| | | | | | $ | 60,464,788 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – continued | | | | | |
| Electrical Equipment – 4.9% | | | | | | | | |
| Amphenol Corp., “A” | | | 190,679 | | | $ | 12,813,629 | |
| Fortive Corp. | | | 103,226 | | | | 5,536,010 | |
| Mettler-Toledo International, Inc. (a) | | | 36,416 | | | | 15,242,281 | |
| W.W. Grainger, Inc. | | | 32,330 | | | | 7,508,643 | |
| | | | | | | | |
| | | | | | $ | 41,100,563 | |
| | | | | | | | |
| Electronics – 3.1% | | | | | | | | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 314,034 | | | $ | 9,028,478 | |
| Texas Instruments, Inc. | | | 224,562 | | | | 16,386,289 | |
| | | | | | | | |
| | | | | | $ | 25,414,767 | |
| | | | | | | | |
| Food & Beverages – 3.7% | | | | | | | | |
| Mead Johnson Nutrition Co., “A” | | | 266,718 | | | $ | 18,872,966 | |
| PepsiCo, Inc. | | | 115,924 | | | | 12,129,128 | |
| | | | | | | | |
| | | | | | $ | 31,002,094 | |
| | | | | | | | |
| Food & Drug Stores – 1.7% | | | | | | | | |
| CVS Health Corp. | | | 176,447 | | | $ | 13,923,433 | |
| | | | | | | | |
| Gaming & Lodging – 0.7% | | | | | | | | |
| Paddy Power PLC | | | 56,347 | | | $ | 6,093,538 | |
| | | | | | | | |
| Insurance – 1.5% | | | | | | | | |
| Aon PLC | | | 108,951 | | | $ | 12,151,305 | |
| | | | | | | | |
| Internet – 6.1% | | | | | | | | |
| Alphabet, Inc., “A” (a) | | | 63,495 | | | $ | 50,316,613 | |
| | | | | | | | |
| Leisure & Toys – 0.6% | | | | | | | | |
| Electronic Arts, Inc. (a) | | | 62,557 | | | $ | 4,926,989 | |
| | | | | | | | |
| Machinery & Tools – 1.5% | | | | | | | | |
| Colfax Corp. (a) | | | 206,273 | | | $ | 7,411,389 | |
| Fastenal Co. | | | 107,710 | | | | 5,060,216 | |
| | | | | | | | |
| | | | | | $ | 12,471,605 | |
| | | | | | | | |
| Medical & Health Technology & Services – 0.8% | |
| Express Scripts Holding Co. (a) | | | 96,240 | | | $ | 6,620,350 | |
| | | | | | | | |
| Medical Equipment – 11.8% | | | | | | | | |
| Abbott Laboratories | | | 564,127 | | | $ | 21,668,118 | |
| Cooper Cos., Inc. | | | 52,477 | | | | 9,179,802 | |
| Danaher Corp. | | | 162,886 | | | | 12,679,046 | |
| Dentsply Sirona, Inc. | | | 107,427 | | | | 6,201,761 | |
| Thermo Fisher Scientific, Inc. | | | 203,054 | | | | 28,650,919 | |
| Waters Corp. (a) | | | 60,976 | | | | 8,194,565 | |
| Zimmer Biomet Holdings, Inc. | | | 113,612 | | | | 11,724,758 | |
| | | | | | | | |
| | | | | | $ | 98,298,969 | |
| | | | | | | | |
| Oil Services – 0.6% | | | | | | | | |
| Schlumberger Ltd. | | | 59,160 | | | $ | 4,966,482 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 4.6% | |
| Mastercard, Inc., “A” | | | 120,872 | | | $ | 12,480,034 | |
| Visa, Inc., “A” | | | 326,838 | | | | 25,499,901 | |
| | | | | | | | |
| | | | | | $ | 37,979,935 | |
| | | | | | | | |
7
MFS Massachusetts Investors Growth Stock Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| COMMON STOCKS – continued | | | | | |
| Pharmaceuticals – 5.2% | | | | | | | | |
| Eli Lilly & Co. | | | 162,661 | | | $ | 11,963,717 | |
| Roche Holding AG | | | 49,893 | | | | 11,368,280 | |
| Zoetis, Inc. | | | 364,306 | | | | 19,501,300 | |
| | | | | | | | |
| | | | | | $ | 42,833,297 | |
| | | | | | | | |
| Printing & Publishing – 1.4% | | | | | | | | |
| Moody’s Corp. | | | 125,481 | | | $ | 11,829,094 | |
| | | | | | | | |
| Railroad & Shipping – 1.6% | | | | | | | | |
| Union Pacific Corp. | | | 126,896 | | | $ | 13,156,577 | |
| | | | | | | | |
| Specialty Chemicals – 2.9% | | | | | | | | |
| Ecolab, Inc. | | | 177,444 | | | $ | 20,799,986 | |
| Praxair, Inc. | | | 25,977 | | | | 3,044,245 | |
| | | | | | | | |
| | | | | | $ | 23,844,231 | |
| | | | | | | | |
| Specialty Stores – 3.6% | | | | | | | | |
| AutoZone, Inc. (a) | | | 18,503 | | | $ | 14,613,484 | |
| TJX Cos., Inc. | | | 206,368 | | | | 15,504,428 | |
| | | | | | | | |
| | | | | | $ | 30,117,912 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $647,653,204) | | | | | | $ | 824,133,584 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| MONEY MARKET FUNDS – 0.6% | | | | | |
| MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $4,802,350) | | | 4,802,630 | | | $ | 4,802,630 | |
| | | | | | | | |
| Total Investments (Identified Cost, $652,455,554) | | | | | | $ | 828,936,214 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.1% | | | | | | | 660,463 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 829,596,677 | |
| | | | | | | | |
| (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 12/31/16 | | | | | | | | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $647,653,204) | | | $824,133,584 | | | | | |
Underlying affiliated funds, at value (identified cost, $4,802,350) | | | 4,802,630 | | | | | |
Total investments, at value (identified cost, $652,455,554) | | | $828,936,214 | | | | | |
Receivables for | �� | | | | | | | |
Investments sold | | | 430,228 | | | | | |
Fund shares sold | | | 212,410 | | | | | |
Interest and dividends | | | 858,617 | | | | | |
Other assets | | | 705 | | | | | |
Total assets | | | | | | | $830,438,174 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | $118,436 | | | | | |
Fund shares reacquired | | | 543,734 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 51,826 | | | | | |
Shareholder servicing costs | | | 260 | | | | | |
Distribution and/or service fees | | | 6,760 | | | | | |
Payable for independent Trustees’ compensation | | | 32 | | | | | |
Accrued expenses and other liabilities | | | 120,449 | | | | | |
Total liabilities | | | | | | | $841,497 | |
Net assets | | | | | | | $829,596,677 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $603,094,603 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 176,474,645 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | 44,843,098 | | | | | |
Undistributed net investment income | | | 5,184,331 | | | | | |
Net assets | | | | | | | $829,596,677 | |
Shares of beneficial interest outstanding | | | | | | | 54,173,873 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $500,923,921 | | | | 32,567,639 | | | | $15.38 | |
Service Class | | | 328,672,756 | | | | 21,606,234 | | | | 15.21 | |
| | | | | | | | | | | | |
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 12/31/16 | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $12,827,881 | | | | | |
Interest | | | 39,238 | | | | | |
Other | | | 36,830 | | | | | |
Dividends from underlying affiliated funds | | | 21,748 | | | | | |
Foreign taxes withheld | | | (289,337 | ) | | | | |
Total investment income | | | | | | | $12,636,360 | |
Expenses | | | | | | | | |
Management fee | | | $6,422,092 | | | | | |
Distribution and/or service fees | | | 833,628 | | | | | |
Shareholder servicing costs | | | 40,468 | | | | | |
Administrative services fee | | | 143,049 | | | | | |
Independent Trustees’ compensation | | | 19,128 | | | | | |
Custodian fee | | | 69,216 | | | | | |
Reimbursement of custodian expenses | | | (224,613 | ) | | | | |
Shareholder communications | | | 105,152 | | | | | |
Audit and tax fees | | | 65,677 | | | | | |
Legal fees | | | 7,945 | | | | | |
Miscellaneous | | | 29,522 | | | | | |
Total expenses | | | | | | | $7,511,264 | |
Reduction of expenses by investment adviser | | | (60,791 | ) | | | | |
Net expenses | | | | | | | $7,450,473 | |
Net investment income | | | | | | | $5,185,887 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments: | | | | | | | | |
Non-affiliated issuers | | | $45,116,224 | | | | | |
Underlying affiliated funds | | | 17 | | | | | |
Foreign currency | | | (1,351 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $45,114,890 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $(511,766 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | (4,144 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $(515,910 | ) |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $44,598,980 | |
Change in net assets from operations | | | | | | | $49,784,867 | |
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 | | | 2016 | | | | 2015 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $5,185,887 | | | | $4,189,541 | |
Net realized gain (loss) on investments and foreign currency | | | 45,114,890 | | | | 106,991,495 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | (515,910 | ) | | | (117,324,119 | ) |
Change in net assets from operations | | | $49,784,867 | | | | $(6,143,083 | ) |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(4,362,605 | ) | | | $(4,497,478 | ) |
From net realized gain on investments | | | (98,136,195 | ) | | | (54,307,466 | ) |
Total distributions declared to shareholders | | | $(102,498,800 | ) | | | $(58,804,944 | ) |
Change in net assets from fund share transactions | | | $6,923,737 | | | | $346,773,849 | |
Total change in net assets | | | $(45,790,196 | ) | | | $281,825,822 | |
Net assets | | | | | | | | |
At beginning of period | | | 875,386,873 | | | | 593,561,051 | |
At end of period (including undistributed net investment income of $5,184,331 and
$4,362,400, respectively) | | | $829,596,677 | | | | $875,386,873 | |
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 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $16.38 | | | | $17.61 | | | | $17.31 | | | | $13.37 | | | | $11.45 | |
| Income (loss) from investment operations | | | | |
Net investment income (d) | | | $0.11 | (c) | | | $0.10 | | | | $0.14 | | | | $0.08 | | | | $0.09 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.95 | | | | (0.21 | ) | | | 1.77 | | | | 3.97 | | | | 1.88 | |
Total from investment operations | | | $1.06 | | | | $(0.11 | ) | | | $1.91 | | | | $4.05 | | | | $1.97 | |
| Less distributions declared to shareholders | | | | |
From net investment income | | | $(0.10 | ) | | | $(0.09 | ) | | | $(0.10 | ) | | | $(0.11 | ) | | | $(0.05 | ) |
From net realized gain on investments | | | (1.96 | ) | | | (1.03 | ) | | | (1.51 | ) | | | — | | | | — | |
Total distributions declared to shareholders | | | $(2.06 | ) | | | $(1.12 | ) | | | $(1.61 | ) | | | $(0.11 | ) | | | $(0.05 | ) |
Net asset value, end of period (x) | | | $15.38 | | | | $16.38 | | | | $17.61 | | | | $17.31 | | | | $13.37 | |
Total return (%) (k)(r)(s)(x) | | | 6.08 | (c) | | | (0.12 | ) | | | 11.51 | | | | 30.39 | | | | 17.25 | |
Ratios (%) (to average net assets) and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.78 | (c) | | | 0.79 | | | | 0.80 | | | | 0.80 | | | | 0.80 | |
Expenses after expense reductions (f) | | | 0.77 | (c) | | | 0.79 | | | | 0.80 | | | | 0.80 | | | | 0.80 | |
Net investment income | | | 0.70 | (c) | | | 0.56 | | | | 0.81 | | | | 0.55 | | | | 0.74 | |
Portfolio turnover | | | 24 | | | | 27 | | | | 23 | | | | 26 | | | | 30 | |
Net assets at end of period (000 omitted) | | | $500,924 | | | | $537,645 | | | | $542,830 | | | | $561,066 | | | | $490,630 | |
See Notes to Financial Statements
12
MFS Massachusetts Investors Growth Stock Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $16.22 | | | | $17.48 | | | | $17.19 | | | | $13.27 | | | | $11.37 | |
| Income (loss) from investment operations | | | | |
Net investment income (d) | | | $0.07 | (c) | | | $0.06 | | | | $0.10 | | | | $0.05 | | | | $0.06 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.94 | | | | (0.21 | ) | | | 1.75 | | | | 3.94 | | | | 1.86 | |
Total from investment operations | | | $1.01 | | | | $(0.15 | ) | | | $1.85 | | | | $3.99 | | | | $1.92 | |
| Less distributions declared to shareholders | | | | |
From net investment income | | | $(0.06 | ) | | | $(0.08 | ) | | | $(0.05 | ) | | | $(0.07 | ) | | | $(0.02 | ) |
From net realized gain on investments | | | (1.96 | ) | | | (1.03 | ) | | | (1.51 | ) | | | — | | | | — | |
Total distributions declared to shareholders | | | $(2.02 | ) | | | $(1.11 | ) | | | $(1.56 | ) | | | $(0.07 | ) | | | $(0.02 | ) |
Net asset value, end of period (x) | | | $15.21 | | | | $16.22 | | | | $17.48 | | | | $17.19 | | | | $13.27 | |
Total return (%) (k)(r)(s)(x) | | | 5.84 | (c) | | | (0.33 | ) | | | 11.23 | | | | 30.13 | | | | 16.85 | |
Ratios (%) (to average net assets) and Supplemental data: | | | | |
Expenses before expense reductions (f) | | | 1.03 | (c) | | | 1.04 | | | | 1.05 | | | | 1.05 | | | | 1.05 | |
Expenses after expense reductions (f) | | | 1.02 | (c) | | | 1.03 | | | | 1.05 | | | | 1.05 | | | | 1.05 | |
Net investment income | | | 0.45 | (c) | | | 0.35 | | | | 0.55 | | | | 0.30 | | | | 0.48 | |
Portfolio turnover | | | 24 | | | | 27 | | | | 23 | | | | 26 | | | | 30 | |
Net assets at end of period (000 omitted) | | | $328,673 | | | | $337,742 | | | | $50,731 | | | | $56,699 | | | | $50,583 | |
| (c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
| (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 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 October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
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 on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange 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. 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
14
MFS Massachusetts Investors Growth Stock Portfolio
Notes to Financial Statements – continued
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, 2016 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $755,943,531 | | | | $— | | | | $— | | | | $755,943,531 | |
France | | | 14,727,722 | | | | 15,596,644 | | | | — | | | | 30,324,366 | |
Switzerland | | | — | | | | 11,368,280 | | | | — | | | | 11,368,280 | |
Taiwan | | | 9,028,478 | | | | — | | | | — | | | | 9,028,478 | |
Ireland | | | 6,093,538 | | | | — | | | | — | | | | 6,093,538 | |
Brazil | | | 6,086,956 | | | | — | | | | — | | | | 6,086,956 | |
United Kingdom | | | — | | | | 5,288,435 | | | | — | | | | 5,288,435 | |
| Mutual Funds | | | 4,802,630 | | | | — | | | | — | | | | 4,802,630 | |
| Total Investments | | | $796,682,855 | | | | $32,253,359 | | | | $— | | | | $828,936,214 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 1 investments presented above, equity investments amounting to $14,727,722 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. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. 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
15
MFS Massachusetts Investors Growth Stock Portfolio
Notes to Financial Statements – continued
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, 2016, 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.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian 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:
| | | | | | | | |
| | | 12/31/16 | | | 12/31/15 | |
| Ordinary income (including any short-term capital gains) | | | $4,362,605 | | | | $4,497,478 | |
| Long-term capital gains | | | 98,136,195 | | | | 54,307,466 | |
| Total distributions | | | $102,498,800 | | | | $58,804,944 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/16 | | | | |
| Cost of investments | | | $653,434,683 | |
| Gross appreciation | | | 199,740,391 | |
| Gross depreciation | | | (24,238,860 | ) |
| Net unrealized appreciation (depreciation) | | | $175,501,531 | |
| Undistributed ordinary income | | | 7,751,528 | |
| Undistributed long-term capital gain | | | 43,255,030 | |
| Other temporary differences | | | (6,015 | ) |
16
MFS Massachusetts Investors Growth Stock Portfolio
Notes to Financial Statements – continued
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported 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
12/31/16 | | | Year ended
12/31/15 | | | Year ended
12/31/16 | | | Year ended
12/31/15 | |
| Initial Class | | | $3,089,337 | | | | $2,812,096 | | | | $59,615,626 | | | | $33,025,044 | |
| Service Class | | | 1,273,268 | | | | 1,685,382 | | | | 38,520,569 | | | | 21,282,422 | |
| Total | | | $4,362,605 | | | | $4,497,478 | | | | $98,136,195 | | | | $54,307,466 | |
| (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, 2016, this management fee reduction amounted to $60,791, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.74% 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, 2018. For the year ended December 31, 2016, 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, 2016, the fee was $37,061, which equated to 0.0043% 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, 2016, these costs amounted to $3,407.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund 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, 2016 was equivalent to an annual effective rate of 0.0167% 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.
17
MFS Massachusetts Investors Growth Stock Portfolio
Notes to Financial Statements – continued
Other – 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. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $1,713 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the 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. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $91,706 and $208,551, respectively. The sales transactions resulted in net realized gains (losses) of $28,842.
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, aggregated $208,023,525 and $296,039,739, 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 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 787,082 | | | | $12,902,539 | | | | 362,212 | | | | $6,177,282 | |
Service Class | | | 1,309,257 | | | | 21,063,257 | | | | 1,017,638 | | | | 17,272,523 | |
| | | 2,096,339 | | | | $33,965,796 | | | | 1,379,850 | | | | $23,449,805 | |
| Shares issued in connection with acquisition of MFS Investors Growth Stock Series | | | | | | | | | | | | | | | | |
Initial Class | | | | | | | | | | | 3,851,646 | | | | $68,713,372 | |
Service Class | | | | | | | | | | | 18,671,119 | | | | 330,665,526 | |
| | | | | | | | | | | 22,522,765 | | | | $399,378,898 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 3,936,281 | | | | $62,704,963 | | | | 2,359,259 | | | | $35,837,140 | |
Service Class | | | 2,523,389 | | | | 39,793,837 | | | | 1,525,087 | | | | 22,967,804 | |
| | | 6,459,670 | | | | $102,498,800 | | | | 3,884,346 | | | | $58,804,944 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (4,985,958 | ) | | | $(80,627,877 | ) | | | (4,574,581 | ) | | | $(79,266,201 | ) |
Service Class | | | (3,046,019 | ) | | | (48,912,982 | ) | | | (3,296,444 | ) | | | (55,593,597 | ) |
| | | (8,031,977 | ) | | | $(129,540,859 | ) | | | (7,871,025 | ) | | | $(134,859,798 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (262,595 | ) | | | $(5,020,375 | ) | | | 1,998,536 | | | | $31,461,593 | |
Service Class | | | 786,627 | | | | 11,944,112 | | | | 17,917,400 | | | | 315,312,256 | |
| | | 524,032 | | | | $6,923,737 | | | | 19,915,936 | | | | $346,773,849 | |
The fund and certain other funds managed by MFS participate in a $1.25 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 Overnight Federal Reserve funds rate or daily 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 Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $5,269 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
18
MFS Massachusetts Investors Growth Stock 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 | | | 3,926,148 | | | | 118,575,169 | | | | (117,698,687 | ) | | | 4,802,630 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $17 | | | | $— | | | | $21,748 | | | | $4,802,630 | |
At close of business on March 27, 2015, the fund with net assets of approximately $584,446,043, acquired all of the assets and liabilities of MFS Investors Growth Stock Series, a series of MFS Variable Insurance Trust. The purpose of the transaction was to provide shareholders of MFS Investors Growth Stock Series the opportunity to participate in a larger combined portfolio with an identical investment objective, investment strategies and policies. The acquisition was accomplished by a tax-free exchange of approximately 22,522,765 shares of the fund (valued at approximately $399,378,898) for all of the assets and liabilities of MFS Investors Growth Stock Series. MFS Investors Growth Stock Series then distributed the shares of the fund that MFS Investors Growth Stock Series received from the fund to its shareholders. MFS Investors Growth Stock Series’ investments on that date were valued at approximately $399,252,356 with a cost basis of approximately $269,227,756. 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 Investors Growth Stock 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.
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, 2016, 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, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Massachusetts Investors Growth Stock Portfolio as of December 31, 2016, 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 15, 2017
20
MFS Massachusetts Investors Growth Stock Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, 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 53) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 55) | | Trustee | | January 2014 | | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 74) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 65) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council (until 2015); 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 |
| | | | |
Maureen R. Goldfarb (age 61) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Michael Hegarty (age 72) | | Trustee | | December 2004 | | Private investor | | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) |
| | | | |
John P. Kavanaugh (age 62) | | Trustee and Vice Chair of Trustees | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 60) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 59) | | Trustee | | March 2005 | | Private investor | | The Travelers Companies, Director; Dycom Industries, Inc., Director |
| | | |
| OFFICERS | | | | | | |
Christopher R. Bohane (k) (age 43) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 48) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 57) | | 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 |
| | | | |
Ethan D. Corey (k) (age 53) | | 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 48) | | President | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 43) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | 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) |
Susan A. Pereira (k) (age 46) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 46) | | 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 64) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 72) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 46) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Martin J. Wolin (k) (age 49) | | Chief Compliance Officer | | July 2015 | | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | | N/A |
| | | | |
James O. Yost (k) (age 56) | | 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. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
| (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. Buller and Kavanaugh and Ms. 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, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a 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 | | |
22
MFS Massachusetts Investors Growth Stock Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the 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, 2016 (“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 Senior Officer, a 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 Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of 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 Broadridge 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 Broadridge 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, 2015, 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 5th quintile for the one-year period and the 4th quintile for the five-year period ended December 31, 2015 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 and the Fund’s retail counterpart, MFS Massachusetts Investors Growth Stock 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, 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
23
MFS Massachusetts Investors Growth Stock Portfolio
Board Review of Investment Advisory Agreement – continued
Fund and 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 Broadridge. 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 data provided by Broadridge (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 Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. 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, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate 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, 2016.
24
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 mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios”, then “VIT II” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $107,950,000 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.
25
rev. 3/16
| | | | |
| 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., and MFS Heritage Trust Company. |
| | |
| 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, or 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, 2016
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 • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Research International Portfolio
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
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 | | | | |
| Nestle S.A. | | | 3.5% | |
| Novartis AG | | | 3.1% | |
| Roche Holding AG | | | 3.0% | |
| Bayer AG | | | 2.3% | |
| Schneider Electric S.A. | | | 2.1% | |
| KDDI Corp. | | | 1.7% | |
| BNP Paribas | | | 1.7% | |
| BP PLC | | | 1.7% | |
| Linde AG | | | 1.6% | |
| Danone S.A. | | | 1.6% | |
| |
| Global equity sectors | | | | |
| Financial Services | | | 24.5% | |
| Capital Goods | | | 23.7% | |
| Health Care | | | 10.6% | |
| Consumer Staples | | | 10.0% | |
| Technology | | | 8.8% | |
| Energy | | | 8.7% | |
| Consumer Cyclicals | | | 8.6% | |
| Telecommunications/Cable Television | | | 4.4% | |
| | | | |
| Issuer country weightings (x) | | | | |
| Japan | | | 19.7% | |
| Switzerland | | | 16.4% | |
| United Kingdom | | | 14.1% | |
| France | | | 9.8% | |
| Germany | | | 7.0% | |
| United States | | | 6.1% | |
| Australia | | | 4.5% | |
| Italy | | | 3.9% | |
| Netherlands | | | 3.7% | |
| Other Countries | | | 14.8% | |
| |
| Currency exposure weightings (y) | | | | |
| Euro | | | 27.7% | |
| Japanese Yen | | | 19.7% | |
| Swiss Franc | | | 16.4% | |
| British Pound Sterling | | | 14.6% | |
| United States Dollar | | | 7.2% | |
| Australian Dollar | | | 4.5% | |
| Hong Kong Dollar | | | 3.0% | |
| South Korean Won | | | 1.4% | |
| Taiwan Dollar | | | 1.3% | |
| Other Currencies | | | 4.2% | |
| (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 & Cash Equivalents. |
| (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 & Cash Equivalents. |
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
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, 2016, Initial Class shares of the MFS Research International Portfolio (“fund”) provided a total return of –0.70%, while Service Class shares of the fund provided a total return of –0.91%. These compare with a return of 1.51% over the same period for the fund’s benchmark, the MSCI EAFE Index.
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
Weak stock selection in the financial services sector detracted from performance relative to the MSCI EAFE Index. Within this sector, the timing of the fund’s ownership in shares of financial services companies HSBC (h) (United Kingdom) and Mitsubishi UFJ Financial Group (h) (Japan), and an overweight position in financial services firm Lloyds Banking Group (United Kingdom), hurt relative returns. Despite share price weakness in the first half of the reporting period, shares of HSBC recovered as results later in the period came in above market expectations owing to strong revenues and lower costs. Additionally, the company improved its Common Equity Tier 1 ratio (CET1) following significant divestment in Brazil, while the announcement of a sizable share buyback appeared to have reassured investors of a strong capital position and the ability to maintain the current dividend level.
Stock selection in both the capital goods and health care sectors also held back relative returns. Within the capital goods sector, an overweight position in Japanese-based automotive component manufacturer Denso (h) weighed on relative performance. Shares of Denso weakened in the first half of the calendar year on the back of higher-than-expected research and development expenditures, antitrust related expenses and losses on the sale of fixed assets and the appreciation of the yen, which adversely affected sales growth. Within the health care sector, the fund’s overweight positions in pharmaceutical companies Santen Pharmaceuticals (Japan), Roche Holding (Switzerland) and Novartis (Switzerland), and holdings of pharmaceutical company Valeant Pharmaceuticals International (b)(h) (Canada), dampened relative returns. The stock price of Santen Pharmaceuticals declined in December after management announced a disappointing clinical trial result for a developmental drug for treating uveitis, an inflammation of the uvea layer of the eye.
Elsewhere, the fund’s timing of ownership in shares of global energy and petrochemicals company Royal Dutch Shell (h) (United Kingdom), and an overweight position in hotel and restaurant operator Whitbread, also hampered relative results. The share price of Royal Dutch Shell strengthened, particularly during the first quarter of 2016, owing primarily to better-than-anticipated production volumes and spending reduction initiatives.
3
MFS Research International Portfolio
Management Review – continued
Contributors to Performance
Strong stock selection in the technology sector boosted relative performance. Within this sector, the fund’s holdings of semiconductor manufacturer Taiwan Semiconductor (b) (Taiwan), and an overweight position in digital products manufacturer ARM (h) (United Kingdom), aided relative performance. Shares of Taiwan Semiconductor grew consistently during the year as cost reductions and expense controls helped the company deliver better-than-expected operating margins. Additionally, overall sales growth significantly outpaced the industry during the year which further aided the share price. Shares of ARM boosted relative performance as the company’s stock price rose after the firm was acquired by Japanese-based holding company SoftBank Group.
Elsewhere, overweight positions in electrical distribution equipment manufacturer Schneider Electric (France), mining operator Rio Tinto (Australia), air conditioning system manufacturer Daikin Industries (Japan), mining giant BHP Billiton (h) (United Kingdom), medical products and equipment manufacturer Terumo (Japan) and integrated oil company BP (United Kingdom) bolstered relative performance. Shares of Schneider Electric grew during the period on the back of increased dividends and better-than-expected gross margin figures. Additionally, not owning shares of pharmaceutical company Novo Nordisk (Denmark) and generic drug manufacturer Teva Pharmaceutical Industries (Israel) also supported relative results. Shares of Novo Nordisk slipped in the second half of the year. The company reported disappointing results owing to significant pricing pressure in the US, higher-than-anticipated foreign exchange headwinds and an upcoming patent expiry for estrogen-based drug Vagifem which, paired with lowered guidance for 2017 and reduced mid-term operating profit growth targets, negatively pressured the share price.
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 a contributor to relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our portfolios to have different currency exposure than the benchmark.
Respectfully,
| | | | |
| Jose Luis Garcia | | Victoria Higley | | Thomas Melendez |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the fund at period end. |
Note to Shareholders: Effective April 29, 2016, Victoria Higley became 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 Research International Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/16
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 12/31/16
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class Inception Date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 5/06/98 | | (0.70)% | | 4.70% | | 0.55% | | |
| | | Service Class | | 8/24/01 | | (0.91)% | | 4.44% | | 0.30% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | MSCI EAFE Index (f) | | 1.51% | | 7.02% | | 1.22% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
MSCI EAFE (Europe, Australasia, Far East) Index – a market capitalization-weighted index that is designed to measure equity market performance in the developed markets, excluding the U.S. and Canada.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
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, 2016 through December 31, 2016
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, 2016 through December 31, 2016.
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
7/01/16 | | | Ending Account Value
12/31/16 | | | Expenses Paid
During Period (p)
7/01/16-12/31/16 | |
| Initial Class | | Actual | | | 0.88% | | | | $1,000.00 | | | | $1,024.80 | | | | $4.48 | |
| | Hypothetical (h) | | | 0.88% | | | | $1,000.00 | | | | $1,020.71 | | | | $4.47 | |
| Service Class | | Actual | | | 1.13% | | | | $1,000.00 | | | | $1,024.57 | | | | $5.75 | |
| | Hypothetical (h) | | | 1.13% | | | | $1,000.00 | | | | $1,019.46 | | | | $5.74 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.09% (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
6
MFS Research International Portfolio
PORTFOLIO OF INVESTMENTS 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 99.3% | | | | | | | | |
| Airlines – 0.4% | | | | | | | | |
| Aena S.A. | | | 11,753 | | | $ | 1,604,001 | |
| | | | | | | | |
| Alcoholic Beverages – 0.5% | | | | | | | | |
| AmBev S.A., ADR | | | 383,003 | | | $ | 1,880,545 | |
| | | | | | | | |
| Apparel Manufacturers – 1.3% | | | | | | | | |
| LVMH Moet Hennessy Louis Vuitton SE | | | 27,111 | | | $ | 5,169,453 | |
| | | | | | | | |
| Automotive – 3.5% | | | | | | | | |
| GKN PLC | | | 1,373,209 | | | $ | 5,594,026 | |
| Koito Manufacturing Co. Ltd. | | | 71,500 | | | | 3,775,562 | |
| USS Co. Ltd. | | | 301,000 | | | | 4,785,211 | |
| | | | | | | | |
| | | | | | $ | 14,154,799 | |
| | | | | | | | |
| Broadcasting – 1.1% | | | | | | | | |
| WPP PLC | | | 189,041 | | | $ | 4,230,809 | |
| | | | | | | | |
| Business Services – 3.4% | | | | | | | | |
| Amadeus IT Holding S.A. | | | 72,401 | | | $ | 3,290,113 | |
| Cerved Information Solutions S.p.A. | | | 119,585 | | | | 990,977 | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 100,388 | | | | 5,624,740 | |
| Mitsubishi Corp. | | | 108,000 | | | | 2,294,917 | |
| Nomura Research, Inc. | | | 52,580 | | | | 1,598,349 | |
| | | | | | | | |
| | | | | | $ | 13,799,096 | |
| | | | | | | | |
| Chemicals – 0.7% | | | | | | | | |
| Orica Ltd. | | | 221,697 | | | $ | 2,816,114 | |
| | | | | | | | |
| Computer Software – 0.7% | | | | | | | | |
Check Point Software Technologies
Ltd. (a) | | | 32,800 | | | $ | 2,770,288 | |
| | | | | | | | |
| Construction – 1.9% | | | | | | | | |
| Techtronic Industries Co. Ltd. | | | 841,000 | | | $ | 3,014,998 | |
| Toto Ltd. | | | 121,100 | | | | 4,779,177 | |
| | | | | | | | |
| | | | | | $ | 7,794,175 | |
| | | | | | | | |
| Consumer Products – 3.1% | | | | | | | | |
| L’Oréal | | | 34,436 | | | $ | 6,285,589 | |
| Reckitt Benckiser Group PLC | | | 75,251 | | | | 6,361,290 | |
| | | | | | | | |
| | | | | | $ | 12,646,879 | |
| | | | | | | | |
| Containers – 1.2% | | | | | | | | |
| Brambles Ltd. | | | 551,167 | | | $ | 4,916,487 | |
| | | | | | | | |
| Electrical Equipment – 2.6% | | | | | | | | |
| Legrand S.A. | | | 33,989 | | | $ | 1,924,876 | |
| Schneider Electric S.A. | | | 119,918 | | | | 8,332,821 | |
| | | | | | | | |
| | | | | | $ | 10,257,697 | |
| | | | | | | | |
| Electronics – 3.3% | | | | | | | | |
| Broadcom Corp. | | | 15,397 | | | $ | 2,721,728 | |
| Mellanox Technologies Ltd. (a) | | | 43,226 | | | | 1,767,943 | |
| Samsung Electronics Co. Ltd. | | | 2,169 | | | | 3,204,823 | |
| Taiwan Semiconductor Manufacturing Co. Ltd. | | | 971,804 | | | | 5,442,139 | |
| | | | | | | | |
| | | | | | $ | 13,136,633 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Energy – Independent – 1.8% | | | | | | | | |
| Cairn Energy PLC (a) | | | 556,241 | | | $ | 1,611,837 | |
| Galp Energia SGPS S.A., “B” | | | 218,006 | | | | 3,240,677 | |
| Oil Search Ltd. | | | 454,813 | | | | 2,353,308 | |
| | | | | | | | |
| | | | | | $ | 7,205,822 | |
| | | | | | | | |
| Energy – Integrated – 2.9% | | | | | | | | |
| BP PLC | | | 1,084,625 | | | $ | 6,739,310 | |
| Eni S.p.A. | | | 305,217 | | | | 4,948,502 | |
| | | | | | | | |
| | | | | | $ | 11,687,812 | |
| | | | | | | | |
| Food & Beverages – 5.1% | | | | | | | | |
| Danone S.A. | | | 102,992 | | | $ | 6,518,915 | |
| Nestle S.A. | | | 195,001 | | | | 13,988,828 | |
| | | | | | | | |
| | | | | | $ | 20,507,743 | |
| | | | | | | | |
| Food & Drug Stores – 0.9% | | | | | | | | |
| Sundrug Co. Ltd. | | | 51,000 | | | $ | 3,530,182 | |
| | | | | | | | |
| Gaming & Lodging – 0.5% | | | | | | | | |
| Paddy Power PLC | | | 17,877 | | | $ | 1,933,274 | |
| | | | | | | | |
| General Merchandise – 0.4% | | | | | | | | |
| PriceSmart, Inc. | | | 21,377 | | | $ | 1,784,980 | |
| | | | | | | | |
| Insurance – 6.2% | | | | | | | | |
| AIA Group Ltd. | | | 1,036,400 | | | $ | 5,799,969 | |
| AMP Ltd. | | | 855,678 | | | | 3,103,926 | |
| Aon PLC | | | 39,916 | | | | 4,451,831 | |
| Hiscox Ltd. | | | 204,520 | | | | 2,560,710 | |
| Swiss Re Ltd. | | | 38,061 | | | | 3,606,881 | |
| Zurich Insurance Group AG | | | 19,905 | | | | 5,467,137 | |
| | | | | | | | |
| | | | | | $ | 24,990,454 | |
| | | | | | | | |
| Internet – 1.4% | | | | | | | | |
| Alibaba Group Holding Ltd., ADR (a) | | | 36,399 | | | $ | 3,196,196 | |
| NAVER Corp. (a) | | | 3,703 | | | | 2,371,669 | |
| | | | | | | | |
| | | | | | $ | 5,567,865 | |
| | | | | | | | |
| Machinery & Tools – 4.7% | | | | | | | | |
| Daikin Industries Ltd. | | | 58,900 | | | $ | 5,394,048 | |
| GEA Group AG | | | 95,791 | | | | 3,839,627 | |
| Kubota Corp. | | | 376,300 | | | | 5,356,907 | |
| Schindler Holding AG | | | 24,429 | | | | 4,301,780 | |
| | | | | | | | |
| | | | | | $ | 18,892,362 | |
| | | | | | | | |
| Major Banks – 5.6% | | | | | | | | |
| Barclays PLC | | | 1,784,024 | | | $ | 4,900,662 | |
| BNP Paribas | | | 106,680 | | | | 6,799,568 | |
Lloyds Banking Group PLC | | | 7,009,505 | | | | 5,390,535 | |
| Sumitomo Mitsui Financial Group, Inc. | | | 141,700 | | | | 5,371,855 | |
| | | | | | | | |
| | | | | | $ | 22,462,620 | |
| | | | | | | | |
| Medical Equipment – 0.3% | | | | | | | | |
| Terumo Corp. | | | 34,500 | | | $ | 1,271,046 | |
| | | | | | | | |
7
MFS Research International Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Metals & Mining – 1.7% | | | | | | | | |
| Iluka Resources Ltd. | | | 375,814 | | | $ | 1,964,380 | |
| Rio Tinto Ltd. | | | 130,459 | | | | 4,967,961 | |
| | | | | | | | |
| | | | | | $ | 6,932,341 | |
| | | | | | | | |
| Natural Gas – Distribution – 1.3% | | | | | | | | |
| China Resources Gas Group Ltd. | | | 876,000 | | | $ | 2,455,140 | |
| Engie | | | 228,146 | | | | 2,906,509 | |
| | | | | | | | |
| | | | | | $ | 5,361,649 | |
| | | | | | | | |
| Natural Gas – Pipeline – 1.3% | | | | | | | | |
| APA Group | | | 454,254 | | | $ | 2,809,353 | |
| Enbridge, Inc. | | | 58,546 | | | | 2,463,672 | |
| | | | | | | | |
| | | | | | $ | 5,273,025 | |
| | | | | | | | |
| Oil Services – 0.4% | | | | | | | | |
| Technip | | | 21,153 | | | $ | 1,501,068 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 10.3% | | | | | |
| ABN AMRO Group N.V., GDR | | | 122,604 | | | $ | 2,716,695 | |
| Aeon Credit Service Co. Ltd. | | | 264,600 | | | | 4,680,327 | |
| DnB NOR A.S.A. | | | 270,038 | | | | 4,015,226 | |
| Element Fleet Management Corp. | | | 188,505 | | | | 1,749,356 | |
| HDFC Bank Ltd., ADR | | | 61,016 | | | | 3,702,451 | |
| Intesa Sanpaolo S.p.A. | | | 2,242,577 | | | | 5,726,936 | |
| Julius Baer Group Ltd. | | | 59,824 | | | | 2,657,213 | |
| KBC Groep N.V. | | | 69,891 | | | | 4,328,170 | |
| Mastercard, Inc., “A” | | | 50,714 | | | | 5,236,221 | |
| UBS AG | | | 409,989 | | | | 6,421,806 | |
| | | | | | | | |
| | | | | | $ | 41,234,401 | |
| | | | | | | | |
| Pharmaceuticals – 10.3% | | | | | | | | |
| Bayer AG | | | 87,600 | | | $ | 9,140,993 | |
| Novartis AG | | | 169,978 | | | | 12,369,017 | |
| Roche Holding AG | | | 53,267 | | | | 12,137,057 | |
| Santen Pharmaceutical Co. Ltd. | | | 428,600 | | | | 5,234,272 | |
| Shionogi & Co. Ltd. | | | 48,900 | | | | 2,333,269 | |
| | | | | | | | |
| | | | | | $ | 41,214,608 | |
| | | | | | | | |
| Printing & Publishing – 1.5% | | | | | | | | |
| RELX N.V. | | | 362,756 | | | $ | 6,097,745 | |
| | | | | | | | |
| Real Estate – 2.4% | | | | | | | | |
| LEG Immobilien AG | | | 69,351 | | | $ | 5,380,010 | |
| Mitsui Fudosan Co. Ltd. | | | 182,000 | | | | 4,199,717 | |
| | | | | | | | |
| | | | | | $ | 9,579,727 | |
| | | | | | | | |
| Restaurants – 0.9% | | | | | | | | |
| Whitbread PLC | | | 44,107 | | | $ | 2,050,286 | |
| Yum China Holdings, Inc. (a) | | | 66,843 | | | | 1,745,939 | |
| | | | | | | | |
| | | | | | $ | 3,796,225 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Specialty Chemicals – 6.4% | | | | | | | | |
| Akzo Nobel N.V. | | | 94,779 | | | $ | 5,919,086 | |
| Croda International PLC | | | 106,624 | | | | 4,182,795 | |
| Linde AG | | | 40,135 | | | | 6,581,103 | |
| Nippon Paint Holdings Co. Ltd. | | | 89,200 | | | | 2,417,506 | |
| Sika AG | | | 693 | | | | 3,329,231 | |
| Symrise AG | | | 54,188 | | | | 3,298,682 | |
| | | | | | | | |
| | | | | | $ | 25,728,403 | |
| | | | | | | | |
| Specialty Stores – 1.6% | | | | | | | | |
| Dufry AG (a) | | | 14,083 | | | $ | 1,756,399 | |
| Esprit Holdings Ltd. (a) | | | 1,014,000 | | | | 791,097 | |
| Just Eat PLC (a) | | | 274,260 | | | | 1,972,218 | |
| Ryohin Keikaku Co. Ltd. | | | 9,000 | | | | 1,759,808 | |
| | | | | | | | |
| | | | | | $ | 6,279,522 | |
| | | | | | | | |
| Telecommunications – Wireless – 3.4% | | | | | |
| KDDI Corp. | | | 272,500 | | | $ | 6,880,055 | |
| SoftBank Corp. | | | 61,900 | | | | 4,086,474 | |
| Vodafone Group PLC | | | 1,103,093 | | | | 2,713,030 | |
| | | | | | | | |
| | | | | | $ | 13,679,559 | |
| | | | | | | | |
| Telephone Services – 1.0% | | | | | | | | |
| BT Group PLC | | | 749,662 | | | $ | 3,394,728 | |
| Hellenic Telecommunications Organization S.A. | | | 76,506 | | | | 719,169 | |
| | | | | | | | |
| | | | | | $ | 4,113,897 | |
| | | | | | | | |
| Tobacco – 1.3% | | | | | | | | |
| Japan Tobacco, Inc. | | | 161,500 | | | $ | 5,311,709 | |
| | | | | | | | |
| Trucking – 1.0% | | | | | | | | |
| Yamato Holdings Co. Ltd. | | | 194,900 | | | $ | 3,950,969 | |
| | | | | | | | |
| Utilities – Electric Power – 1.0% | | | | | | | | |
| Enel S.p.A. | | | 917,516 | | | $ | 4,037,641 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $396,976,405) | | | | | | $ | 399,103,625 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 0.6% | | | | | |
| MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $2,422,703) | | | 2,422,703 | | | $ | 2,422,703 | |
| | | | | | | | |
Total Investments
(Identified Cost, $399,399,108) | | | | | | $ | 401,526,328 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.1% | | | | | | | 364,425 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 401,890,753 | |
| | | | | | | | |
| (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 |
| PLC | | Public Limited Company |
See Notes to Financial Statements
8
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 12/31/16 | | | | | | | | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $396,976,405) | | | $399,103,625 | | | | | |
Underlying affiliated funds, at value (identified cost, $2,422,703) | | | 2,422,703 | | | | | |
Total investments, at value (identified cost, $399,399,108) | | | $401,526,328 | | | | | |
Foreign currency, at value (identified cost, $204,010) | | | 205,378 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 814,843 | | | | | |
Fund shares sold | | | 125,146 | | | | | |
Interest and dividends | | | 1,151,151 | | | | | |
Other assets | | | 342 | | | | | |
Total assets | | | | | | | $403,823,188 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | $1,517,691 | | | | | |
Fund shares reacquired | | | 230,090 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 29,882 | | | | | |
Shareholder servicing costs | | | 108 | | | | | |
Distribution and/or service fees | | | 1,700 | | | | | |
Payable for independent Trustees’ compensation | | | 65 | | | | | |
Accrued expenses and other liabilities | | | 152,899 | | | | | |
Total liabilities | | | | | | | $1,932,435 | |
Net assets | | | | | | | $401,890,753 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $409,631,588 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 2,056,313 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (17,030,768 | ) | | | | |
Undistributed net investment income | | | 7,233,620 | | | | | |
Net assets | | | | | | | $401,890,753 | |
Shares of beneficial interest outstanding | | | | | | | 29,748,031 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $318,753,049 | | | | 23,534,242 | | | | $13.54 | |
Service Class | | | 83,137,704 | | | | 6,213,789 | | | | 13.38 | |
See Notes to Financial Statements
9
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 12/31/16 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $12,305,488 | | | | | |
Interest | | | 47,099 | | | | | |
Dividends from underlying affiliated funds | | | 11,406 | | | | | |
Other | | | 31,097 | | | | | |
Foreign taxes withheld | | | (964,135 | ) | | | | |
Total investment income | | | | | | | $11,430,955 | |
Expenses | | | | | | | | |
Management fee | | | $3,669,526 | | | | | |
Distribution and/or service fees | | | 214,682 | | | | | |
Shareholder servicing costs | | | 17,685 | | | | | |
Administrative services fee | | | 73,192 | | | | | |
Independent Trustees’ compensation | | | 11,035 | | | | | |
Custodian fee | | | 138,358 | | | | | |
Reimbursement of custodian expenses | | | (192,739 | ) | | | | |
Shareholder communications | | | 52,851 | | | | | |
Audit and tax fees | | | 63,741 | | | | | |
Legal fees | | | 3,469 | | | | | |
Miscellaneous | | | 22,431 | | | | | |
Total expenses | | | | | | | $4,074,231 | |
Reduction of expenses by investment adviser | | | (28,931 | ) | | | | |
Net expenses | | | | | | | $4,045,300 | |
Net investment income | | | | | | | $7,385,655 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments: | | | | | | | | |
Non-affiliated issuers (net of $426 country tax) | | | $(4,849,601 | ) | | | | |
Underlying affiliated funds | | | (276 | ) | | | | |
Foreign currency | | | (262,166 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $(5,112,043 | ) |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $(1,482,306 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | (2,140 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $(1,484,446 | ) |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $(6,596,489 | ) |
Change in net assets from operations | | | | | | | $789,166 | |
See Notes to Financial Statements
10
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 | | | 2016 | | | | 2015 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $7,385,655 | | | | $6,444,865 | |
Net realized gain (loss) on investments and foreign currency | | | (5,112,043 | ) | | | (7,729,463 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | | (1,484,446 | ) | | | (11,734,834 | ) |
Change in net assets from operations | | | $789,166 | | | | $(13,019,432 | ) |
| Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(6,410,697 | ) | | | $(8,316,948 | ) |
From net realized gain on investments | | | — | | | | (3,582,010 | ) |
Total distributions declared to shareholders | | | $(6,410,697 | ) | | | $(11,898,958 | ) |
Change in net assets from fund share transactions | | | $4,052,321 | | | | $100,994,304 | |
Total change in net assets | | | $(1,569,210 | ) | | | $76,075,914 | |
| Net assets | | | | | | | | |
At beginning of period | | | 403,459,963 | | | | 327,384,049 | |
At end of period (including undistributed net investment income of $7,233,620 and
$6,368,721, respectively) | | | $401,890,753 | | | | $403,459,963 | |
See Notes to Financial Statements
11
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 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $13.85 | | | | $14.56 | | | | $16.09 | | | | $13.62 | | | | $11.94 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.25 | (c) | | | $0.24 | | | | $0.39 | | | | $0.25 | | | | $0.19 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | (0.34 | ) | | | (0.52 | ) | | | (1.46 | ) | | | 2.33 | | | | 1.77 | |
Total from investment operations | | | $(0.09 | ) | | | $(0.28 | ) | | | $(1.07 | ) | | | $2.58 | | | | $1.96 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.22 | ) | | | $(0.30 | ) | | | $(0.30 | ) | | | $(0.11 | ) | | | $(0.28 | ) |
From net realized gain on investments | | | — | | | | (0.13 | ) | | | (0.16 | ) | | | — | | | | — | |
Total distributions declared to shareholders | | | $(0.22 | ) | | | $(0.43 | ) | | | $(0.46 | ) | | | $(0.11 | ) | | | $(0.28 | ) |
Net asset value, end of period (x) | | | $13.54 | | | | $13.85 | | | | $14.56 | | | | $16.09 | | | | $13.62 | |
Total return (%) (k)(r)(s)(x) | | | (0.70 | )(c) | | | (1.96 | ) | | | (6.88 | ) | | | 19.01 | | | | 16.59 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.95 | (c) | | | 1.00 | | | | 1.00 | | | | 1.00 | | | | 1.07 | |
Expenses after expense reductions (f) | | | 0.94 | (c) | | | 1.00 | | | | 0.99 | | | | 0.99 | | | | 1.07 | |
Net investment income | | | 1.87 | (c) | | | 1.61 | | | | 2.49 | | | | 1.68 | | | | 1.44 | |
Portfolio turnover | | | 41 | | | | 38 | | | | 27 | | | | 35 | | | | 46 | |
Net assets at end of period (000 omitted) | | | $318,753 | | | | $305,502 | | | | $253,001 | | | | $286,763 | | | | $269,211 | |
See Notes to Financial Statements
12
MFS Research International Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $13.68 | | | | $14.39 | | | | $15.91 | | | | $13.46 | | | | $11.80 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.21 | (c) | | | $0.20 | | | | $0.36 | | | | $0.21 | | | | $0.23 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | (0.33 | ) | | | (0.51 | ) | | | (1.47 | ) | | | 2.31 | | | | 1.67 | |
Total from investment operations | | | $(0.12 | ) | | | $(0.31 | ) | | | $(1.11 | ) | | | $2.52 | | | | $1.90 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.18 | ) | | | $(0.27 | ) | | | $(0.25 | ) | | | $(0.07 | ) | | | $(0.24 | ) |
From net realized gain on investments | | | — | | | | (0.13 | ) | | | (0.16 | ) | | | — | | | | — | |
Total distributions declared to shareholders | | | $(0.18 | ) | | | $(0.40 | ) | | | $(0.41 | ) | | | $(0.07 | ) | | | $(0.24 | ) |
Net asset value, end of period (x) | | | $13.38 | | | | $13.68 | | | | $14.39 | | | | $15.91 | | | | $13.46 | |
Total return (%) (k)(r)(s)(x) | | | (0.91 | )(c) | | | (2.20 | ) | | | (7.16 | ) | | | 18.77 | | | | 16.29 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.20 | (c) | | | 1.25 | | | | 1.25 | | | | 1.25 | | | | 1.34 | |
Expenses after expense reductions (f) | | | 1.19 | (c) | | | 1.25 | | | | 1.24 | | | | 1.24 | | | | 1.34 | |
Net investment income | | | 1.58 | (c) | | | 1.36 | | | | 2.30 | | | | 1.45 | | | | 1.87 | |
Portfolio turnover | | | 41 | | | | 38 | | | | 27 | | | | 35 | | | | 46 | |
Net assets at end of period (000 omitted) | | | $83,138 | | | | $97,958 | | | | $74,383 | | | | $92,773 | | | | $91,341 | |
| (c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
| (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 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 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 October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
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 on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange 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. 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
14
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, 2016 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
Japan | | | $8,841,891 | | | | $70,169,470 | | | | $— | | | | $79,011,361 | |
Switzerland | | | 44,129,373 | | | | 21,905,974 | | | | — | | | | 66,035,347 | |
United Kingdom | | | 6,203,028 | | | | 50,467,171 | | | | — | | | | 56,670,199 | |
France | | | 13,085,157 | | | | 26,353,642 | | | | — | | | | 39,438,799 | |
Germany | | | 12,439,675 | | | | 15,800,740 | | | | — | | | | 28,240,415 | |
United States | | | 21,587,442 | | | | — | | | | — | | | | 21,587,442 | |
Australia | | | 5,162,661 | | | | 12,800,906 | | | | — | | | | 17,963,567 | |
Italy | | | 5,726,936 | | | | 9,977,120 | | | | — | | | | 15,704,056 | |
Netherlands | | | 2,716,695 | | | | 12,016,831 | | | | — | | | | 14,733,526 | |
Other Countries | | | 36,413,399 | | | | 23,305,514 | | | | — | | | | 59,718,913 | |
| Mutual Funds | | | 2,422,703 | | | | — | | | | — | | | | 2,422,703 | |
| Total Investments | | | $158,728,960 | | | | $242,797,368 | | | | $— | | | | $401,526,328 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $19,911,053 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $90,908,135 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. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. 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
15
MFS Research International Portfolio
Notes to Financial Statements – continued
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, 2016, 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.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian 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 expiration of capital loss carryforwards and wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/16 | | | 12/31/15 | |
| Ordinary income (including any short-term capital gains) | | | $6,410,697 | | | | $9,195,865 | |
| Long-term capital gains | | | — | | | | 2,703,093 | |
| Total distributions | | | $6,410,697 | | | | $11,898,958 | |
16
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 12/31/16 | | | | |
| Cost of investments | | | $402,226,749 | |
| Gross appreciation | | | 28,388,548 | |
| Gross depreciation | | | (29,088,969 | ) |
| Net unrealized appreciation (depreciation) | | | $(700,421 | ) |
| Undistributed ordinary income | | | 7,281,177 | |
| Capital loss carryforwards | | | (14,203,127 | ) |
| Other temporary differences | | | (118,464 | ) |
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 December31, 2016, the fund had capital loss carryforwards available to offset future realized gains as follows:
| | | | |
| Pre-enactment losses which expire as follows: | | | | |
| 12/31/17 | | | $(2,184,929 | ) |
| |
| Post-enactment losses which are characterized as follows: | | | | |
| Long-Term | | | $(12,018,198 | ) |
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
12/31/16 | | | Year ended
12/31/15 | | | Year ended
12/31/16 | | | Year ended
12/31/15 | |
| Initial Class | | | $5,253,219 | | | | $6,429,230 | | | | $— | | | | $2,700,893 | |
| Service Class | | | 1,157,478 | | | | 1,887,718 | | | | — | | | | 881,117 | |
| Total | | | $6,410,697 | | | | $8,316,948 | | | | $— | | | | $3,582,010 | |
| (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, 2016, this management fee reduction amounted to $28,931, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.89% 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, 2018. For the year ended December 31, 2016, 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.
17
MFS Research International 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, 2016, the fee was $15,402, which equated to 0.0038% 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, 2016, these costs amounted to $2,283.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund 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, 2016 was equivalent to an annual effective rate of 0.0180% 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 – 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. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $808 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the 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. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $5,579,504 and $1,755,313, respectively. The sales transactions resulted in net realized gains (losses) of $266,243.
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, aggregated $177,302,855 and $166,721,435, 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 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 4,041,108 | | | | $51,331,181 | | | | 897,592 | | | | $12,867,985 | |
Service Class | | | 772,122 | | | | 10,322,971 | | | | 757,915 | | | | 11,035,640 | |
| | | 4,813,230 | | | | $61,654,152 | | | | 1,655,507 | | | | $23,903,625 | |
| Shares issued in connection with acquisition of MFS Research International Series Fund | | | | | | | | | | | | | | | | |
Initial Class | | | | | | | | | | | 6,908,974 | | | | $107,365,457 | |
Service Class | | | | | | | | | | | 2,534,997 | | | | 38,912,199 | |
| | | | | | | | | | | 9,443,971 | | | | $146,277,656 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 374,695 | | | | $5,253,219 | | | | 655,429 | | | | $9,130,123 | |
Service Class | | | 83,512 | | | | 1,157,478 | | | | 201,077 | | | | 2,768,835 | |
| | | 458,207 | | | | $6,410,697 | | | | 856,506 | | | | $11,898,958 | |
18
MFS Research International Portfolio
Notes to Financial Statements – continued
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (2,945,541 | ) | | | $(40,269,094 | ) | | | (3,773,580 | ) | | | $(58,657,091 | ) |
Service Class | | | (1,804,269 | ) | | | (23,743,434 | ) | | | (1,499,403 | ) | | | (22,428,844 | ) |
| | | (4,749,810 | ) | | | $(64,012,528 | ) | | | (5,272,983 | ) | | | $(81,085,935 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | 1,470,262 | | | | $16,315,306 | | | | 4,688,415 | | | | $70,706,474 | |
Service Class | | | (948,635 | ) | | | (12,262,985 | ) | | | 1,994,586 | | | | 30,287,830 | |
| | | 521,627 | | | | $4,052,321 | | | | 6,683,001 | | | | $100,994,304 | |
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 30%, 10%, and 6%, respectively, of the value of outstanding voting shares of the fund.
The fund and certain other funds managed by MFS participate in a $1.25 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 Overnight Federal Reserve funds rate or daily 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 Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $2,521 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 | | | 1,991,559 | | | | 79,823,326 | | | | (79,392,182 | ) | | | 2,422,703 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $(276 | ) | | | $— | | | | $11,406 | | | | $2,422,703 | |
At close of business on March 27, 2015, the fund with net assets of approximately $336,203,665, acquired all of the assets and liabilities of MFS Research International Series, a series of MFS Variable Insurance Trust. The purpose of the transaction was to provide shareholders of MFS Research International Series the opportunity to participate in a larger combined portfolio with an identical investment objective, investment policies and strategies. The acquisition was accomplished by a tax-free exchange of approximately 9,443,971 shares of the fund (valued at approximately $146,277,656) for all of the assets and liabilities of MFS Research International Series. MFS Research International Series then distributed the shares of the fund that MFS Research International Series received from the fund to its shareholders. MFS Research International Series’ investments on that date were valued at approximately $141,953,349 with a cost basis of approximately $135,092,624. 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 Research International 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.
19
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, 2016, 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, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Research International Portfolio as of December 31, 2016, 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 15, 2017
20
MFS Research International Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, 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 53) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 55) | | Trustee | | January 2014 | | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 74) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 65) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council (until 2015); 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 |
| | | | |
Maureen R. Goldfarb (age 61) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Michael Hegarty (age 72) | | Trustee | | December 2004 | | Private investor | | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) |
| | | | |
John P. Kavanaugh (age 62) | | Trustee and Vice Chair of Trustees | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 60) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 59) | | Trustee | | March 2005 | | Private investor | | The Travelers Companies, Director; Dycom Industries, Inc., Director |
| | | |
| OFFICERS | | | | | | |
Christopher R. Bohane (k) (age 43) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 48) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 57) | | 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 |
| | | | |
Ethan D. Corey (k) (age 53) | | 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 48) | | President | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 43) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
21
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) |
Susan A. Pereira (k) (age 46) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 46) | | 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 64) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 72) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 46) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Martin J. Wolin (k) (age 49) | | Chief Compliance Officer | | July 2015 | | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | | N/A |
| | | | |
James O. Yost (k) (age 56) | | 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. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
| (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. Buller and Kavanaugh and Ms. 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, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a 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 Victoria Higley Thomas Melendez | | |
22
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, 2016 (“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 Senior Officer, a 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 Broadridge Financial Solutions Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of 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 Broadridge 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 Broadridge 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, 2015, 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 3rd quintile for the one-year period and the 4th quintile for the five-year period ended December 31, 2015 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 substandard relative performance of the Fund’s retail counterpart, MFS Research International Fund, which has substantially similar investment strategies and experiences substantially similar investment performance as the Fund, at the time of their contract review meetings in 2015, they had met at each of their regular meetings since then with MFS’ senior investment management personnel to discuss the performance of the Fund’s retail counterpart and MFS’ efforts to improve the performance of
23
MFS Research International Portfolio
Board Review of Investment Advisory Agreement – continued
the Fund’s retail counterpart. The Trustees further noted that MFS Research International Fund’s three-year performance as compared to its benchmark improved for the period ended December 31, 2015, as compared to the 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 Broadridge. 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 data provided by Broadridge (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 Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. 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, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate 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, 2016.
24
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 mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios”, then “VIT II” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
Income derived from foreign sources was $10,761,522. The fund intends to pass through foreign tax credits of $820,150 for the fiscal year.
25
rev. 3/16
| | | | |
| 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., and MFS Heritage Trust Company. |
| | |
| 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, or 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, 2016
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 • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Strategic Income Portfolio
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
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 | | | 43.0% | |
| High Yield Corporates | | | 37.3% | |
| U.S. Treasury Securities | | | 5.1% | |
| Collateralized Debt Obligations | | | 4.1% | |
| Emerging Markets Bonds | | | 3.5% | |
| Commercial Mortgage-Backed Securities | | | 2.7% | |
| Floating Rate Loans | | | 1.3% | |
| Asset-Backed Securities | | | 0.7% | |
| Mortgage-Backed Securities | | | 0.6% | |
| U.S. Government Agencies | | | 0.4% | |
| | | | |
| Composition including fixed income credit quality (a)(i) | |
| AAA | | | 2.4% | |
| AA | | | 1.9% | |
| A | | | 12.5% | |
| BBB | | | 34.1% | |
| BB | | | 20.7% | |
| B | | | 15.4% | |
| CCC | | | 4.8% | |
| CC (o) | | | 0.0% | |
| C | | | 0.5% | |
| D | | | 0.1% | |
| U.S. Government | | | 4.8% | |
| Federal Agencies | | | 1.0% | |
| Not Rated | | | 0.5% | |
| Non-Fixed Income (o) | | | 0.0% | |
| Cash & Cash Equivalents | | | 1.6% | |
| Other | | | (0.3)% | |
| |
| Portfolio facts (i) | | | | |
| Average Duration (d) | | | 5.4 | |
| Average Effective Maturity (m) | | | 7.9 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. Not Rated includes fixed income securities, including fixed income futures contracts, which have not been rated by any rating agency. Non-Fixed Income includes any equity securities (including convertible bonds and equity derivatives) and/or commodity-linked derivatives. The fund may or may not have held all of these instruments on this date. 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. |
2
MFS Strategic Income Portfolio
Portfolio Composition – continued
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, including Cash & Cash Equivalents and Other, of the MFS High Yield Pooled Portfolio and not to the exposure from investing directly in the MFS High Yield Pooled Portfolio itself.
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Other includes equivalent exposure from currency derivatives and/or any offsets to derivative positions and may be negative.
Percentages are based on net assets as of 12/31/16.
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, 2016, Initial Class shares of the MFS Strategic Income Portfolio (“fund”) provided a total return of 8.24%, while Service Class shares of the fund provided a total return of 8.00%. These compare with a return of 2.65% over the same period for the fund’s benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index (formerly “Barclays U.S. Aggregate Bond Index”).
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Factors Affecting Performance
Relative to the Bloomberg Barclays U.S. Aggregate Bond Index, the fund’s greater exposure to both industrials and financial institutions contributed to performance as these sectors outperformed the benchmark during the reporting period. A lesser exposure to securities within both the treasury and mortgage-backed securities (MBS) agency fixed rate sectors also benefited relative returns. The fund’s average shorter duration (d) stance during the reporting period was another positive factor for relative performance, as yields generally increased across the curve.
The combination of security selection and an overweight position within “BBB” rated (r) bonds negatively impacted the fund’s relative performance during the reporting period.
Respectfully,
| | | | | | |
| William Adams | | Ward Brown | | Philipp Burgener | | David Cole |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| | | |
Alexander Mackey | | Joshua Marston | | Robert Persons | | Matt Ryan |
Portfolio Manager | | Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| (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. |
| (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. |
4
MFS Strategic Income Portfolio
Management Review – continued
Note to Shareholders: During the reporting period ended December 31, 2016, James Calmas was a Portfolio Manager of the Fund. Effective February 1, 2017, James Calmas is no longer a Portfolio Manager of the Fund. Effective February 1, 2017, Philipp Burgener and Alexander Mackey became Portfolio Managers 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 Strategic Income Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/16
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 12/31/16
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class Inception Date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 5/06/98 | | 8.24% | | 4.21% | | 5.01% | | |
| | | Service Class | | 8/24/01 | | 8.00% | | 3.96% | | 4.74% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Bloomberg Barclays U.S. Aggregate Bond Index (f) | | 2.65% | | 2.23% | | 4.34% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Bloomberg Barclays U.S. Aggregate Bond Index (formerly Barclays U.S. Aggregate Bond Index) – a market capitalization-weighted index that measures the performance of the U.S. investment-grade, fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities with at least one year to final maturity.
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.
6
MFS Strategic Income Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders during the Period,
July 1, 2016 through December 31, 2016
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, 2016 through December 31, 2016.
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
7/01/16 | | | Ending Account Value
12/31/16 | | | Expenses Paid
During Period (p)
7/01/16-12/31/16 | |
| Initial Class | | Actual | | | 0.62% | | | | $1,000.00 | | | | $1,011.33 | | | | $3.13 | |
| | Hypothetical (h) | | | 0.62% | | | | $1,000.00 | | | | $1,022.02 | | | | $3.15 | |
| Service Class | | Actual | | | 0.88% | | | | $1,000.00 | | | | $1,010.58 | | | | $4.45 | |
| | Hypothetical (h) | | | 0.88% | | | | $1,000.00 | | | | $1,020.71 | | | | $4.47 | |
| (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 184/366 (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. |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian during the six month period. Had this one-time Reimbursement of Expenses by Custodian not occurred during the 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 0.80%, $4.04 and $4.06 for Initial Class and 1.05%, $5.31 and $5.33 for Service Class, respectively. See Note 2 in the Notes to Financial Statements for additional information.
7
MFS Strategic Income Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – 62.7% | | | | | |
| Asset-Backed & Securitized – 7.4% | | | | | |
| ARI Fleet Lease Trust, 2016-A, “A2”, 1.82%, 7/15/2024 (n) | | $ | 100,000 | | | $ | 100,001 | |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 2.134%, 12/28/2040 (z) | | | 227,943 | | | | 173,885 | |
| Cent CLO LP, 2012-16AR, “A1AR”, FRN, 4.085%, 8/01/2024 (z) | | | 315,000 | | | | 315,014 | |
| Commercial Mortgage Trust, 2015-PC1, “A5”, 3.902%, 7/10/2050 | | | 346,107 | | | | 361,134 | |
| Credit Suisse Commercial Mortgage Trust, “A4”, FRN, 5.934%, 9/15/2039 | | | 91,624 | | | | 92,949 | |
| Credit Suisse Commercial Mortgage Trust, “AM”, FRN, 5.687%, 6/15/2039 | | | 350,000 | | | | 353,295 | |
| Crest Ltd., CDO, 7%, 1/28/2040 (a)(p) | | | 638,983 | | | | 77,100 | |
| Dryden Senior Loan Fund, 2014-31A, “C”, CLO, FRN, 3.731%, 4/18/2026 (z) | | | 280,000 | | | | 279,626 | |
| Eaton Vance CDO Ltd., 2014-1A, “B”. FRN, 2.93%, 7/15/2026 (z) | | | 310,000 | | | | 308,499 | |
| Falcon Franchise Loan LLC, FRN, 7.156%, 1/05/2023 (i)(z) | | | 12,200 | | | | 498 | |
| First Union National Bank Commercial Mortgage Trust, FRN, 2.187%, 1/12/2043 (i)(q)(z) | | | 10,117 | | | | 49 | |
| First Union-Lehman Brothers Bank of America, FRN, 1.073%, 11/18/2035 (i) | | | 543,928 | | | | 4,948 | |
| Fortress Credit BSL Ltd., 2013-1A, “A”, FRN, 2.057%, 1/19/2025 (n) | | | 409,154 | | | | 408,352 | |
| JPMorgan Chase Commercial Mortgage Trust, 2007-LD11, “AM”, FRN, 5.753%, 6/15/2049 | | | 293,049 | | | | 295,509 | |
| Lehman Brothers Commercial Conduit Mortgage Trust, FRN, 1.086%, 2/18/2030 (i) | | | 23,323 | | | | 1 | |
| Morgan Stanley Capital I Trust, “AM”, FRN, 5.689%, 4/15/2049 | | | 300,000 | | | | 293,942 | |
| Morgan Stanley Capital I, Inc., FRN, 1.481%, 4/28/2039 (i)(z) | | | 397,241 | | | | 2,765 | |
| Race Point CLO Ltd., “C”, FRN, 3.711%, 2/20/2025 (n) | | | 337,173 | | | | 337,138 | |
| Sierra Receivables Funding Co. LLC, 2015-1A, “A”, 2.4%, 3/22/2032 (n) | | | 85,151 | | | | 84,744 | |
| Voya CLO Ltd., FRN, 3.83%, 10/15/2022 (n) | | | 421,466 | | | | 421,452 | |
| | | | | | | | |
| | | | | | $ | 3,910,901 | |
| | | | | | | | |
| Automotive – 2.3% | | | | | | | | |
| Ford Motor Credit Co. LLC, FRN, 1.816%, 1/09/2018 | | $ | 390,000 | | | $ | 391,147 | |
| General Motors Financial Co., Inc., 2.625%, 7/10/2017 | | | 168,000 | | | | 168,905 | |
| General Motors Financial Co., Inc., 3.45%, 4/10/2022 | | | 273,000 | | | | 269,704 | |
| Hyundai Capital America, 2%, 3/19/2018 (n) | | | 234,000 | | | | 233,927 | |
| Hyundai Capital America, 2.4%, 10/30/2018 (n) | | | 158,000 | | | | 158,628 | |
| | | | | | | | |
| | | | | | $ | 1,222,311 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | |
| Biotechnology – 0.5% | | | | | | | | |
| Life Technologies Corp., 6%, 3/01/2020 | | $ | 240,000 | | | $ | 261,291 | |
| | | | | | | | |
| Broadcasting – 0.5% | | | | | | | | |
| SES Global Americas Holdings GP, 2.5%, 3/25/2019 (n) | | $ | 102,000 | | | $ | 101,372 | |
| Time Warner, Inc., 3.8%, 2/15/2027 | | | 142,000 | | | | 140,753 | |
| | | | | | | | |
| | | | | | $ | 242,125 | |
| | | | | | | | |
| Building – 1.0% | | | | | | | | |
| Martin Marietta Materials, Inc., 4.25%, 7/02/2024 | | $ | 215,000 | | | $ | 218,195 | |
| Martin Marietta Materials, Inc., FRN, 1.937%, 6/30/2017 | | | 300,000 | | | | 300,516 | |
| | | | | | | | |
| | | | | | $ | 518,711 | |
| | | | | | | | |
| Business Services – 0.1% | | | | | | | | |
| Fidelity National Information Services, Inc., 2.85%, 10/15/2018 | | $ | 65,000 | | | $ | 66,118 | |
| | | | | | | | |
| Cable TV – 1.6% | | | | | | | | |
| Charter Communications Operating LLC, 3.579%, 7/23/2020 | | $ | 200,000 | | | $ | 203,905 | |
| Cox Communications, Inc., 3.25%, 12/15/2022 (n) | | | 306,000 | | | | 297,729 | |
| Time Warner Cable, Inc., 8.25%, 4/01/2019 | | | 310,000 | | | | 348,218 | |
| | | | | | | | |
| | | | | | $ | 849,852 | |
| | | | | | | | |
| Chemicals – 0.6% | | | | | | | | |
| Dow Chemical Co., 8.55%, 5/15/2019 | | $ | 280,000 | | | $ | 320,778 | |
| | | | | | | | |
| Computer Software – 1.0% | | | | | | | | |
| Diamond 1 Finance Corp./Diamond 2 Finance Corp., 6.02%, 6/15/2026 (n) | | $ | 189,000 | | | $ | 204,477 | |
| Microsoft Corp., 3.125%, 11/03/2025 | | | 314,000 | | | | 317,073 | |
| | | | | | | | |
| | | | | | $ | 521,550 | |
| | | | | | | | |
| Conglomerates – 1.1% | | | | | | | | |
| General Electric Capital Corp., 6%, 8/07/2019 | | $ | 80,000 | | | $ | 88,351 | |
| General Electric Capital Corp., 5.5%, 1/08/2020 | | | 205,000 | | | | 224,483 | |
| Johnson Controls International PLC, 5.7%, 3/01/2041 | | | 260,000 | | | | 294,247 | |
| | | | | | | | |
| | | | | | $ | 607,081 | |
| | | | | | | | |
| Consumer Products – 1.0% | | | | | | | | |
| Newell Rubbermaid, Inc., 2.875%, 12/01/2019 | | $ | 110,000 | | | $ | 111,907 | |
| Newell Rubbermaid, Inc., 4.2%, 4/01/2026 | | | 138,000 | | | | 143,845 | |
| Reckitt Benckiser Treasury Services PLC, 3.625%, 9/21/2023 (n) | | | 259,000 | | | | 263,829 | |
| | | | | | | | |
| | | | | | $ | 519,581 | |
| | | | | | | | |
| Consumer Services – 0.8% | | | | | | | | |
| Experian Finance PLC, 2.375%, 6/15/2017 (n) | | $ | 400,000 | | | $ | 401,400 | |
| | | | | | | | |
8
MFS Strategic Income Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | |
| Defense Electronics – 0.2% | | | | | | | | |
| BAE Systems Holdings, Inc., 6.375%, 6/01/2019 (n) | | $ | 100,000 | | | $ | 109,049 | |
| | | | | | | | |
| Electrical Equipment – 0.2% | | | | | | | | |
| Arrow Electronics, Inc., 3%, 3/01/2018 | | $ | 84,000 | | | $ | 84,946 | |
| | | | | | | | |
| Emerging Market Quasi-Sovereign – 0.5% | | | | | |
| IIRSA Norte Finance Ltd., 8.75%, 5/30/2024 | | $ | 158,930 | | | $ | 180,386 | |
| Petrobras Global Finance B.V., 8.375%, 5/23/2021 | | | 2,000 | | | | 2,155 | |
| Petroleos Mexicanos, 6.5%, 6/02/2041 | | | 80,000 | | | | 74,924 | |
| | | | | | | | |
| | | | | | $ | 257,465 | |
| | | | | | | | |
| Emerging Market Sovereign – 0.5% | | | | | |
| Republic of Hungary, 5.375%, 2/21/2023 | | $ | 146,000 | | | $ | 158,242 | |
| United Mexican States, 4%, 10/02/2023 | | | 86,000 | | | | 86,198 | |
| | | | | | | | |
| | | | | | $ | 244,440 | |
| | | | | | | | |
| Energy – Integrated – 0.6% | | | | | | | | |
| BP Capital Markets PLC, 4.5%, 10/01/2020 | | $ | 75,000 | | | $ | 80,420 | |
| BP Capital Markets PLC, 4.742%, 3/11/2021 | | | 220,000 | | | | 239,785 | |
| | | | | | | | |
| | | | | | $ | 320,205 | |
| | | | | | | | |
| Financial Institutions – 0.8% | | | | | | | | |
| CIT Group, Inc., 3.875%, 2/19/2019 | | $ | 240,000 | | | $ | 245,100 | |
| LeasePlan Corp. N.V., 3%, 10/23/2017 (n) | | | 200,000 | | | | 201,426 | |
| | | | | | | | |
| | | | | | $ | 446,526 | |
| | | | | | | | |
| Food & Beverages – 4.6% | | | | | | | | |
| Anheuser-Busch InBev Finance, Inc., 3.65%, 2/01/2026 | | $ | 486,000 | | | $ | 492,624 | |
| Anheuser-Busch InBev Worldwide, Inc., 3.75%, 1/15/2022 | | | 205,000 | | | | 213,765 | |
| Anheuser-Busch InBev Worldwide, Inc., 3.3%, 2/01/2023 | | | 154,000 | | | | 156,570 | |
| Coca-Cola Bottling Co. Consolidated, 3.8%, 11/25/2025 | | | 310,000 | | | | 310,888 | |
| Kerry Group Financial Services, 3.2%, 4/09/2023 (n) | | | 320,000 | | | | 305,860 | |
| Kraft Heinz Foods Co., 6.125%, 8/23/2018 | | | 250,000 | | | | 266,449 | |
| Pernod Ricard S.A., 4.45%, 1/15/2022 (n) | | | 150,000 | | | | 158,993 | |
| Tyson Foods, Inc., 4.5%, 6/15/2022 | | | 124,000 | | | | 131,821 | |
| Wm. Wrigley Jr. Co., 2.4%, 10/21/2018 (n) | | | 91,000 | | | | 91,797 | |
| Wm. Wrigley Jr. Co., 3.375%, 10/21/2020 (n) | | | 277,000 | | | | 284,532 | |
| | | | | | | | |
| | | | | | $ | 2,413,299 | |
| | | | | | | | |
| Food & Drug Stores – 0.8% | | | | | | | | |
| CVS Health Corp., 3.875%, 7/20/2025 | | $ | 257,000 | | | $ | 264,779 | |
| Walgreens Boots Alliance, Inc., 3.3%, 11/18/2021 | | | 176,000 | | | | 179,137 | |
| | | | | | | | |
| | | | | | $ | 443,916 | |
| | | | | | | | |
| Insurance – 1.2% | | | | | | | | |
| American International Group, Inc., 3.75%, 7/10/2025 | | $ | 294,000 | | | $ | 295,516 | |
| Unum Group, 4%, 3/15/2024 | | | 323,000 | | | | 323,946 | |
| | | | | | | | |
| | | | | | $ | 619,462 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | |
| Insurance – Health – 1.1% | | | | | | | | |
| Aetna, Inc., 3.2%, 6/15/2026 | | $ | 298,000 | | | $ | 294,367 | |
| UnitedHealth Group, Inc., 3.75%, 7/15/2025 | | | 299,000 | | | | 309,124 | |
| | | | | | | | |
| | | | | | $ | 603,491 | |
| | | | | | | | |
| Insurance – Property & Casualty – 1.2% | | | | | |
| Allied World Assurance Co. Holdings Ltd., 4.35%, 10/29/2025 | | $ | 310,000 | | | $ | 308,773 | |
| AXIS Capital Holdings Ltd., 5.875%, 6/01/2020 | | | 90,000 | | | | 98,586 | |
| Liberty Mutual Group, Inc., 4.95%, 5/01/2022 (n) | | | 187,000 | | | | 203,833 | |
| | | | | | | | |
| | | | | | $ | 611,192 | |
| | | | | | | | |
| Major Banks – 6.8% | | | | | | | | |
| Bank of America Corp., 2.151%, 11/09/2020 | | $ | 100,000 | | | $ | 98,636 | |
| Bank of America Corp., 4.125%, 1/22/2024 | | | 325,000 | | | | 337,380 | |
| Bank of America Corp., 4.183%, 11/25/2027 | | | 260,000 | | | | 259,768 | |
| Barclays PLC, 3.25%, 1/12/2021 | | | 425,000 | | | | 425,414 | |
| Goldman Sachs Group, Inc., 5.75%, 1/24/2022 | | | 334,000 | | | | 375,132 | |
| Goldman Sachs Group, Inc., FRN, 1.901%, 10/23/2019 | | | 160,000 | | | | 161,295 | |
| ING Bank N.V., 5.8%, 9/25/2023 (n) | | | 322,000 | | | | 353,448 | |
| JPMorgan Chase & Co., 4.625%, 5/10/2021 | | | 230,000 | | | | 247,439 | |
| Merrill Lynch & Co., Inc., 6.4%, 8/28/2017 | | | 120,000 | | | | 123,676 | |
| Morgan Stanley, 7.3%, 5/13/2019 | | | 100,000 | | | | 111,384 | |
| Morgan Stanley, 5.625%, 9/23/2019 | | | 200,000 | | | | 216,694 | |
| Morgan Stanley, 3.7%, 10/23/2024 | | | 277,000 | | | | 279,955 | |
| Royal Bank of Scotland Group PLC, 6%, 12/19/2023 | | | 380,000 | | | | 394,299 | |
| Royal Bank of Scotland Group PLC, 7.5% to 8/10/2020, FRN to 12/29/2049 | | | 239,000 | | | | 226,453 | |
| | | | | | | | |
| | | | | | $ | 3,610,973 | |
| | | | | | | | |
| Medical & Health Technology & Services – 0.3% | |
| Laboratory Corp. of America Holdings, 2.625%, 2/01/2020 | | $ | 140,000 | | | $ | 139,790 | |
| | | | | | | | |
| Medical Equipment – 0.3% | |
| Abbott Laboratories, 3.4%, 11/30/2023 | | $ | 154,000 | | | $ | 153,241 | |
| | | | | | | | |
| Metals & Mining – 1.9% | |
| Barrick Gold Corp., 4.1%, 5/01/2023 | | $ | 106,000 | | | $ | 108,629 | |
| Freeport-McMoRan, Inc., 2.375%, 3/15/2018 | | | 130,000 | | | | 129,025 | |
| Freeport-McMoRan, Inc., 3.1%, 3/15/2020 | | | 200,000 | | | | 195,000 | |
| Glencore Funding LLC, 2.125%, 4/16/2018 (n) | | | 140,000 | | | | 139,409 | |
| Glencore Funding LLC, 4.125%, 5/30/2023 (z) | | | 158,000 | | | | 159,002 | |
| Glencore Funding LLC, 4%, 4/16/2025 (z) | | | 84,000 | | | | 82,320 | |
| Kinross Gold Corp., 5.95%, 3/15/2024 | | | 217,000 | | | | 219,713 | |
| | | | | | | | |
| | | | | | $ | 1,033,098 | |
| | | | | | | | |
| Midstream – 3.0% | |
| APT Pipelines Ltd., 4.2%, 3/23/2025 (n) | | $ | 245,000 | | | $ | 243,942 | |
| Enterprise Products Partners LP, 6.3%, 9/15/2017 | | | 230,000 | | | | 237,201 | |
| Kinder Morgan Energy Partners LP, 6.375%, 3/01/2041 | | | 320,000 | | | | 346,578 | |
9
MFS Strategic Income Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | | | | | |
| Midstream – continued | | | | | |
| ONEOK Partners LP, 3.2%, 9/15/2018 | | $ | 120,000 | | | $ | 122,598 | |
| Spectra Energy Capital LLC, 8%, 10/01/2019 | | | 230,000 | | | | 261,484 | |
| Williams Cos., Inc., 3.7%, 1/15/2023 | | | 74,000 | | | | 71,410 | |
| Williams Cos., Inc., 4.55%, 6/24/2024 | | | 295,000 | | | | 292,788 | |
| | | | | | | | |
| | | | | | $ | 1,576,001 | |
| | | | | | | | |
| Mortgage-Backed – 0.6% | | | | | |
| Fannie Mae, 6%, 5/01/2017 | | $ | 512 | | | $ | 514 | |
| Fannie Mae, 5.5%, 3/01/2020 - 9/01/2034 | | | 36,188 | | | | 38,830 | |
| Fannie Mae, 6.5%, 4/01/2032 | | | 29,637 | | | | 34,223 | |
| Freddie Mac, 4.224%, 3/25/2020 | | | 241,289 | | | | 257,005 | |
| | | | | | | | |
| | | | | | $ | 330,572 | |
| | | | | | | | |
| Network & Telecom – 1.5% | | | | | |
| AT&T, Inc., 2.45%, 6/30/2020 | | $ | 310,000 | | | $ | 307,622 | |
| Verizon Communications, Inc., 5.15%, 9/15/2023 | | | 334,000 | | | | 368,933 | |
| Verizon Communications, Inc., FRN, 1.763%, 6/17/2019 | | | 140,000 | | | | 141,273 | |
| | | | | | | | |
| | | | | | $ | 817,828 | |
| | | | | | | | |
| Oils – 0.7% | |
| Marathon Petroleum Corp., 3.625%, 9/15/2024 | | $ | 140,000 | | | $ | 138,096 | |
| Valero Energy Corp., 3.4%, 9/15/2026 | | | 246,000 | | | | 235,321 | |
| | | | | | | | |
| | | | | | $ | 373,417 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 2.7% | | | | | |
| Citigroup, Inc., FRN, 2.074%, 8/02/2021 | | $ | 270,000 | | | $ | 272,893 | |
| Citizens Financial Group, Inc., 4.3%, 12/03/2025 | | | 192,000 | | | | 194,777 | |
| Groupe BPCE S.A., 12.5% to 9/30/2019, FRN to 8/29/2049 (n) | | | 259,000 | | | | 316,182 | |
| Intesa Sanpaolo S.p.A., 5.017%, 6/26/2024 (n) | | | 445,000 | | | | 410,806 | |
| Lloyds Bank PLC, 5.8%, 1/13/2020 (n) | | | 210,000 | | | | 229,402 | |
| | | | | | | | |
| | | | | | $ | 1,424,060 | |
| | | | | | | | |
| Pharmaceuticals – 1.8% | | | | | |
| Actavis Funding SCS, 4.75%, 3/15/2045 | | $ | 282,000 | | | $ | 276,323 | |
| Gilead Sciences, Inc., 3.65%, 3/01/2026 | | | 209,000 | | | | 211,620 | |
| Shire Acquisitions Investments Ireland Designated Activity Co., 2.875%, 9/23/2023 | | | 318,000 | | | | 301,892 | |
| Teva Pharmaceutical Industries Ltd., 3.15%, 10/01/2026 | | | 174,000 | | | | 160,174 | |
| | | | | | | | |
| | | | | | $ | 950,009 | |
| | | | | | | | |
| Pollution Control – 0.4% | | | | | |
| Republic Services, Inc., 5.25%, 11/15/2021 | | $ | 210,000 | | | $ | 233,265 | |
| | | | | | | | |
| Railroad & Shipping – 0.3% | | | | | |
| Panama Canal Railway Co., 7%, 11/01/2026 (n) | | $ | 150,800 | | | $ | 149,292 | |
| | | | | | | | |
| Real Estate – Apartment – 0.6% | | | | | |
| AvalonBay Communities, Inc., REIT, 2.9%, 10/15/2026 | | $ | 320,000 | | | $ | 302,370 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | |
| Real Estate – Healthcare – 0.6% | | | | | |
| HCP, Inc., REIT, 5.375%, 2/01/2021 | | $ | 236,000 | | | $ | 257,616 | |
| Welltower, Inc., REIT, 2.25%, 3/15/2018 | | | 81,000 | | | | 81,336 | |
| | | | | | | | |
| | | | | | $ | 338,952 | |
| | | | | | | | |
| Real Estate – Office – 0.4% | |
| Boston Properties LP, REIT, 3.7%, 11/15/2018 | | $ | 66,000 | | | $ | 67,971 | |
| Vornado Realty LP, REIT, 2.5%, 6/30/2019 | | | 165,000 | | | | 165,516 | |
| | | | | | | | |
| | | | | | $ | 233,487 | |
| | | | | | | | |
| Real Estate – Retail – 0.7% | |
| Kimco Realty Corp., REIT, 6.875%, 10/01/2019 | | $ | 58,000 | | | $ | 64,943 | |
| Kimco Realty Corp., REIT, 2.8%, 10/01/2026 | | | 119,000 | | | | 110,582 | |
| Realty Income Corp., REIT, 3%, 1/15/2027 | | | 233,000 | | | | 219,027 | |
| | | | | | | | |
| | | | | | $ | 394,552 | |
| | | | | | | | |
| Supranational – 1.1% | |
| Banco Latinoamericano de Comercio Exterior S.A., 3.25%, 5/07/2020 (n) | | $ | 210,000 | | | $ | 211,260 | |
| Corporacion Andina de Fomento, 4.375%, 6/15/2022 | | | 340,000 | | | | 360,692 | |
| | | | | | | | |
| | | | | | $ | 571,952 | |
| | | | | | | | |
| Telecommunications – Wireless – 0.5% | |
| SBA Tower Trust, 2.898%, 10/15/2044 (n) | | $ | 255,000 | | | $ | 256,809 | |
| | | | | | | | |
| Tobacco – 1.2% | |
| Altria Group, Inc., 9.25%, 8/06/2019 | | $ | 76,000 | | | $ | 89,640 | |
| Imperial Tobacco Finance PLC, 3.75%, 7/21/2022 (n) | | | 208,000 | | | | 213,305 | |
| Reynolds American, Inc., 8.125%, 6/23/2019 | | | 173,000 | | | | 197,285 | |
| Reynolds American, Inc., 6.875%, 5/01/2020 | | | 120,000 | | | | 136,182 | |
| | | | | | | | |
| | | | | | $ | 636,412 | |
| | | | | | | | |
| U.S. Government Agencies and Equivalents – 0.4% | |
| Small Business Administration, 6.35%, 4/01/2021 | | $ | 4,998 | | | $ | 5,306 | |
| Small Business Administration, 4.77%, 4/01/2024 | | | 36,391 | | | | 38,285 | |
| Small Business Administration, 4.99%, 9/01/2024 | | | 27,203 | | | | 28,922 | |
| Small Business Administration, 4.86%, 1/01/2025 | | | 34,343 | | | | 36,108 | |
| Small Business Administration, 4.625%, 2/01/2025 | | | 48,340 | | | | 50,938 | |
| Small Business Administration, 5.11%, 8/01/2025 | | | 39,423 | | | | 42,053 | |
| | | | | | | | |
| | | | | | $ | 201,612 | |
| | | | | | | | |
| U.S. Treasury Obligations – 4.8% | |
| U.S. Treasury Bonds, 2.5%, 2/15/2045 (f) | | $ | 2,850,000 | | | $ | 2,532,633 | |
| | | | | | | | |
| Utilities – Electric Power – 2.5% | |
| Dominion Resources, Inc., 3.9%, 10/01/2025 | | $ | 168,000 | | | $ | 171,293 | |
| EDP Finance B.V., 5.25%, 1/14/2021 (n) | | | 200,000 | | | | 211,420 | |
| Enel Finance International S.A., 6.25%, 9/15/2017 (n) | | | 140,000 | | | | 144,288 | |
| Exelon Generation Co. LLC, 5.2%, 10/01/2019 | | | 135,000 | | | | 144,622 | |
10
MFS Strategic Income Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| BONDS – continued | |
| Utilities – Electric Power – continued | |
| Exelon Generation Co. LLC, 4.25%, 6/15/2022 | | $ | 128,000 | | | $ | 132,356 | |
| Oncor Electric Delivery Co., 4.1%, 6/01/2022 | | | 245,000 | | | | 261,394 | |
Southern Co., 5.5% to 3/15/2022,
FRN to 3/15/2057 | | | 270,000 | | | | 272,716 | |
| | | | | | | | |
| | | | | | $ | 1,338,089 | |
| | | | | | | | |
Total Bonds
(Identified Cost, $33,109,159) | | | $ | 33,194,104 | |
| | | | | | | | |
| | |
| COMMON STOCKS – 0.0% | | | | | | | | |
| Energy – Independent – 0.0% | | | | | | | | |
Pacific Exploration & Production Corp. (a) (Identified Cost, $106,984) | | | 594 | | | $ | 24,173 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| UNDERLYING AFFILIATED FUNDS – 35.3% | | | | | |
| MFS High Yield Pooled Portfolio (v) (Identified Cost, $20,190,373) | | | 2,028,247 | | | $ | 18,680,157 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 1.6% | | | | | |
| MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $859,396) | | | 859,396 | | | $ | 859,396 | |
| | | | | | | | |
Total Investments
(Identified Cost, $54,265,912) | | | | | | $ | 52,757,830 | |
| | | | | | | | |
OTHER ASSETS,
LESS LIABILITIES – 0.4% | | | | 209,417 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | $ | 52,967,247 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (f) | | All or a portion of the security has been segregated as collateral for open futures contracts. |
| (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 $7,248,102, representing 13.7% of net assets. |
| (p) | | Payment-in-kind security for which interest income may be received in additional securities and/or cash. During the period, no interest income was received in additional securities and/or cash. |
| (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, 2.134%, 12/28/2040 | | 3/01/06 | | | $227,943 | | | | $173,885 | |
| Cent CLO LP, 2012-16AR, “A1AR”, FRN, 4.085%, 8/01/2024 | | 5/04/16 | | | 315,000 | | | | 315,014 | |
| Dryden Senior Loan Fund, 2014-31A, “C”, CLO, FRN, 3.731%, 4/18/2026 | | 1/29/16 | | | 263,577 | | | | 279,626 | |
| Eaton Vance CDO Ltd., 2014-1A, “B”. FRN, 2.93%, 7/15/2026 | | 7/21/16 | | | 307,398 | | | | 308,499 | |
| Falcon Franchise Loan LLC, FRN, 7.156%, 1/05/2023 | | 1/18/02 | | | 1,786 | | | | 498 | |
| First Union National Bank Commercial Mortgage Trust, FRN, 2.187%, 1/12/2043 | | 12/11/03 | | | 14 | | | | 49 | |
| Glencore Funding LLC, 4.125%, 5/30/2023 | | 12/01/16-12/19/16 | | | 158,004 | | | | 159,002 | |
| Glencore Funding LLC, 4%, 4/16/2025 | | 12/01/16-12/16/16 | | | 82,603 | | | | 82,320 | |
| Morgan Stanley Capital I, Inc., FRN, 1.481%, 4/28/2039 | | 7/20/04 | | | 5,076 | | | | 2,765 | |
| Total Restricted Securities | | | | | | | | | $1,321,658 | |
| % of Net assets | | | | | | | | | 2.5% | |
The following abbreviations are used in this report and are defined:
| CDO | | Collateralized Debt Obligation |
| CLO | | Collateralized Loan Obligation |
| FRN | | Floating Rate Note. Interest rate resets periodically and the current rate may not be the rate reported at period end. |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
11
MFS Strategic Income 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 12/31/16
Forward Foreign Currency Exchange Contracts at 12/31/16
| | | | | | | | | | | | | | | | | | | | | | | | |
| Type | | Currency | | | Counterparty | | Contracts to Deliver/Receive | | Settlement Date
Range | | In Exchange For | | | Contracts
at Value | | | Unrealized
Appreciation (Depreciation) | |
| Asset Derivatives | | | | | | | | | | | | | | | | |
| SELL | | | NOK | | | Citibank N.A. | | 20,996 | | 3/10/17 | | $ | 2,501 | | | $ | 2,432 | | | $ | 69 | |
| BUY | | | SEK | | | Citibank N.A. | | 6,636 | | 3/10/17 | | | 730 | | | | 731 | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | $ | 70 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Derivatives | | | | | | | | | | | | | | | | |
| BUY | | | AUD | | | Westpac Banking Corp. | | 17,140 | | 3/10/17 | | $ | 12,755 | | | $ | 12,349 | | | $ | (406 | ) |
| BUY | | | DKK | | | Citibank N.A. | | 8,317 | | 3/10/17 | | | 1,208 | | | | 1,182 | | | | (26 | ) |
| BUY | | | EUR | | | Citibank N.A. | | 2,362 | | 3/10/17 | | | 2,542 | | | | 2,494 | | | | (48 | ) |
| BUY | | | GBP | | | Merrill Lynch International | | 4,460 | | 3/10/17 | | | 5,665 | | | | 5,505 | | | | (160 | ) |
| BUY | | | JPY | | | Goldman Sachs International | | 68,643 | | 3/10/17 | | | 606 | | | | 589 | | | | (17 | ) |
| BUY | | | NZD | | | JPMorgan Chase Bank N.A. | | 2,820 | | 3/10/17 | | | 2,013 | | | | 1,955 | | | | (58 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | $ | (715 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Futures Contracts at 12/31/16
| | | | | | | | | | | | | | | | | | |
| Description | | Currency | | | Contracts | | | Value | | Expiration
Date | | | Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives | | | | | | | | | | | | | | | | | | |
| Interest Rate Futures | | | | | | | | | | | | | | | | | | |
| U.S. Treasury Note 10 yr (Short) | | | USD | | | | 23 | | | $2,858,469 | | | March - 2017 | | | | $12,135 | |
| | | | | | | | | | | | | | | | | | |
| Liability Derivatives | | | | | | | | | | | | | | | | | | |
| Interest Rate Futures | | | | | | | | | | | | | | | | | | |
| U.S. Treasury Bond 30 yr (Long) | | | USD | | | | 20 | | | $3,013,125 | | | March - 2017 | | | | $(4,083 | ) |
| | | | | | | | | | | | | | | | | | |
At December 31, 2016, the fund had liquid securities with an aggregate value of $72,868 to cover any commitments for certain derivative contracts.
See Notes to Financial Statements
12
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 12/31/16 | | | | | | | | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $33,216,143) | | | $33,218,277 | | | | | |
Underlying affiliated funds, at value (identified cost, $21,049,769) | | | 19,539,553 | | | | | |
Total investments, at value (identified cost, $54,265,912) | | | | | | | $52,757,830 | |
Cash | | | 9,754 | | | | | |
Receivables for | | | | | | | | |
Forward foreign currency exchange contracts | | | 70 | | | | | |
Daily variation margin on open futures contracts | | | 4,022 | | | | | |
Investments sold | | | 35,026 | | | | | |
Fund shares sold | | | 1,563 | | | | | |
Interest | | | 320,102 | | | | | |
Receivable from investment adviser | | | 6,844 | | | | | |
Total assets | | | | | | | $53,135,211 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Forward foreign currency exchange contracts | | | $715 | | | | | |
Investments purchased | | | 1,374 | | | | | |
Fund shares reacquired | | | 98,858 | | | | | |
Payable to affiliates | | | | | | | | |
Shareholder servicing costs | | | 93 | | | | | |
Distribution and/or service fees | | | 180 | | | | | |
Payable for independent Trustees’ compensation | | | 33 | | | | | |
Accrued expenses and other liabilities | | | 66,711 | | | | | |
Total liabilities | | | | | | | $167,964 | |
Net assets | | | | | | | $52,967,247 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $54,219,454 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | (1,500,675 | ) | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (2,099,430 | ) | | | | |
Undistributed net investment income | | | 2,347,898 | | | | | |
Net assets | | | | | | | $52,967,247 | |
Shares of beneficial interest outstanding | | | | | | | 5,460,206 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $44,191,013 | | | | 4,549,200 | | | | $9.71 | |
Service Class | | | 8,776,234 | | | | 911,006 | | | | 9.63 | |
See Notes to Financial Statements
13
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 12/31/16 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Interest | | | $1,392,789 | | | | | |
Dividends from underlying affiliated funds | | | 1,253,709 | | | | | |
Other | | | 8,235 | | | | | |
Total investment income | | | | | | | $2,654,733 | |
Expenses | | | | | | | | |
Management fee | | | $387,094 | | | | | |
Distribution and/or service fees | | | 22,702 | | | | | |
Shareholder servicing costs | | | 14,725 | | | | | |
Administrative services fee | | | 18,325 | | | | | |
Independent Trustees’ compensation | | | 3,160 | | | | | |
Custodian fee | | | 9,483 | | | | | |
Reimbursement of custodian expenses | | | (49,089 | ) | | | | |
Shareholder communications | | | 12,128 | | | | | |
Audit and tax fees | | | 75,490 | | | | | |
Legal fees | | | 5,488 | | | | | |
Miscellaneous | | | 17,236 | | | | | |
Total expenses | | | | | | | $516,742 | |
Reduction of expenses by investment adviser | | | (99,887 | ) | | | | |
Net expenses | | | | | | | $416,855 | |
Net investment income | | | | | | | $2,237,878 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments: | | | | | | | | |
Non-affiliated issuers | | | $444,968 | | | | | |
Underlying affiliated funds | | | (71,201 | ) | | | | |
Futures contracts | | | 61,466 | | | | | |
Foreign currency | | | 82,580 | | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $517,813 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $1,729,198 | | | | | |
Futures contracts | | | (7,857 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | (83,927 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $1,637,414 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $2,155,227 | |
Change in net assets from operations | | | | | | | $4,393,105 | |
See Notes to Financial Statements
14
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 | | | 2016 | | | | 2015 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $2,237,878 | | | | $2,377,328 | |
Net realized gain (loss) on investments and foreign currency | | | 517,813 | | | | (43,379 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | | 1,637,414 | | | | (3,321,251 | ) |
Change in net assets from operations | | | $4,393,105 | | | | $(987,302 | ) |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(1,657,951 | ) | | | $(3,552,545 | ) |
Change in net assets from fund share transactions | | | $(6,737,895 | ) | | | $(9,033,727 | ) |
Total change in net assets | | | $(4,002,741 | ) | | | $(13,573,574 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 56,969,988 | | | | 70,543,562 | |
At end of period (including undistributed net investment income of $2,347,898 and
$1,569,941, respectively) | | | $52,967,247 | | | | $56,969,988 | |
See Notes to Financial Statements
15
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 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $9.25 | | | | $10.01 | | | | $10.01 | | | | $10.19 | | | | $9.74 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.40 | (c) | | | $0.37 | | | | $0.41 | | | | $0.42 | | | | $0.44 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.37 | | | | (0.55 | ) | | | (0.08 | ) | | | (0.28 | ) | | | 0.56 | |
Total from investment operations | | | $0.77 | | | | $(0.18 | ) | | | $0.33 | | | | $0.14 | | | | $1.00 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.31 | ) | | | $(0.58 | ) | | | $(0.33 | ) | | | $(0.32 | ) | | | $(0.55 | ) |
Net asset value, end of period (x) | | | $9.71 | | | | $9.25 | | | | $10.01 | | | | $10.01 | | | | $10.19 | |
Total return (%) (k)(r)(s)(x) | | | 8.24 | (c) | | | (1.85 | ) | | | 3.27 | | | | 1.46 | | | | 10.42 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f)(h) | | | 0.89 | (c) | | | 0.96 | | | | 0.94 | | | | 1.00 | | | | 1.02 | |
Expenses after expense reductions (f)(h) | | | 0.71 | (c) | | | 0.80 | | | | 0.80 | | | | 0.85 | | | | 0.90 | |
Net investment income | | | 4.09 | (c) | | | 3.74 | | | | 4.05 | | | | 4.18 | | | | 4.35 | |
Portfolio turnover | | | 21 | | | | 31 | | | | 21 | | | | 28 | | | | 40 | |
Net assets at end of period (000 omitted) | | | $44,191 | | | | $47,422 | | | | $59,824 | | | | $63,319 | | | | $43,564 | |
See Notes to Financial Statements
16
MFS Strategic Income Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $9.17 | | | | $9.92 | | | | $9.93 | | | | $10.12 | | | | $9.67 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.37 | (c) | | | $0.34 | | | | $0.39 | | | | $0.39 | | | | $0.41 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.37 | | | | (0.54 | ) | | | (0.09 | ) | | | (0.28 | ) | | | 0.56 | |
Total from investment operations | | | $0.74 | | | | $(0.20 | ) | | | $0.30 | | | | $0.11 | | | | $0.97 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.28 | ) | | | $(0.55 | ) | | | $(0.31 | ) | | | $(0.30 | ) | | | $(0.52 | ) |
Net asset value, end of period (x) | | | $9.63 | | | | $9.17 | | | | $9.92 | | | | $9.93 | | | | $10.12 | |
Total return (%) (k)(r)(s)(x) | | | 8.00 | (c) | | | (2.06 | ) | | | 2.99 | | | | 1.18 | | | | 10.18 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f)(h) | | | 1.14 | (c) | | | 1.21 | | | | 1.19 | | | | 1.25 | | | | 1.27 | |
Expenses after expense reductions (f)(h) | | | 0.97 | (c) | | | 1.05 | | | | 1.05 | | | | 1.10 | | | | 1.15 | |
Net investment income | | | 3.83 | (c) | | | 3.49 | | | | 3.80 | | | | 3.93 | | | | 4.11 | |
Portfolio turnover | | | 21 | | | | 31 | | | | 21 | | | | 28 | | | | 40 | |
Net assets at end of period (000 omitted) | | | $8,776 | | | | $9,548 | | | | $10,719 | | | | $11,829 | | | | $8,867 | |
| (c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
| (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 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
17
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”). MFS does not receive a management fee from the High Yield Pooled Portfolio. The High Yield Pooled Portfolio’s investment objective is to seek total return with an emphasis on high current income, but also considering capital appreciation. 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 and the High Yield Pooled Portfolio invest in foreign securities. Investments in foreign securities are vulnerable to the effects of changes in the relative values of the local currency and the U.S. dollar and to the effects of changes in each country’s legal, political, and economic environment.
In October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
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.
Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange as provided by a third-party pricing service. 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 on their primary exchange as provided by a third-party pricing service. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation on their primary exchange as provided by a third-party pricing service. 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 on their primary exchange as provided by a third-party pricing service. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation on their primary exchange as provided by
18
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
a third-party pricing service. 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 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, 2016 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities | | | $— | | | | $24,173 | | | | $— | | | | $24,173 | |
| U.S. Treasury Bonds & U.S. Government Agency & Equivalents | | | — | | | | 2,734,245 | | | | — | | | | 2,734,245 | |
| Non-U.S. Sovereign Debt | | | — | | | | 1,073,857 | | | | — | | | | 1,073,857 | |
| U.S. Corporate Bonds | | | — | | | | 18,393,569 | | | | — | | | | 18,393,569 | |
| Residential Mortgage-Backed Securities | | | — | | | | 330,572 | | | | — | | | | 330,572 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 1,405,090 | | | | — | | | | 1,405,090 | |
| Asset-Backed Securities (including CDOs) | | | — | | | | 2,505,811 | | | | — | | | | 2,505,811 | |
| Foreign Bonds | | | — | | | | 6,750,960 | | | | — | | | | 6,750,960 | |
| Mutual Funds | | | 19,539,553 | | | | — | | | | — | | | | 19,539,553 | |
| Total Investments | | | $19,539,553 | | | | $33,218,277 | | | | $— | | | | $52,757,830 | |
| | | | |
| Other Financial Instruments | | | | | | | | | | | | |
| Futures Contracts – Assets | | | $12,135 | | | | $— | | | | $— | | | | $12,135 | |
| Futures Contracts – Liabilities | | | (4,083 | ) | | | — | | | | — | | | | (4,083 | ) |
| Forward Foreign Currency Exchange Contracts – Assets | | | — | | | | 70 | | | | — | | | | 70 | |
| Forward Foreign Currency Exchange Contracts – Liabilities | | | — | | | | (715 | ) | | | — | | | | (715 | ) |
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
19
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
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, 2016 as reported in the Statement of Assets and Liabilities:
| | | | | | | | | | |
| | | | | Fair Value (a) | |
| Risk | | Derivative Contracts | | Asset Derivatives | | | Liability Derivatives | |
| Interest Rate | | Interest Rate Futures | | | $12,135 | | | | $(4,083 | ) |
| Foreign Exchange | | Forward Foreign Currency Exchange | | | 70 | | | | (715 | ) |
| Total | | | | | $12,205 | | | | $(4,798 | ) |
| (a) | The value of futures contracts includes cumulative appreciation (depreciation) as reported in the fund’s Portfolio of Investments. Only the current day net 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, 2016 as reported in the Statement of Operations:
| | | | | | | | |
| Risk | | Futures Contracts | | | Foreign Currency | |
| Interest Rate | | | $61,466 | | | | $— | |
| Foreign Exchange | | | — | | | | 82,580 | |
| Total | | | $61,466 | | | | $82,580 | |
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, 2016 as reported in the Statement of Operations:
| | | | | | | | |
| Risk | | Futures Contracts | | | Translation of
Assets and
Liabilities in
Foreign Currencies | |
| Interest Rate | | | $(7,857 | ) | | | $— | |
| Foreign Exchange | | | — | | | | (83,927 | ) |
| Total | | | $(7,857 | ) | | | $(83,927 | ) |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain, but not all, uncleared 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. 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 agreement 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.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the clearing broker and the clearing house for cleared derivatives (e.g., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for uncleared derivatives (e.g., forward foreign currency exchange contracts, uncleared swap agreements, and uncleared options). For derivatives traded under an ISDA Master Agreement, which contains a collateral support annex, 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
20
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
brokers.” Securities pledged as collateral or margin for the same purpose, if any, are noted in the Portfolio of Investments. The fund may be required to make payments of interest on uncovered collateral or margin obligations with the broker. Any such payments are included in “Miscellaneous” expense in the Statement of Operations.
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, a multicurrency cash settlement system for the centralized settlement of foreign transactions. 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, where applicable, 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.
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.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error
21
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian 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 and expiration of capital loss carryforwards.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/16 | | | 12/31/15 | |
| Ordinary income (including any short-term capital gains) | | | $1,657,951 | | | | $3,552,545 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/16 | | | | |
| Cost of investments | | | $54,715,272 | |
| Gross appreciation | | | 753,087 | |
| Gross depreciation | | | (2,710,529 | ) |
| Net unrealized appreciation (depreciation) | | | $(1,957,442 | ) |
| Undistributed ordinary income | | | 2,355,164 | |
| Capital loss carryforwards | | | (1,642,018 | ) |
| Other temporary differences | | | (7,911 | ) |
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, 2016, 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 | |
| | | Year ended
12/31/16 | | | Year ended
12/31/15 | |
| Initial Class | | | $1,402,576 | | | | $2,970,056 | |
| Service Class | | | 255,375 | | | | 582,489 | |
| Total | | | $1,657,951 | | | | $3,552,545 | |
22
MFS Strategic Income 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 $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, 2016, this management fee reduction amounted to $3,928, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 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 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, 2018. For the year ended December 31, 2016, this reduction amounted to $95,959, 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, 2016, the fee was $13,319, which equated to 0.0241% 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, 2016, these costs amounted to $1,406.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund 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, 2016 was equivalent to an annual effective rate of 0.0331% 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 – 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. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $109 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the 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. This money market fund does not pay a management fee to MFS.
23
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
The fund invests in the High Yield Pooled Portfolio, which is a mutual fund advised by MFS that does not pay management fees to MFS but does incur investment and operating costs. 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. The High Yield Pooled Portfolio does not pay a management fee to MFS or distribution and/or service fee to MFD.
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, were as follows:
| | | | | | | | |
| | | Purchases | | | Sales | |
| U.S. Government securities | | | $767,763 | | | | $555,247 | |
| Investments (non-U.S. Government securities) | | | $10,683,820 | | | | $14,868,006 | |
| (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 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 332,652 | | | | $3,239,753 | | | | 243,706 | | | | $2,413,257 | |
Service Class | | | 89,017 | | | | 845,820 | | | | 115,251 | | | | 1,146,200 | |
| | | 421,669 | | | | $4,085,573 | | | | 358,957 | | | | $3,559,457 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 142,829 | | | | $1,402,576 | | | | 316,300 | | | | $2,970,056 | |
Service Class | | | 26,192 | | | | 255,375 | | | | 62,499 | | | | 582,489 | |
| | | 169,021 | | | | $1,657,951 | | | | 378,799 | | | | $3,552,545 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (1,051,969 | ) | | | $(10,163,349 | ) | | | (1,413,078 | ) | | | $(14,034,614 | ) |
Service Class | | | (244,957 | ) | | | (2,318,070 | ) | | | (217,306 | ) | | | (2,111,115 | ) |
| | | (1,296,926 | ) | | | $(12,481,419 | ) | | | (1,630,384 | ) | | | $(16,145,729 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (576,488 | ) | | | $(5,521,020 | ) | | | (853,072 | ) | | | $(8,651,301 | ) |
Service Class | | | (129,748 | ) | | | (1,216,875 | ) | | | (39,556 | ) | | | (382,426 | ) |
| | | (706,236 | ) | | | $(6,737,895 | ) | | | (892,628 | ) | | | $(9,033,727 | ) |
The fund and certain other funds managed by MFS participate in a $1.25 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 Overnight Federal Reserve funds rate or daily 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 Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $341 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
24
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 | | | 2,203,194 | | | | 438,350 | | | | (613,297 | ) | | | 2,028,247 | |
| MFS Institutional Money Market Portfolio | | | 3,983,002 | | | | 11,593,755 | | | | (14,717,361 | ) | | | 859,396 | |
| | | | |
| Underlying Affiliated Funds | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS High Yield Pooled Portfolio | | | $(71,245) | | | | $— | | | | $1,248,756 | | | | $18,680,157 | |
| MFS Institutional Money Market Portfolio | | | 44 | | | | — | | | | 4,953 | | | | 859,396 | |
| | | | | | | | | | | | | | | | |
| | | $(71,201) | | | | $— | | | | $1,253,709 | | | | $19,539,553 | |
| | | | | | | | | | | | | | | | |
In May 2015, the Motors Liquidation Company Avoidance Action Trust (hereafter, “AAT”) served upon the fund a complaint in an adversary proceeding in the U.S. Bankruptcy Court for the Southern District of New York, captioned Motors Liquidation Company Avoidance Action Trust v. JPMorgan Chase Bank, N.A., et al. (No. 09-00504 (REG)). The complaint, which was originally filed in 2009 but not served on the fund until 2015, names as defendants over 500 entities (including the fund) that held an interest in a $1.5 billion General Motors (GM) term loan in 2009, when GM filed for bankruptcy. The AAT alleges that the fund and the other term loan lenders were improperly treated as secured lenders with respect to the term loan shortly before and immediately after GM’s bankruptcy, receiving full principal and interest payments under the loan. The AAT alleges that the fund and other term loan lenders should have been treated as unsecured (or partially unsecured) creditors because the main lien securing the collateral was allegedly not perfected at the time of GM’s bankruptcy due to an erroneous filing in October 2008 that terminated the financing statement perfecting the lien. The AAT seeks to claw back payments made to the fund and the other term loan lenders after, and during the 90 days before, GM’s June 2009 bankruptcy petition. During that time period, the fund received term loan payments of approximately $190,000. The fund cannot predict the outcome of this proceeding. Among other things, it is unclear whether the AAT’s claims will succeed; what the fund would be entitled to as an unsecured (or partially unsecured) creditor, given the existence of other collateral not impacted by the erroneous October 2008 filing; whether third parties responsible for the erroneous October 2008 filing would bear some or all of any liability; and the degree to which the fund may be entitled to indemnification from a third party for any amount required to be disgorged. The fund has and will continue to incur legal expenses associated with the defense of this action and in related claims against third parties.
25
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, 2016, 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, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Strategic Income Portfolio as of December 31, 2016, 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 15, 2017
26
MFS Strategic Income Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, 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 53) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 55) | | Trustee | | January 2014 | | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 74) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 65) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council (until 2015); 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 |
| | | | |
Maureen R. Goldfarb (age 61) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Michael Hegarty (age 72) | | Trustee | | December 2004 | | Private investor | | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) |
| | | | |
John P. Kavanaugh (age 62) | | Trustee and Vice Chair of Trustees | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 60) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 59) | | Trustee | | March 2005 | | Private investor | | The Travelers Companies, Director; Dycom Industries, Inc., Director |
| | | |
| OFFICERS | | | | | | |
Christopher R. Bohane (k) (age 43) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 48) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 57) | | 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 |
| | | | |
Ethan D. Corey (k) (age 53) | | 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 48) | | President | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 43) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
27
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) |
Susan A. Pereira (k) (age 46) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 46) | | 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 64) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 72) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 46) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Martin J. Wolin (k) (age 49) | | Chief Compliance Officer | | July 2015 | | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | | N/A |
| | | | |
James O. Yost (k) (age 56) | | 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. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
| (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. Buller and Kavanaugh and Ms. 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, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
28
MFS Strategic Income Portfolio
Trustees and Officers – continued
The Statement of Additional Information for a 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 Philipp Burgener David Cole Alexander Mackey Joshua Marston Robert Persons Matt Ryan | | |
29
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, 2016 (“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 Senior Officer, a 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 Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of 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 Broadridge 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 Broadridge 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, 2015, 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, 2015 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.
30
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 Broadridge. 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 data provided by Broadridge (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 Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. 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, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate 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, 2016.
31
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 mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios”, then “VIT II” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
32
rev. 3/16
| | | | |
| 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. |
33
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., and MFS Heritage Trust Company. |
| | |
| 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, or 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. |
34
ANNUAL REPORT
December 31, 2016
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 • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Technology Portfolio
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
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) | | | | |
| Alphabet, Inc., “A” | | | 12.5% | |
| Amazon.com, Inc. | | | 6.7% | |
| Facebook, Inc., “A” | | | 6.6% | |
| Microsoft Corp. | | | 6.3% | |
| Microchip Technology, Inc. | | | 3.5% | |
| Hewlett Packard Enterprise | | | 3.4% | |
| Visa, Inc., “A” | | | 3.3% | |
| Salesforce.com, Inc. | | | 3.3% | |
| Adobe Systems, Inc. | | | 3.3% | |
| NXP Semiconductors N.V. | | | 3.0% | |
| | | | |
| Top five industries (i) | | | | |
| Internet | | | 21.3% | |
| Computer Software | | | 15.3% | |
| Electronics | | | 12.2% | |
| Computer Software – Systems (s) | | | 9.6% | |
| Business Services | | | 8.6% | |
| (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 & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Other includes equivalent exposure from currency derivatives and/or any offsets to derivative positions.
Percentages are based on net assets as of 12/31/16.
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, 2016, Initial Class shares of the MFS Technology Portfolio (“fund”) provided a total return of 8.69%, while Service Class shares of the fund provided a total return of 8.39%. These compare with a return of 11.96% over the same period for the fund’s benchmark, the Standard & Poor’s 500 Stock Index, and a return of 13.56% for the fund’s other benchmark, the Standard & Poor’s North American Technology Sector Index.
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day
Detractors from Performance
Stock selection in the computer software industry was a primary factor that detracted from performance relative to the Standard & Poor’s North American Technology Sector Index. Overweight holdings of customer information software manager Salesforce.com and open source software solutions provider Red Hat weakened relative performance. The fund’s holdings of enterprise software solutions developer Enghouse Systems (b)(h) (Canada) also dampened relative performance.
An underweight position in the electronics industry was another area of relative weakness. The fund’s underweight position in computer graphics processors maker NVIDIA (h) weighed on relative returns as the stock outperformed the benchmark during the period. Strong demand for the company’s graphical processing units used in the gaming and deep learning data center segments helped drive record results. Not owning shares of semiconductor company Texas Instruments also hurt relative performance as the stock outperformed the benchmark during the reporting period.
Elsewhere, the fund’s short position in diversified technology products and services company IBM weighed on relative returns. Overweight positions in technology holdings company Alphabet and financial services software designer SS&C detracted from relative returns. The fund’s underweight holding of wireless communications software company QUALCOMM also weakened relative returns. Holdings of data platform provider Hortonworks (b)(h) further dampened relative performance.
Contributors to Performance
An overweight position and stock selection in the broadcasting industry were primary contributors to relative performance. The fund’s position in shares of media firm Time Warner (b) benefited relative performance. Shares of Time Warner rose following news of a proposed acquisition of the company by telecommunications services provider AT&T. The stock price was further buoyed after management reported earnings that were above consensus estimates, driven by strong results in the Turner cable networks division and a favorable tax adjustment.
3
MFS Technology Portfolio
Management Review – continued
Stock selection in the consumer services industry also strengthened relative returns. However, there were no individual securities within this industry that were among the fund’s top relative contributors during the reporting period.
In other industries, the fund’s overweight positions in enterprise information technology provider Hewlett-Packard, semiconductor manufacturer Microchip Technology, software solutions provider Silicon Laboratories, global provider of banking and payment technologies Fidelity National Information Services and online information portal Yahoo (h) helped relative returns. Shares of Microchip Technologies rose as synergies from the recent acquisition of Atmel pushed earnings above market expectations and led the company to raise its earnings outlook. The fund’s holdings of digital marketing software provider Marketo (b)(h) aided relative returns. The timing of the fund’s ownership in shares of enterprise software products maker Oracle (h), and a short position in computer components company Intel (h), also supported relative results. Not owning shares of network security solutions provider Palo Alto Networks further benefited 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 12/31/16
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 12/31/16
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class Inception Date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 6/16/00 | | 8.69% | | 15.60% | | 10.14% | | |
| | | Service Class | | 8/24/01 | | 8.39% | | 15.28% | | 9.86% | | |
| | | | |
| Comparative benchmarks | | | | | | | | |
| | | Standard & Poor’s 500 Stock Index (f) | | 11.96% | | 14.66% | | 6.95% | | |
| | | Standard & Poor’s North American Technology Sector Index (f) | | 13.56% | | 17.41% | | 10.42% | | |
| (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, 2016 through December 31, 2016
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, 2016 through December 31, 2016.
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
7/01/16 | | | Ending
Account Value
12/31/16 | | | Expenses Paid
During Period (p)
7/01/16-12/31/16 | |
| Initial Class | | Actual | | | 0.81% | | | | $1,000.00 | | | | $1,080.01 | | | | $4.24 | |
| | Hypothetical (h) | | | 0.81% | | | | $1,000.00 | | | | $1,021.06 | | | | $4.12 | |
| Service Class | | Actual | | | 1.06% | | | | $1,000.00 | | | | $1,078.44 | | | | $5.54 | |
| | Hypothetical (h) | | | 1.06% | | | | $1,000.00 | | | | $1,019.81 | | | | $5.38 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios include 0.04% of investment related expenses from short sales (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.07% (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
6
MFS Technology Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 97.6% | | | | | | | | |
| Aerospace – 1.0% | | | | | | | | |
| Leidos Holdings, Inc. | | | 19,937 | | | $ | 1,019,578 | |
| Northrop Grumman Corp. | | | 1,608 | | | | 373,989 | |
| | | | | | | | |
| | | | | | $ | 1,393,567 | |
| | | | | | | | |
| Broadcasting – 1.2% | | | | | | | | |
| Time Warner, Inc. | | | 17,228 | | | $ | 1,663,019 | |
| | | | | | | | |
| Brokerage & Asset Managers – 2.3% | | | | | |
| Intercontinental Exchange, Inc. | | | 24,460 | | | $ | 1,380,033 | |
| NASDAQ, Inc. | | | 27,882 | | | | 1,871,440 | |
| | | | | | | | |
| | | | | | $ | 3,251,473 | |
| | | | | | | | |
| Business Services – 8.6% | | | | | | | | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 37,164 | | | $ | 2,082,299 | |
| Equifax, Inc. | | | 9,837 | | | | 1,163,028 | |
| Fidelity National Information Services, Inc. | | | 37,644 | | | | 2,847,391 | |
| Fiserv, Inc. (a) | | | 19,151 | | | | 2,035,368 | |
| FleetCor Technologies, Inc. (a) | | | 11,898 | | | | 1,683,805 | |
| Global Payments, Inc. | | | 24,348 | | | | 1,689,995 | |
| Verisk Analytics, Inc., “A” (a) | | | 8,480 | | | | 688,322 | |
| | | | | | | | |
| | | | | | $ | 12,190,208 | |
| | | | | | | | |
| Cable TV – 0.5% | | | | | | | | |
| Charter Communications, Inc., “A” (a) | | | 2,661 | | | $ | 766,155 | |
| | | | | | | | |
| Computer Software – 15.3% | | | | | | | | |
| Adobe Systems, Inc. (a) | | | 45,530 | | | $ | 4,687,313 | |
| Akamai Technologies, Inc. (a) | | | 23,073 | | | | 1,538,508 | |
| Cadence Design Systems, Inc. (a) | | | 45,333 | | | | 1,143,298 | |
| Microsoft Corp. | | | 142,736 | | | | 8,869,615 | |
| Red Hat, Inc. (a) | | | 7,564 | | | | 527,211 | |
| Salesforce.com, Inc. (a) | | | 68,606 | | | | 4,696,767 | |
| Twilio, Inc., “A” (a) | | | 5,806 | | | | 167,503 | |
| | | | | | | | |
| | | | | | $ | 21,630,215 | |
| | | | | | | | |
| Computer Software – Systems – 10.4% | | | | | |
| Apple, Inc. (s) | | | 35,157 | | | $ | 4,071,884 | |
| Constellation Software, Inc. | | | 4,071 | | | | 1,849,922 | |
| Hewlett Packard Enterprise | | | 208,521 | | | | 4,825,176 | |
| Kinaxis, Inc. (a) | | | 4,629 | | | | 215,479 | |
| NICE Systems Ltd., ADR | | | 11,253 | | | | 773,756 | |
| ServiceNow, Inc. (a) | | | 11,080 | | | | 823,687 | |
| SS&C Technologies Holdings, Inc. | | | 40,202 | | | | 1,149,777 | |
| Vantiv, Inc., “A” (a) | | | 11,119 | | | | 662,915 | |
| Verint Systems, Inc. (a) | | | 12,100 | | | | 426,525 | |
| | | | | | | | |
| | | | | | $ | 14,799,121 | |
| | | | | | | | |
| Consumer Services – 1.8% | | | | | | | | |
| Priceline Group, Inc. (a) | | | 1,755 | | | $ | 2,572,935 | |
| | | | | | | | |
| Electrical Equipment – 1.3% | | | | | | | | |
| Amphenol Corp., “A” | | | 27,778 | | | $ | 1,866,682 | |
| | | | | | | | |
| Electronics – 12.3% | | | | | | | | |
| Applied Materials, Inc. | | | 55,562 | | | $ | 1,792,986 | |
| Broadcom Corp. | | | 20,215 | | | | 3,573,406 | |
| Coherent, Inc. (a) | | | 6,311 | | | | 867,037 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Electronics – continued | | | | | | | | |
| Mellanox Technologies Ltd. (a) | | | 13,200 | | | $ | 539,880 | |
| Microchip Technology, Inc. | | | 76,353 | | | | 4,898,045 | |
| NXP Semiconductors N.V. (a) | | | 43,951 | | | | 4,307,638 | |
| Silicon Laboratories, Inc. (a) | | | 22,051 | | | | 1,433,315 | |
| | | | | | | | |
| | | | | | $ | 17,412,307 | |
| | | | | | | | |
| Entertainment – 0.8% | | | | | | | | |
| Netflix, Inc. (a) | | | 9,139 | | | $ | 1,131,408 | |
| | | | | | | | |
| Internet – 21.4% | | | | | | | | |
| Alibaba Group Holding Ltd., ADR (a) | | | 25,461 | | | $ | 2,235,730 | |
| Alphabet, Inc., “A” (a)(s) | | | 22,308 | | | | 17,677,975 | |
| Facebook, Inc., “A” (a)(s) | | | 80,956 | | | | 9,313,988 | |
| LogMeIn, Inc. | | | 10,742 | | | | 1,037,140 | |
| | | | | | | | |
| | | | | | $ | 30,264,833 | |
| | | | | | | | |
| Leisure & Toys – 2.7% | | | | | | | | |
| Activision Blizzard, Inc. | | | 47,335 | | | $ | 1,709,267 | |
| Electronic Arts, Inc. (a) | | | 27,385 | | | | 2,156,843 | |
| | | | | | | | |
| | | | | | $ | 3,866,110 | |
| | | | | | | | |
| Network & Telecom – 3.5% | | | | | | | | |
| Cisco Systems, Inc. | | | 131,901 | | | $ | 3,986,048 | |
| Harris Corp. | | | 3,385 | | | | 346,861 | |
| Qualcomm, Inc. | | | 10,399 | | | | 678,015 | |
| | | | | | | | |
| | | | | | $ | 5,010,924 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 6.2% | |
| Mastercard, Inc., “A” | | | 39,003 | | | $ | 4,027,060 | |
| Visa, Inc., “A” | | | 60,543 | | | | 4,723,565 | |
| | | | | | | | |
| | | | | | $ | 8,750,625 | |
| | | | | | | | |
| Specialty Stores – 6.7% | | | | | | | | |
| Amazon.com, Inc. (a) | | | 12,698 | | | $ | 9,521,849 | |
| | | | | | | | |
| Telecommunications – Wireless – 1.6% | |
| American Tower Corp., REIT | | | 9,177 | | | $ | 969,825 | |
| SBA Communications Corp. (a) | | | 12,104 | | | | 1,249,859 | |
| | | | | | | | |
| | | | | | $ | 2,219,684 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $98,886,248) | | | | | | $ | 138,311,115 | |
| | | | | | | | |
| Issuer/Expiration Date/Strike Price | | Number of
Contracts | | | | |
| PUT OPTIONS PURCHASED – 0.0% | |
| Consumer Services – 0.0% | | | | | | | | |
| Tripadvisor, Inc. – March 2017 @ $49 | | | 40 | | | $ | 18,800 | |
| | | | | | | | |
| Electronics – 0.0% | | | | | | | | |
| Sanmina Corp. – February 2017 @ $38 | | | 65 | | | $ | 19,500 | |
| | | | | | | | |
| Internet – 0.0% | | | | | | | | |
| Twitter, Inc. – March 2017 @ $19 | | | 63 | | | $ | 20,790 | |
| | | | | | | | |
Total Put Options Purchased
(Premium Paid, $65,305) | | | | | | $ | 59,090 | |
| | | | | | | | |
7
MFS Technology Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| MONEY MARKET FUNDS – 3.8% | | | | | |
MFS Institutional Money Market Portfolio,
0.51% (v) (Identified Cost, $5,414,347) | | | 5,414,389 | | | $ | 5,414,389 | |
| | | | | | | | |
Total Investments
(Identified Cost, $104,365,900) | | | | | | $ | 143,784,594 | |
| | | | | | | | |
| |
| SECURITIES SOLD SHORT – (1.3)% | | | | | |
| Computer Software – Systems – (0.9)% | | | | | |
| International Business Machines Corp. | | | (7,345 | ) | | $ | (1,219,197 | ) |
| | | | | | | | |
| Electrical Equipment – (0.4)% | | | | | |
| Belden, Inc. | | | (7,736 | ) | | $ | (578,421 | ) |
| | | | | | | | |
Total Securities Sold Short
(Proceeds Received, $1,622,223) | | | | | | $ | (1,797,618 | ) |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.1)% | | | | | | | (231,339 | ) |
| | | | | | | | |
| Net Assets – 100.0% | | | | | | $ | 141,755,637 | |
| | | | | | | | |
| (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, 2016, the fund had cash collateral of $43,517 and other liquid securities with an aggregate value of $3,250,183 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 |
| 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 12/31/16 | | | | | | | | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $98,951,553) | | | $138,370,205 | | | | | |
Underlying affiliated funds, at value (identified cost, $5,414,347) | | | 5,414,389 | | | | | |
Total investments, at value (identified cost, $104,365,900) | | | $143,784,594 | | | | | |
Deposits with brokers | | | 43,517 | | | | | |
Receivables for | | | | | | | | |
Fund shares sold | | | 144,087 | | | | | |
Interest and dividends | | | 29,607 | | | | | |
Other assets | | | 125 | | | | | |
Total assets | | | | | | | $144,001,930 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Dividends on securities sold short | | | $387 | | | | | |
Securities sold short, at value (proceeds received, $1,622,223) | | | 1,797,618 | | | | | |
Investments purchased | | | 356,221 | | | | | |
Fund shares reacquired | | | 32,033 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 8,962 | | | | | |
Shareholder servicing costs | | | 55 | | | | | |
Distribution and/or service fees | | | 2,616 | | | | | |
Payable for independent Trustees’ compensation | | | 45 | | | | | |
Accrued expenses and other liabilities | | | 48,356 | | | | | |
Total liabilities | | | | | | | $2,246,293 | |
Net assets | | | | | | | $141,755,637 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $99,570,638 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 39,243,261 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | 2,941,738 | | | | | |
Net assets | | | | | | | $141,755,637 | |
Shares of beneficial interest outstanding | | | | | | | 11,187,593 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $15,195,091 | | | | 1,152,101 | | | | $13.19 | |
Service Class | | | 126,560,546 | | | | 10,035,492 | | | | 12.61 | |
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 12/31/16 | | | | | |
Net investment loss | | | | | |
Income | | | | | | | | |
Dividends | | | $948,977 | | | | | |
Interest | | | 9,277 | | | | | |
Dividends from underlying affiliated funds | | | 12,574 | | | | | |
Other | | | 5,176 | | | | | |
Foreign taxes withheld | | | (2,504 | ) | | | | |
Total investment income | | | | | | | $973,500 | |
Expenses | | | | | | | | |
Management fee | | | $977,528 | | | | | |
Distribution and/or service fees | | | 287,969 | | | | | |
Shareholder servicing costs | | | 8,037 | | | | | |
Administrative services fee | | | 30,081 | | | | | |
Independent Trustees’ compensation | | | 5,273 | | | | | |
Custodian fee | | | 12,956 | | | | | |
Reimbursement of custodian expenses | | | (50,065 | ) | | | | |
Shareholder communications | | | 12,754 | | | | | |
Audit and tax fees | | | 53,443 | | | | | |
Legal fees | | | 1,623 | | | | | |
Dividend and interest expense on securities sold short | | | 38,750 | | | | | |
Miscellaneous | | | 21,188 | | | | | |
Total expenses | | | | | | | $1,399,537 | |
Reduction of expenses by investment adviser | | | (9,253 | ) | | | | |
Net expenses | | | | | | | $1,390,284 | |
Net investment loss | | | | | | | $(416,784 | ) |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments: | | | | | | | | |
Non-affiliated issuers | | | $4,112,134 | | | | | |
Underlying affiliated funds | | | 71 | | | | | |
Written options | | | 159,976 | | | | | |
Securities sold short | | | (246,422 | ) | | | | |
Foreign currency | | | 899 | | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $4,026,658 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $7,610,186 | | | | | |
Securities sold short | | | (135,389 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | (27 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $7,474,770 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $11,501,428 | |
Change in net assets from operations | | | | | | | $11,084,644 | |
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 | | | 2016 | | | | 2015 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment loss | | | $(416,784 | ) | | | $(465,252 | ) |
Net realized gain (loss) on investments and foreign currency | | | 4,026,658 | | | | 3,622,863 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 7,474,770 | | | | 7,577,384 | |
Change in net assets from operations | | | $11,084,644 | | | | $10,734,995 | |
| Distributions declared to shareholders | | | | | | | | |
From net realized gain on investments | | | $(3,659,012 | ) | | | $(3,394,608 | ) |
Change in net assets from fund share transactions | | | $12,740,167 | | | | $16,495,188 | |
Total change in net assets | | | $20,165,799 | | | | $23,835,575 | |
Net assets | | | | | | | | |
At beginning of period | | | 121,589,838 | | | | 97,754,263 | |
At end of period (including accumulated net investment loss of $0 and
$99, respectively) | | | $141,755,637 | | | | $121,589,838 | |
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 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $12.45 | | | | $11.63 | | | | $10.71 | | | | $7.93 | | | | $6.92 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment loss (d) | | | $(0.01 | )(c) | | | $(0.03 | ) | | | $(0.02 | ) | | | $(0.02 | ) | | | $(0.04 | ) |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 1.10 | | | | 1.22 | | | | 1.16 | | | | 2.81 | | | | 1.05 | |
Total from investment operations | | | $1.09 | | | | $1.19 | | | | $1.14 | | | | $2.79 | | | | $1.01 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net realized gain on investments | | | $(0.35 | ) | | | $(0.37 | ) | | | $(0.22 | ) | | | $(0.01 | ) | | | $— | |
Net asset value, end of period (x) | | | $13.19 | | | | $12.45 | | | | $11.63 | | | | $10.71 | | | | $7.93 | |
Total return (%) (k)(r)(s)(x) | | | 8.69 | (c) | | | 10.75 | | | | 10.71 | | | | 35.18 | | | | 14.60 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.85 | (c) | | | 0.91 | | | | 0.94 | | | | 1.05 | | | | 1.18 | |
Expenses after expense reductions (f) | | | 0.85 | (c) | | | 0.91 | | | | 0.93 | | | | 1.05 | | | | 1.13 | |
Net investment loss | | | (0.10 | )(c) | | | (0.22 | ) | | | (0.20 | ) | | | (0.27 | ) | | | (0.51 | ) |
Portfolio turnover | | | 36 | | | | 45 | | | | 35 | | | | 48 | | | | 62 | |
Net assets at end of period (000 omitted) | | | $15,195 | | | | $15,588 | | | | $16,062 | | | | $15,428 | | | | $13,019 | |
| Supplemental Ratios (%): | | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets after expense
reductions excluding short sale expenses (f) | | | 0.82 | (c) | | | 0.89 | | | | 0.91 | | | | 0.95 | | | | 1.00 | |
See Notes to Financial Statements
12
MFS Technology Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Net asset value, beginning of period | | | $11.95 | | | | $11.20 | | | | $10.35 | | | | $7.69 | | | | $6.73 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment loss (d) | | | $(0.04 | )(c) | | | $(0.05 | ) | | | $(0.05 | ) | | | $(0.05 | ) | | | $(0.06 | ) |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 1.05 | | | | 1.17 | | | | 1.12 | | | | 2.72 | | | | 1.02 | |
Total from investment operations | | | $1.01 | | | | $1.12 | | | | $1.07 | | | | $2.67 | | | | $0.96 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net realized gain on investments | | | $(0.35 | ) | | | $(0.37 | ) | | | $(0.22 | ) | | | $(0.01 | ) | | | $— | |
Net asset value, end of period (x) | | | $12.61 | | | | $11.95 | | | | $11.20 | | | | $10.35 | | | | $7.69 | |
Total return (%) (k)(r)(s)(x) | | | 8.39 | (c) | | | 10.53 | | | | 10.40 | | | | 34.72 | | | | 14.26 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.10 | (c) | | | 1.16 | | | | 1.19 | | | | 1.30 | | | | 1.48 | |
Expenses after expense reductions (f) | | | 1.10 | (c) | | | 1.16 | | | | 1.18 | | | | 1.30 | | | | 1.42 | |
Net investment loss | | | (0.35 | )(c) | | | (0.47 | ) | | | (0.45 | ) | | | (0.52 | ) | | | (0.74 | ) |
Portfolio turnover | | | 36 | | | | 45 | | | | 35 | | | | 48 | | | | 62 | |
Net assets at end of period (000 omitted) | | | $126,561 | | | | $106,002 | | | | $81,693 | | | | $58,379 | | | | $32,010 | |
| Supplemental Ratios (%): | | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets after expense
reductions excluding short sale expenses (f) | | | 1.06 | (c) | | | 1.14 | | | | 1.16 | | | | 1.20 | | | | 1.25 | |
| (c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
| (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 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 October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
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 on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange as provided by a third-party pricing service. Equity securities held short, for which there were no sales reported for that day, are generally valued at the last quoted daily ask quotation on their primary market or exchange 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 on their primary exchange as provided by a third-party pricing service. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation on their primary exchange as provided by a third-party pricing service. 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
14
MFS Technology 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, 2016 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $128,928,589 | | | | $59,090 | | | | $— | | | | $128,987,679 | |
Netherlands | | | 4,307,638 | | | | — | | | | — | | | | 4,307,638 | |
China | | | 2,235,731 | | | | — | | | | — | | | | 2,235,731 | |
Canada | | | 2,065,401 | | | | — | | | | — | | | | 2,065,401 | |
Israel | | | 773,756 | | | | — | | | | — | | | | 773,756 | |
| Mutual Funds | | | 5,414,389 | | | | — | | | | — | | | | 5,414,389 | |
| Total Investments | | | $143,725,504 | | | | $59,090 | | | | $— | | | | $143,784,594 | |
| Short Sales | | | $(1,797,618 | ) | | | $— | | | | $— | | | | $(1,797,618 | ) |
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 purchased options, as presented in the Portfolio of Investments, generally are indicative of the volume of purchased options held during the period. The volume of written options held during the period is reflected in the written option activity table.
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, 2016 as reported in the Statement of Assets and Liabilities:
| | | | | | |
| | | | | Fair Value (a) | |
| Risk | | Derivative Contracts | | Asset Derivatives | |
| Equity | | Purchased Equity Options | | | $59,090 | |
| (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, 2016 as reported in the Statement of Operations:
| | | | | | | | |
| Risk | | Investments
(Purchased Options) | | | Written Options | |
| Equity | | | $(292,158 | ) | | | $159,976 | |
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, 2016 as reported in the Statement of Operations:
| | | | |
| Risk | | Investments
(Purchased Options) | |
| Equity | | | $(5,651 | ) |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain, but not all, uncleared 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. 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 agreement 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.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the clearing broker and the clearing house for cleared derivatives (e.g., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for uncleared derivatives (e.g., forward foreign currency exchange contracts, uncleared swap agreements, and uncleared options). For derivatives traded under an ISDA Master Agreement, which contains a collateral support annex, 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 fund may be required to make payments of interest on uncovered collateral or margin obligations with the broker. Any such payments are included in “Miscellaneous” expense in the Statement of Operations.
Written Options – In exchange for a premium, the fund wrote call options on securities for which it anticipated the price would decline and also wrote put options on securities for which 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 or directly with the clearing broker, based on the type of option. For uncleared 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 uncleared 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, 2016:
| | | | | | | | |
| | | Number of
contracts | | | Premiums
received | |
| Outstanding, beginning of period | | | — | | | | $— | |
| Options written | | | 17,496 | | | | 1,073,869 | |
| Options closed | | | (5,191 | ) | | | (462,463 | ) |
| Options exercised | | | (1,219 | ) | | | (58,632 | ) |
| Options expired | | | (11,086 | ) | | | (552,774 | ) |
| 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 uncleared 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, where applicable, 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.
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, 2016, this expense amounted to $38,750. 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. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. 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, 2016, 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
17
MFS Technology Portfolio
Notes to Financial Statements – continued
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.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian 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:
| | | | | | | | |
| | | 12/31/16 | | | 12/31/15 | |
| Ordinary income (including any short-term capital gains) | | | $— | | | | $1,705,601 | |
| Long-term capital gains | | | 3,659,012 | | | | 1,689,007 | |
| Total distributions | | | $3,659,012 | | | | $3,394,608 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/16 | | | | |
| Cost of investments | | | $104,540,453 | |
| Gross appreciation | | | 40,150,718 | |
| Gross depreciation | | | (906,577 | ) |
| Net unrealized appreciation (depreciation) | | | $39,244,141 | |
| Undistributed ordinary income | | | 828,261 | |
| Undistributed long-term capital gain | | | 3,489,260 | |
| Other temporary differences | | | (1,376,663 | ) |
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
18
MFS Technology Portfolio
Notes to Financial Statements – continued
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
12/31/16 | | | Year ended
12/31/15 | |
| Initial Class | | | $398,532 | | | | $461,237 | |
| Service Class | | | 3,260,480 | | | | 2,933,371 | |
| Total | | | $3,659,012 | | | | $3,394,608 | |
| (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, 2016, this management fee reduction amounted to $9,253, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate 0.74% 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 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, 2018. For the year ended December 31, 2016, 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, 2016, the fee was $7,367, which equated to 0.0056% 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, 2016, these costs amounted to $670.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund 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, 2016 was equivalent to an annual effective rate of 0.0231% 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 – 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
19
MFS Technology Portfolio
Notes to Financial Statements – continued
Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $263 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the 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. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in sale transactions pursuant to this policy, which amounted to $94,272. The sales transactions resulted in net realized gains (losses) of $(3,630).
For the year ended December 31, 2016, purchases and sales of investments, other than purchased option transactions, short sales, and short-term obligations, aggregated $57,275,907 and $46,237,277, 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 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 62,965 | | | | $787,597 | | | | 91,653 | | | | $1,099,490 | |
Service Class | | | 2,251,503 | | | | 27,047,907 | | | | 2,238,577 | | | | 26,068,727 | |
| | | 2,314,468 | | | | $27,835,504 | | | | 2,330,230 | | | | $27,168,217 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 29,987 | | | | $398,532 | | | | 42,946 | | | | $461,237 | |
Service Class | | | 256,327 | | | | 3,260,480 | | | | 284,242 | | | | 2,933,371 | |
| | | 286,314 | | | | $3,659,012 | | | | 327,188 | | | | $3,394,608 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (192,929 | ) | | | $(2,432,011 | ) | | | (263,963 | ) | | | $(3,145,108 | ) |
Service Class | | | (1,344,754 | ) | | | (16,322,338 | ) | | | (943,939 | ) | | | (10,922,529 | ) |
| | | (1,537,683 | ) | | | $(18,754,349 | ) | | | (1,207,902 | ) | | | $(14,067,637 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (99,977 | ) | | | $(1,245,882 | ) | | | (129,364 | ) | | | $(1,584,381 | ) |
Service Class | | | 1,163,076 | | | | 13,986,049 | | | | 1,578,880 | | | | 18,079,569 | |
| | | 1,063,099 | | | | $12,740,167 | | | | 1,449,516 | | | | $16,495,188 | |
The fund and certain other funds managed by MFS participate in a $1.25 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 Overnight Federal Reserve funds rate or daily 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 Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $807 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
20
MFS Technology 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 | | | 5,222,460 | | | | 39,509,176 | | | | (39,317,247 | ) | | | 5,414,389 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $71 | | | | $— | | | | $12,574 | | | | $5,414,389 | |
21
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, 2016, 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, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Technology Portfolio as of December 31, 2016, 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 15, 2017
22
MFS Technology Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, 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 53) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 55) | | Trustee | | January 2014 | | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 74) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 65) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council (until 2015); 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 |
| | | | |
Maureen R. Goldfarb (age 61) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Michael Hegarty (age 72) | | Trustee | | December 2004 | | Private investor | | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) |
| | | | |
John P. Kavanaugh (age 62) | | Trustee and Vice Chair of Trustees | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 60) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 59) | | Trustee | | March 2005 | | Private investor | | The Travelers Companies, Director; Dycom Industries, Inc., Director |
| | | |
| OFFICERS | | | | | | |
Christopher R. Bohane (k) (age 43) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 48) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 57) | | 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 |
| | | | |
Ethan D. Corey (k) (age 53) | | 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 48) | | President | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 43) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
23
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) |
Susan A. Pereira (k) (age 46) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 46) | | 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 64) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 72) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 46) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Martin J. Wolin (k) (age 49) | | Chief Compliance Officer | | July 2015 | | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | | N/A |
| | | | |
James O. Yost (k) (age 56) | | 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. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
| (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. Buller and Kavanaugh and Ms. 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, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a 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, 2016 (“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 Senior Officer, a 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 Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of 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 Broadridge 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 Broadridge 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, 2015, 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 each of the one- and five-year periods ended December 31, 2015 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 Broadridge. 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 data provided by Broadridge (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 Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. 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, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate 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, 2016.
26
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 mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios”, then “VIT II” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $4,025,000 as capital gain dividends paid during the fiscal year.
27
rev. 3/16
| | | | |
| 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., and MFS Heritage Trust Company. |
| | |
| 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, or 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, 2016
MFS® U.S. GOVERNMENT MONEY MARKET PORTFOLIO
(formerly MFS® Money Market Portfolio)
MFS® Variable Insurance Trust II
MKS-ANN
MFS® U.S. GOVERNMENT MONEY MARKET PORTFOLIO
(formerly MFS® Money Market Portfolio)
CONTENTS
Note to Shareholders: Effective April 29, 2016, the fund’s name changed from MFS Money Market Portfolio to MFS U.S. Government Money Market Portfolio.
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS U.S. Government Money Market Portfolio
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
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 U.S. Government Money Market Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (u)
| | | | |
| Composition including fixed income credit quality (a)(u) | |
| A-1+ | | | 18.8% | |
| A-1 | | | 81.2% | |
| Not Rated | | | 0.0% | |
| Other Assets Less Liabilities (o) | | | (0.0)% | |
| | | | |
| Maturity breakdown (u) | | | | |
| 0 - 7 days | | | 19.5% | |
| 8 - 29 days | | | 51.1% | |
| 30 - 59 days | | | 29.4% | |
| Other Assets Less Liabilities (o) | | | (0.0)% | |
| (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 12/31/16.
The portfolio is actively managed and current holdings may be different.
2
MFS U.S. Government Money Market Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/16
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 | | 0.01% | | 0.00% | | |
| | | Service Class | | 8/24/01 | | 0.01% | | 0.00% | | |
Notes to Performance Summary
Yields quoted are based on the latest seven days ended as of December 31, 2016, 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.
Prior to April 29, 2016, the fund was named MFS Money Market Portfolio and MFS normally invested the fund’s assets in U.S. dollar-denominated money market instruments and repurchase agreements. Effective April 29, 2016, the fund’s name was changed to MFS U.S. Government Money Market Portfolio and the fund adopted an investment strategy of normally investing at least 99.5% of the fund’s total assets in cash, U.S. Government money market instruments, and/or repurchase agreements collateralized by cash or U.S. Government securities and an investment strategy of normally investing at least 80% of the fund’s net assets in U.S. Government money market instruments and repurchase agreements collateralized by U.S. Government securities.
3
MFS U.S. Government Money Market Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders during the Period,
July 1, 2016 through December 31, 2016
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, 2016 through December 31, 2016.
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
7/01/16 | | | Ending
Account Value
12/31/16 | | | Expenses Paid
During Period (p)
7/01/16-12/31/16 | |
| Initial Class | | Actual | | | 0.30% | | | | $1,000.00 | | | | $1,000.09 | | | | $1.51 | |
| | Hypothetical (h) | | | 0.30% | | | | $1,000.00 | | | | $1,023.63 | | | | $1.53 | |
| Service Class | | Actual | | | 0.30% | | | | $1,000.00 | | | | $1,000.08 | | | | $1.51 | |
| | Hypothetical (h) | | | 0.30% | | | | $1,000.00 | | | | $1,023.63 | | | | $1.53 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
As more fully disclosed in footnote 3 to the financial statements, the expense ratios reported above include additional expense reductions to avoid a negative yield.
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.02% (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
4
MFS U.S. Government Money Market Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| U.S. GOVERNMENT AGENCIES AND EQUIVALENTS (y) – 100.0% | |
| Fannie Mae, 0.41%, due 1/11/2017 | | $ | 7,592,000 | | | $ | 7,591,135 | |
| Fannie Mae, 0.39%, due 1/17/2017 | | | 4,110,000 | | | | 4,109,288 | |
| Fannie Mae, 0.37%, due 1/18/2017 | | | 14,725,000 | | | | 14,722,427 | |
| Fannie Mae, 0.379%, due 1/18/2017 | | | 7,444,000 | | | | 7,442,668 | |
| Fannie Mae, 0.39%, due 1/20/2017 | | | 1,252,000 | | | | 1,251,742 | |
| Fannie Mae, 0.43%, due 1/20/2017 | | | 2,400,000 | | | | 2,399,455 | |
| Fannie Mae, 0.35%, due 2/01/2017 | | | 2,359,000 | | | | 2,358,289 | |
| Fannie Mae, 0.38%, due 2/01/2017 | | | 8,000,000 | | | | 7,997,382 | |
| Fannie Mae, 0.44%, due 2/01/2017 | | | 4,600,000 | | | | 4,598,257 | |
| Fannie Mae, 0.47%, due 2/01/2017 | | | 3,759,000 | | | | 3,757,479 | |
| Federal Farm Credit Bank, 0.5%, due 1/19/2017 | | | 6,700,000 | | | | 6,698,325 | |
| Federal Farm Credit Bank, 0.4%, due 1/27/2017 | | | 12,735,000 | | | | 12,731,321 | |
| Federal Farm Credit Bank, 0.43%, due 1/30/2017 | | | 2,600,000 | | | | 2,599,099 | |
| Federal Farm Credit Bank, 0.49%, due 2/02/2017 | | | 4,212,000 | | | | 4,210,165 | |
| Federal Farm Credit Bank, 0.46%, due 2/03/2017 | | | 4,256,000 | | | | 4,254,205 | |
| Federal Farm Credit Bank, 0.42%, due 2/22/2017 | | | 8,000,000 | | | | 7,995,147 | |
| Federal Home Loan Bank, 0.39%, due 1/04/2017 | | | 14,022,000 | | | | 14,021,544 | |
| Federal Home Loan Bank, 0.4%, due 1/05/2017 | | | 3,614,000 | | | | 3,613,839 | |
| Federal Home Loan Bank, 0.4%, due 1/05/2017 | | | 14,400,000 | | | | 14,399,360 | |
| Federal Home Loan Bank, 0.3%, due 1/06/2017 | | | 6,095,000 | | | | 6,094,746 | |
| Federal Home Loan Bank, 0.32%, due 1/06/2017 | | | 15,265,000 | | | | 15,264,322 | |
| Federal Home Loan Bank, 0.35%, due 1/11/2017 | | | 4,962,000 | | | | 4,961,518 | |
| Federal Home Loan Bank, 0.32%, due 1/13/2017 | | | 112,000 | | | | 111,988 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| U.S. GOVERNMENT AGENCIES AND EQUIVALENTS (y) – continued | |
| Federal Home Loan Bank, 0.36%, due 1/13/2017 | | $ | 15,216,000 | | | $ | 15,214,174 | |
| Federal Home Loan Bank, 0.35%, due 1/18/2017 | | | 15,178,000 | | | | 15,175,491 | |
| Federal Home Loan Bank, 0.449%, due 1/18/2017 | | | 4,468,000 | | | | 4,467,053 | |
| Federal Home Loan Bank, 0.45%, due 1/18/2017 | | | 1,641,000 | | | | 1,640,651 | |
| Federal Home Loan Bank, 0.355%, due 1/25/2017 | | | 7,618,000 | | | | 7,616,197 | |
| Freddie Mac, 0.32%, due 1/03/2017 | | | 10,798,000 | | | | 10,797,808 | |
| Freddie Mac, 0.43%, due 1/19/2017 | | | 13,719,000 | | | | 13,716,050 | |
| Freddie Mac, 0.38%, due 1/23/2017 | | | 9,000,000 | | | | 8,997,910 | |
| Freddie Mac, 0.4%, due 1/23/2017 | | | 9,600,000 | | | | 9,597,653 | |
| Freddie Mac, 0.34%, due 1/30/2017 | | | 5,000,000 | | | | 4,998,631 | |
| Freddie Mac, 0.42%, due 2/02/2017 | | | 14,728,000 | | | | 14,722,502 | |
| Freddie Mac, 0.34%, due 2/06/2017 | | | 5,612,000 | | | | 5,610,092 | |
| Freddie Mac, 0.355%, due 2/07/2017 | | | 18,000,000 | | | | 17,993,433 | |
| Freddie Mac, 0.395%, due 2/23/2017 | | | 10,558,000 | | | | 10,551,860 | |
| U.S. Treasury Bill, 0.32%, due 1/05/2017 | | | 6,640,000 | | | | 6,639,764 | |
| U.S. Treasury Bill, 0.345%, due 1/12/2017 | | | 5,000,000 | | | | 4,999,473 | |
| U.S. Treasury Bill, 0.3525%, due 1/12/2017 | | | 15,215,000 | | | | 15,213,361 | |
| U.S. Treasury Bill, 0.33%, due 1/26/2017 | | | 15,145,000 | | | | 15,141,529 | |
| U.S. Treasury Bill, 0.38%, due 1/26/2017 | | | 1,312,000 | | | | 1,311,654 | |
| U.S. Treasury Bill, 0.425%, due 1/26/2017 | | | 9,963,000 | | | | 9,960,060 | |
| U.S. Treasury Bill, 0.35%, due 2/09/2017 | | | 15,000,000 | | | | 14,994,313 | |
| | | | | | | | |
Total U.S. Government Agencies and
Equivalents, at Amortized Cost and Value | | | $ | 362,543,360 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.0)% | | | | (150,254 | ) |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 362,393,106 | |
| | | | | | | | |
| (y) | | The rate shown represents an annualized yield at time of purchase. |
See Notes to Financial Statements
5
MFS U.S. Government 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 12/31/16 | | | | | | | | |
Assets | | | | | | | | |
Investments, at amortized cost and value | | | $362,543,360 | | | | | |
Cash | | | 306 | | | | | |
Receivable for fund shares sold | | | 183,646 | | | | | |
Other assets | | | 319 | | | | | |
Total assets | | | | | | | $362,727,631 | |
Liabilities | | | | | | | | |
Payable for fund shares reacquired | | | $258,431 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 11,595 | | | | | |
Shareholder servicing costs | | | 62 | | | | | |
Payable for independent Trustees’ compensation | | | 80 | | | | | |
Accrued expenses and other liabilities | | | 64,357 | | | | | |
Total liabilities | | | | | | | $334,525 | |
Net assets | | | | | | | $362,393,106 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $362,393,106 | | | | | |
Net assets | | | | | | | $362,393,106 | |
Shares of beneficial interest outstanding | | | | | | | 362,612,917 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $179,457,917 | | | | 179,566,073 | | | | $1.00 | |
Service Class | | | 182,935,189 | | | | 183,046,844 | | | | 1.00 | |
See Notes to Financial Statements
6
MFS U.S. Government 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 12/31/16 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Interest | | | $1,189,089 | | | | | |
Other | | | 4,027 | | | | | |
Total investment income | | | | | | | $1,193,116 | |
Expenses | | | | | | | | |
Management fee | | | $1,920,660 | | | | | |
Distribution and/or service fees | | | 495,078 | | | | | |
Shareholder servicing costs | | | 11,867 | | | | | |
Administrative services fee | | | 69,521 | | | | | |
Independent Trustees’ compensation | | | 11,057 | | | | | |
Custodian fee | | | 20,994 | | | | | |
Reimbursement of custodian expenses | | | (29,710 | ) | | | | |
Audit and tax fees | | | 35,322 | | | | | |
Legal fees | | | 3,322 | | | | | |
Miscellaneous | | | 13,229 | | | | | |
Total expenses | | | | | | | $2,551,340 | |
Reduction of expenses by investment adviser and distributor | | | (1,389,179 | ) | | | | |
Net expenses | | | | | | | $1,162,161 | |
Net investment income | | | | | | | $30,955 | |
Net realized gain (loss) on investments | | | | | | | $3,595 | |
Change in net assets from operations | | | | | | | $34,550 | |
See Notes to Financial Statements
7
MFS U.S. Government 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 | | | 2016 | | | | 2015 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $30,955 | | | | $0 | |
Net realized gain (loss) on investments | | | 3,595 | | | | 51 | |
Change in net assets from operations | | | $34,550 | | | | $51 | |
| Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(30,955 | ) | | | $— | |
Change in net assets from fund share transactions | | | $(10,468,273 | ) | | | $(46,710,775 | ) |
Total change in net assets | | | $(10,464,678 | ) | | | $(46,710,724 | ) |
| Net assets | | | | | | | | |
At beginning of period | | | 372,857,784 | | | | 419,568,508 | |
At end of period | | | $362,393,106 | | | | $372,857,784 | |
See Notes to Financial Statements
8
MFS U.S. Government 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 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
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 | (c)(w) | | | $0.00 | | | | $0.00 | | | | $0.00 | | | | $0.00 | |
Net realized and unrealized gain (loss) on investments | | | 0.00 | (w) | | | 0.00 | (w) | | | 0.00 | (w) | | | 0.00 | (w) | | | 0.00 | |
Total from investment operations | | | $0.00 | (w) | | | $0.00 | (w) | | | $0.00 | (w) | | | $0.00 | (w) | | | $0.00 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.00 | )(w) | | | $— | | | | $— | | | | $— | | | | $— | |
Net asset value, end of period | | | $1.00 | | | | $1.00 | | | | $1.00 | | | | $1.00 | | | | $1.00 | |
Total return (%) (k)(r) | | | 0.01 | (c) | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.53 | (c) | | | 0.57 | | | | 0.55 | | | | 0.55 | | | | 0.55 | |
Expenses after expense reductions (f) | | | 0.30 | (c) | | | 0.13 | | | | 0.10 | | | | 0.12 | | | | 0.16 | |
Net investment income | | | 0.01 | (c) | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | |
Net assets at end of period (000 omitted) | | | $179,458 | | | | $190,761 | | | | $214,019 | | | | $228,673 | | | | $242,646 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
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 | (c)(w) | | | $0.00 | | | | $0.00 | | | | $0.00 | | | | $0.00 | |
Net realized and unrealized gain (loss) on investments | | | 0.00 | (w) | | | 0.00 | (w) | | | 0.00 | (w) | | | 0.00 | (w) | | | 0.00 | |
Total from investment operations | | | $0.00 | (w) | | | $0.00 | (w) | | | $0.00 | (w) | | | $0.00 | (w) | | | $0.00 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.00 | )(w) | | | $— | | | | $— | | | | $— | | | | $— | |
Net asset value, end of period | | | $1.00 | | | | $1.00 | | | | $1.00 | | | | $1.00 | | | | $1.00 | |
Total return (%) (k)(r) | | | 0.01 | (c) | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.79 | (c) | | | 0.82 | | | | 0.80 | | | | 0.80 | | | | 0.80 | |
Expenses after expense reductions (f) | | | 0.30 | (c) | | | 0.13 | | | | 0.10 | | | | 0.12 | | | | 0.15 | |
Net investment income | | | 0.01 | (c) | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | |
Net assets at end of period (000 omitted) | | | $182,935 | | | | $182,097 | | | | $205,550 | | | | $246,964 | | | | $289,762 | |
| (c) | | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
| (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. |
| (w) | | Per share amount was less than $0.01. |
See Notes to Financial Statements
9
MFS U.S. Government Money Market Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS U.S. Government Money Market Portfolio (formerly 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.
Prior to April 29, 2016, the fund was named MFS Money Market Portfolio and MFS normally invested the fund’s assets in U.S. dollar-denominated money market instruments and repurchase agreements. Effective April 29, 2016, the fund’s name was changed to MFS U.S. Government Money Market Portfolio and the fund adopted an investment strategy of normally investing at least 99.5% of the fund’s total assets in cash, U.S. Government money market instruments, and/ or repurchase agreements collateralized by cash or U.S. Government securities and an investment strategy of normally investing at least 80% of the fund’s net assets in U.S. Government money market instruments and repurchase agreements collateralized by U.S. Government securities.
| (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 October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
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, 2016 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Short-term securities | | | $— | | | | $362,543,360 | | | | $— | | | | $362,543,360 | |
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
10
MFS U.S. Government Money Market Portfolio
Notes to Financial Statements – continued
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 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. At December 31, 2016, the fund had no repurchase agreements 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. All premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian 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, 2016, there were no significant adjustments due to differences between book and tax accounting.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/16 | | | 12/31/15 | |
| Ordinary income (including any short-term capital gains) | | | $30,955 | | | | $— | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/16 | | | | |
| Cost of investments | | | $362,543,360 | |
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. 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
12/31/16 | | | Year ended
12/31/15 | |
| Initial Class | | | $15,975 | | | | $— | |
| Service Class | | | 14,980 | | | | — | |
| Total | | | $30,955 | | | | $— | |
11
MFS U.S. Government 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, 2016, MFS voluntarily waived receipt of $866,843 of the fund’s management fee in order to avoid a negative yield. For the year ended December 31, 2016, this voluntary waiver had the effect of reducing the management fee by 0.23% 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, 2016, this management fee reduction amounted to $27,258, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.27% 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, 2018. For the year ended December 31, 2016, 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, 2016, MFD voluntarily waived receipt of $495,078 of the fund’s distribution and/or service fees in order to avoid a negative yield. For the year ended December 31, 2016, this voluntary waiver had the effect of reducing the distribution and/or service fees by 0.25% of average daily net assets attributable to Service Class shares on an annualized basis. The distribution and/or service fees incurred for the year ended December 31, 2016 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, 2016, the fee was $9,321, which equated to 0.0024% 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, 2016, these costs amounted to $2,546.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund 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, 2016 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 – 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. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $747 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ISO.
12
MFS U.S. Government Money Market Portfolio
Notes to Financial Statements – continued
| (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 12/31/16 | | | Year ended 12/31/15 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 50,259,392 | | | | $50,259,392 | | | | 58,858,173 | | | | $58,858,173 | |
Service Class | | | 147,523,783 | | | | 147,523,783 | | | | 77,562,487 | | | | 77,562,487 | |
| | | 197,783,175 | | | | $197,783,175 | | | | 136,420,660 | | | | $136,420,660 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 15,975 | | | | $15,975 | | | | — | | | | $— | |
Service Class | | | 14,980 | | | | 14,980 | | | | — | | | | — | |
| | | 30,955 | | | | $30,955 | | | | — | | | | $— | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (61,584,806 | ) | | | $(61,584,806 | ) | | | (82,126,619 | ) | | | $(82,126,619 | ) |
Service Class | | | (146,697,597 | ) | | | (146,697,597 | ) | | | (101,004,816 | ) | | | (101,004,816 | ) |
| | | (208,282,403 | ) | | | $(208,282,403 | ) | | | (183,131,435 | ) | | | $(183,131,435 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (11,309,439 | ) | | | $(11,309,439 | ) | | | (23,268,446 | ) | | | $(23,268,446 | ) |
Service Class | | | 841,166 | | | | 841,166 | | | | (23,442,329 | ) | | | (23,442,329 | ) |
| | | (10,468,273 | ) | | | $(10,468,273 | ) | | | (46,710,775 | ) | | | $(46,710,775 | ) |
The fund and certain other funds managed by MFS participate in a $1.25 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 Overnight Federal Reserve funds rate or daily 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 Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $2,387 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
13
MFS U.S. Government 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 U.S. Government Money Market Portfolio (formerly MFS Money Market Portfolio):
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS U.S. Government Money Market Portfolio (formerly MFS Money Market Portfolio) (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2016, 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, 2016, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS U.S. Government Money Market Portfolio as of December 31, 2016, 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 15, 2017
14
MFS U.S. Government Money Market Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, 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 53) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 55) | | Trustee | | January 2014 | | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 74) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 65) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council (until 2015); 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 |
| | | | |
Maureen R. Goldfarb (age 61) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Michael Hegarty (age 72) | | Trustee | | December 2004 | | Private investor | | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) |
| | | | |
John P. Kavanaugh (age 62) | | Trustee and Vice Chair of Trustees | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 60) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 59) | | Trustee | | March 2005 | | Private investor | | The Travelers Companies, Director; Dycom Industries, Inc., Director |
| | | |
| OFFICERS | | | | | | |
Christopher R. Bohane (k) (age 43) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 48) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 57) | | 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 |
| | | | |
Ethan D. Corey (k) (age 53) | | 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 48) | | President | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 43) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
15
MFS U.S. Government 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) |
Susan A. Pereira (k) (age 46) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 46) | | 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 64) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 72) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 46) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Martin J. Wolin (k) (age 49) | | Chief Compliance Officer | | July 2015 | | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | | N/A |
| | | | |
James O. Yost (k) (age 56) | | 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. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
| (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. Buller and Kavanaugh and Ms. 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, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a 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 Ed O’Dette | | |
16
MFS U.S. Government 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, 2016 (“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 Senior Officer, a 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 Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of 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 Broadridge 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 Broadridge 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, 2015, 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 each of the one- and five-year periods ended December 31, 2015 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 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.
17
MFS U.S. Government Money Market Portfolio
Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Broadridge. 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 data provided by Broadridge (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 Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. 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, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate 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, 2016.
18
MFS U.S. Government 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 mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), 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 on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios”, then “VIT II” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
19
rev. 3/16
| | | | |
| 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. |
20
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., and MFS Heritage Trust Company. |
| | |
| 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, or 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. |
21
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 definition enumerated in paragraph (b) of Item 2 of this Form N-CSR. However, effective January 1, 2017, the Code was amended to (i) clarify that the term “for profit” company as used in Section II.B of the Code excludes the investment adviser and its subsidiaries and pooled investment vehicles sponsored by the investment adviser or its subsidiaries, (ii) align the Code’s provisions regarding receipt of gifts and entertainment in Section II.B of the Code with the gifts and entertainment policy of the Funds’ investment adviser, and (iii) make other administrative changes. 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 amended effective as of January 1, 2017 is filed as an exhibit to this Form N-CSR.
| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
Messrs. Steven E. Buller and John P. Kavanaugh and Ms. Maryanne L. Roepke, 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. Buller and Kavanaugh and Ms. Roepke 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, 2016 and 2015, audit fees billed to each Fund by Deloitte were as follows:
| | | | | | | | |
| | | Audit Fees | |
| | | 2016 | | | 2015 | |
Fees billed by Deloitte: | | | | | | | | |
MFS Blended Research Core Equity Portfolio | | | 42,794 | | | | 42,794 | |
MFS Core Equity Portfolio | | | 44,818 | | | | 44,818 | |
MFS Corporate Bond Portfolio | | | 62,599 | | | | 62,599 | |
MFS Emerging Markets Equity Portfolio | | | 45,103 | | | | 45,103 | |
MFS Global Governments Portfolio | | | 60,371 | | | | 60,371 | |
MFS Global Growth Portfolio | | | 55,106 | | | | 55,106 | |
MFS Global Research Portfolio | | | 43,664 | | | | 43,664 | |
MFS Global Tactical Allocation Portfolio | | | 60,408 | | | | 60,408 | |
MFS Government Securities Portfolio | | | 51,294 | | | | 51,294 | |
MFS High Yield Portfolio | | | 66,648 | | | | 66,648 | |
MFS International Growth Portfolio | | | 45,103 | | | | 45,103 | |
MFS International Value Portfolio | | | 45,971 | | | | 45,971 | |
MFS Massachusetts Investors Growth Stock Portfolio | | | 44,718 | | | | 44,718 | |
MFS U.S. Government Money Market Portfolio | | | 26,407 | | | | 26,407 | |
MFS Research International Portfolio | | | 42,794 | | | | 42,794 | |
MFS Strategic Income Portfolio | | | 66,386 | | | | 66,386 | |
MFS Technology Portfolio | | | 42,894 | | | | 42,894 | |
| | | | | | | | |
Total | | | 847,078 | | | | 847,078 | |
For the fiscal years ended December 31, 2016 and 2015, 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 | |
| | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Fees billed by Deloitte: | | | | | | | | | | | | | | | | | | | | | | | | |
To MFS Blended Research Core Equity Portfolio | | | 2,400 | | | | 2,400 | | | | 4,810 | | | | 4,810 | | | | 0 | | | | 93 | |
To MFS Core Equity Portfolio | | | 2,400 | | | | 2,400 | | | | 4,810 | | | | 4,810 | | | | 0 | | | | 32 | |
To MFS Corporate Bond Portfolio | | | 2,400 | | | | 2,400 | | | | 4,810 | | | | 4,810 | | | | 0 | | | | 57 | |
To MFS Emerging Markets Equity Portfolio | | | 2,400 | | | | 2,400 | | | | 4,810 | | | | 4,810 | | | | 0 | | | | 15 | |
To MFS Global Governments Portfolio | | | 2,400 | | | | 2,400 | | | | 4,810 | | | | 4,810 | | | | 0 | | | | 43 | |
To MFS Global Growth Portfolio | | | 2,400 | | | | 2,400 | | | | 4,810 | | | | 4,810 | | | | 0 | | | | 12 | |
To MFS Global Research Portfolio | | | 2,400 | | | | 2,400 | | | | 4,810 | | | | 4,810 | | | | 0 | | | | 25 | |
To MFS Global Tactical Allocation Portfolio | | | 2,400 | | | | 2,400 | | | | 4,810 | | | | 4,810 | | | | 0 | | | | 10,184 | |
To MFS Government Securities Portfolio | | | 2,400 | | | | 2,400 | | | | 4,810 | | | | 4,810 | | | | 0 | | | | 160 | |
To MFS High Yield Portfolio | | | 2,400 | | | | 2,400 | | | | 4,810 | | | | 4,810 | | | | 0 | | | | 128 | |
To MFS International Growth Portfolio | | | 2,400 | | | | 2,400 | | | | 4,810 | | | | 4,810 | | | | 0 | | | | 40 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
To MFS International Value Portfolio | | | 2,400 | | | | 2,400 | | | | 4,810 | | | | 4,810 | | | | 0 | | | | 226 | |
To MFS Massachusetts Investors Growth Stock Portfolio | | | 2,400 | | | | 2,400 | | | | 4,810 | | | | 4,810 | | | | 0 | | | | 114 | |
To MFS U.S. Government Money Market Portfolio | | | 2,400 | | | | 2,400 | | | | 4,810 | | | | 4,810 | | | | 0 | | | | 88 | |
To MFS Research International Portfolio | | | 2,400 | | | | 2,400 | | | | 4,810 | | | | 4,810 | | | | 0 | | | | 69 | |
To MFS Strategic Income Portfolio | | | 2,400 | | | | 2,400 | | | | 4,810 | | | | 4,810 | | | | 0 | | | | 14 | |
To MFS Technology Portfolio | | | 2,400 | | | | 2,400 | | | | 4,810 | | | | 4,810 | | | | 0 | | | | 16 | |
Total fees billed by Deloitte To above Funds: | | | 40,800 | | | | 40,800 | | | | 81,770 | | | | 81,770 | | | | 0 | | | | 11,316 | |
| | | |
| | | Audit-Related Fees1 | | | Tax Fees2 | | | All Other Fees3 | |
| | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Fees billed by Deloitte: | | | | | | | | | | | | | | | | | | | | | | | | |
To MFS and MFS Related Entities of MFS Blended Research Core Equity Portfolio* | | | 0 | | | | 186,019 | | | | 0 | | | | 0 | | | | 5,000 | | | | 5,000 | |
To MFS and MFS Related Entities of MFS Core Equity Portfolio* | | | 0 | | | | 186,019 | | | | 0 | | | | 0 | | | | 5,000 | | | | 5,000 | |
To MFS and MFS Related Entities of MFS Corporate Bond Portfolio* | | | 0 | | | | 186,019 | | | | 0 | | | | 0 | | | | 5,000 | | | | 5,000 | |
To MFS and MFS Related Entities of MFS Emerging Markets Equity Portfolio* | | | 0 | | | | 186,019 | | | | 0 | | | | 0 | | | | 5,000 | | | | 5,000 | |
To MFS and MFS Related Entities of MFS Global Governments Portfolio* | | | 0 | | | | 186,019 | | | | 0 | | | | 0 | | | | 5,000 | | | | 5,000 | |
To MFS and MFS Related Entities of MFS Global Growth Portfolio* | | | 0 | | | | 186,019 | | | | 0 | | | | 0 | | | | 5,000 | | | | 5,000 | |
To MFS and MFS Related Entities of MFS Global Research Portfolio* | | | 0 | | | | 186,019 | | | | 0 | | | | 0 | | | | 5,000 | | | | 5,000 | |
To MFS and MFS Related Entities of MFS Global Tactical Allocation Portfolio* | | | 0 | | | | 186,019 | | | | 0 | | | | 0 | | | | 5,000 | | | | 5,000 | |
To MFS and MFS Related Entities of MFS Government Securities Portfolio* | | | 0 | | | | 186,019 | | | | 0 | | | | 0 | | | | 5,000 | | | | 5,000 | |
To MFS and MFS Related Entities of MFS High Yield Portfolio* | | | 0 | | | | 186,019 | | | | 0 | | | | 0 | | | | 5,000 | | | | 5,000 | |
To MFS and MFS Related Entities of MFS International Growth Portfolio* | | | 0 | | | | 186,019 | | | | 0 | | | | 0 | | | | 5,000 | | | | 5,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
To MFS and MFS Related Entities of MFS International Value Portfolio* | | | 0 | | | | 186,019 | | | | 0 | | | | 0 | | | | 5,000 | | | | 5,000 | |
To MFS and MFS Related Entities of MFS Massachusetts Investors Growth Stock Portfolio* | | | 0 | | | | 186,019 | | | | 0 | | | | 0 | | | | 5,000 | | | | 5,000 | |
To MFS and MFS Related Entities of MFS U.S. Government Money Market Portfolio* | | | 0 | | | | 186,019 | | | | 0 | | | | 0 | | | | 5,000 | | | | 5,000 | |
To MFS and MFS Related Entities of MFS Research International Portfolio* | | | 0 | | | | 186,019 | | | | 0 | | | | 0 | | | | 5,000 | | | | 5,000 | |
To MFS and MFS Related Entities of MFS Strategic Income Portfolio* | | | 0 | | | | 186,019 | | | | 0 | | | | 0 | | | | 5,000 | | | | 5,000 | |
To MFS and MFS Related Entities of MFS Technology Portfolio* | | | 0 | | | | 186,019 | | | | 0 | | | | 0 | | | | 5,000 | | | | 5,000 | |
| | | | | | | | |
| | | Aggregate fees for non-audit
services: | |
| | | 2016 | | | 2015 | |
Fees billed by Deloitte: | | | | | | | | |
To MFS Blended Research Core Equity Portfolio, MFS and MFS Related Entities# | | | 117,722 | | | | 198,322 | |
To MFS Core Equity Portfolio, MFS and MFS Related Entities# | | | 117,722 | | | | 198,261 | |
To MFS Corporate Bond Portfolio, MFS and MFS Related Entities# | | | 117,722 | | | | 198,286 | |
To MFS Emerging Markets Equity Portfolio, MFS and MFS Related Entities# | | | 117,722 | | | | 198,244 | |
To MFS Global Governments Portfolio, MFS and MFS Related Entities# | | | 117,722 | | | | 198,272 | |
To MFS Global Growth Portfolio MFS and MFS Related Entities# | | | 117,722 | | | | 198,241 | |
To MFS Global Research Portfolio, MFS and MFS Related Entities# | | | 117,722 | | | | 198,254 | |
To MFS Global Tactical Allocation Portfolio, MFS and MFS Related Entities# | | | 117,722 | | | | 208,413 | |
To MFS Government Securities Portfolio, MFS and MFS Related Entities# | | | 117,722 | | | | 198,389 | |
To MFS High Yield Portfolio, MFS and MFS Related Entities# | | | 117,722 | | | | 198,357 | |
To MFS International Growth Portfolio, MFS and MFS Related Entities# | | | 117,722 | | | | 198,269 | |
To MFS International Value Portfolio, MFS and MFS Related Entities# | | | 117,722 | | | | 198,455 | |
To MFS Massachusetts Investors Growth Stock Portfolio, MFS and MFS Related Entities# | | | 117,722 | | | | 198,343 | |
To MFS U.S. Government Money Market Portfolio, MFS and MFS Related Entities# | | | 117,722 | | | | 198,317 | |
To MFS Research International Portfolio, MFS and MFS Related Entities# | | | 117,722 | | | | 198,298 | |
To MFS Strategic Income Portfolio, MFS and MFS Related Entities# | | | 117,722 | | | | 198,243 | |
To MFS Technology Portfolio, MFS and MFS Related Entities# | | | 117,722 | | | | 198,245 | |
| * | 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
| | |
| By (Signature and Title)* | | DAVID L. DILORENZO |
| | David L. DiLorenzo, President |
Date: February 15, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | |
| By (Signature and Title)* | | DAVID L. DILORENZO |
| | David L. DiLorenzo, President |
| | (Principal Executive Officer) |
Date: February 15, 2017
| | |
| By (Signature and Title)* | | JAMES O. YOST |
| | James O. Yost, Treasurer |
| | (Principal Financial Officer and Accounting Officer) |
Date: February 15, 2017
| * | Print name and title of each signing officer under his or her signature. |
