Performance Summary, Information About Your Fund's Expenses, Management Summary, Portfolio Summary, Investment Portfolio, Statement of Assets and Liabilities, Statement of Operations, Statement of Changes in Net Assets and Financial Highlights for:
This report must be preceded or accompanied by a prospectus. To obtain an additional prospectus or summary prospectus, if available, call (800) 728-3337 or your financial representative. We advise you to consider the Fund's objectives, risks, charges and expenses carefully before investing. The summary prospectus and prospectus contain this and other important information about the Fund. Please read the prospectus carefully before you invest.
Investments in variable insurance portfolios (VIPs) involve risk. Stocks may decline in value. Bond investments are subject to interest-rate and credit risks. When interest rates rise, bond prices generally fall. Credit risk refers to the ability of an issuer to make timely payments of principal and interest. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increased volatility. Investing in foreign securities, particularly those of emerging markets, presents certain risks, such as currency fluctuations, political and economic changes, and market risks. There are additional risks associated with investing in commodities, high-yield bonds, aggressive growth stocks, non-diversified/ concentrated funds and small- and mid-cap stocks which are more fully explained in the prospectuses. Please read the prospectus for more information.
DWS Investments is part of Deutsche Bank's Asset Management division and, within the US, represents the retail asset management activities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company.
All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce ret urns. While all share classes have the same underlying portfolio, their performance will differ.
The gross expense ratios of the Fund, as stated in the fee table of the prospectus dated May 1, 2010 are 5.09% and 5.32% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Although allocation among different asset categories generally limits risk, the investment advisor may favor an asset category that underperforms other assets or markets as a whole. The Fund expects to invest in underlying funds that emphasize alternatives or non-traditional asset categories or investment strategies, and as a result, it is subject to the risk factors of those underlying funds. Some of those risks include stock market risk, credit and interest rate risk, volatility in commodity prices and high-yield debt securities, short sales risk and the political, general economic, liquidity and currency risks of foreign investments, which may be particularly significant for emerging markets. The Fund may use derivatives, including as part of its global alpha strategy. The Fund also expects to have direct and indirect exposure to derivatives, which may be more volatile and less liquid than traditional securities. The Fund could suffer losses on its derivative positions. See the prospectus for additional risks and specific details regarding the Fund's risk profile.
Fund returns shown for all periods reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.
The growth of $10,000 is cumulative.
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Fund expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In addition to the ongoing expenses which the Fund bears directly, the Fund's shareholders indirectly bear the expense of the Underlying Funds in which the Fund invests. These expenses are not included in the Fund's annualized expense ratios used to calculate the expen se estimate in the tables. In the most recent six-month period, the Fund limited the ongoing expenses the Fund bears directly; had it not done so, expenses would have been higher. The examples in the table are based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2010 to December 31, 2010).
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
For more information, please refer to the Fund's prospectus.
These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
The weakest returns came from the absolute return segment, which seeks to generate positive returns independent of market direction. Our investment in DWS Disciplined Market Neutral Fund, which holds roughly equal weightings in both long and short investments, typically does not keep pace with the broader market when stocks perform as well as they did during the past year. Nevertheless, we believe the fund remains an important part of the Fund's diversification.
As we move into 2011, we remain committed to providing our investors with a one-stop, professionally managed way to gain exposure to the alternative asset classes. We believe our multifaceted role as managers — selecting asset classes, determine the weightings for each asset class and deciding on the appropriate timing of portfolio reallocations — can add significant value for our investors over time.
The Blended Index is calculated using the performance of two unmanaged indices, representative of stocks (the Morgan Stanley Capital International (MSCI) World Index (70%)) and bonds (the Barclays Capital US Aggregate Bond Index (30%)). These results are summed to produce the aggregate benchmark.
The iShares MSCI EAFE Small Cap Index Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, as represented by the MSCI EAFE Small Cap Index.
The WisdomTree Emerging Markets SmallCap Dividend Fund seeks investment results that correspond to the price and yield performance, before fees and expenses, of the WisdomTree Emerging Markets SmallCap Dividend Index.
The SPDR Barclays Capital International Treasury Bond Fund tracks the Barclays Capital Global Treasury Ex-US Capped Index. The international bond ETF invests at least 80% of securities that are in the underlying index as well as derivatives such as swaps and options. Some of the regions represented in the bond ETF are Japan, Germany, France, Italy and Greece.
Equity index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. Fixed income index returns, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.
Asset allocation is subject to change.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
There have been no significant transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2010.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce returns.
The gross expense ratio of the Fund, as stated in the fee table of the prospectus dated May 1, 2010 is 0.62% for Class A shares and may differ from the expense ratio disclosed in the Financial Highlights table in this report.
Although allocation among different asset categories generally limits risk, the investment advisor may favor an asset category that underperforms other assets or markets as a whole. Bond investments are subject to interest-rate and credit risks. When interest rates rise, bond prices generally fall. Credit risk refers to the ability of an issuer to make timely payments of principal and interest. The Fund may use derivatives, including as part of its global alpha strategy. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. Stocks may decline in value. See the prospectus for details.
Fund returns for the 3-year, 5-year and 10-year periods shown reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.
The growth of $10,000 is cumulative.
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees and other Fund expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2010 to December 31, 2010).
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
For more information, please refer to the Fund's prospectus.
These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
We believe DWS Balanced VIP, by virtue of its extensive diversification, continues to offer investors a compelling way to gain exposure to a wide range of asset classes within the global financial markets. We will continue to review asset allocation and manager allocation periodically, and we are always looking for opportunities to expand our universe and increase diversification among managers and investment styles.
The Barclays Capital US Aggregate Bond Index is an unmanaged, market-value-weighted measure of Treasury issues, corporate bond issues and mortgage securities.
The iShares Russell 2000 Value Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the small capitalization sector of the US equity market as represented by the Russell 2000 Value Index. The index represents approximate 50% of the Russell 2000 Index.
The iShares JPMorgan USD Emerging Markets Bond Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the JPMorgan EMBI Global Core Index.
The SPDR Barclays Capital International Treasury Bond ETF tracks the Barclays Global Treasury Ex-US Capped index. The international bond ETF invests at least 80% of securities that are in the underlying index as well as derivatives such as swaps and options. Some of the regions represented in the bond ETF are Japan, Germany, France, Italy and Greece.
Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.
Asset allocation and sector diversification exclude derivatives and are subject to change.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
FDIC: Federal Deposit Insurance Corp.
NATL: National Public Finance Guarantee Corp.
PIK: Denotes that all or a portion of the income is paid in-kind.
Included in the portfolio are investments in mortgage or asset-backed securities which are interests in separate pools of mortgages or assets. Effective maturities of these investments may be shorter than stated maturities due to prepayments. Some separate investments in the Federal National Mortgage Association issues which have similar coupon rates have been aggregated for presentation purposes in this investment portfolio.
As of December 31, 2010, the Fund had the following open forward foreign currency exchange contracts:
For information on the Fund's policy and additional disclosures regarding futures contracts and forward foreign currency exchange contracts, please refer to Note B in the accompanying Notes to Financial Statements.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
There have been no significant transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2010.
The following is a reconciliation of the Fund's Level 3 investments for which significant unobservable inputs were used in determining value:
Transfers between price levels are recognized at the beginning of the reporting period.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce returns. While all share classes have the same un derlying portfolio, their performance will differ.
The gross expense ratios of the Fund, as stated in the fee table of the prospectus dated May 1, 2010 are 0.75% and 1.02% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Any fund that focuses in a particular segment of the market will generally be more volatile than a fund that invests more broadly. Stocks may decline in value. See the prospectus for details.
Fund returns shown during the 3-year, 5-year and 10-year/Life of Class periods reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.
The growth of $10,000 is cumulative.
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Fund expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2010 to December 31, 2010).
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
For more information, please refer to the Fund's prospectus.
These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
Our approach to managing the Fund is disciplined and dynamic — disciplined in the sense that we use a quantitative approach that measures numerous factors related to growth, value, quality and market sentiment, and dynamic in that we can choose to give different weightings to these factors based on a rigorous analysis of the past that seeks to determine which periods are most like now. The past year was a highly rotational year for style performance, with leadership changing several times — from growth to market sentiment, then to quality and then back to market sentiment. The Fund's growth and market sentiment factors performed relatively well over the full year, whereas the value and quality factors were mostly weak. We started the year with healthy weightings to market sentiment and growth, which added value early in the year. However, our relatively large weighting toward value throughout the year more than offset this and proved to be the biggest drag on relative performance.
Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.
Asset allocation and sector diversification are subject to change.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
There have been no significant transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2010.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce returns.
The gross expense ratios of the Fund, as stated in the fee table of the prospectus dated May 1, 2010 is 0.59% for Class A shares, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Bond investments are subject to interest-rate and credit risks. When interest rates rise, bond prices generally fall. Credit risk refers to the ability of an issuer to make timely payments of principal and interest. In the current market environment, mortgage backed securities are experiencing increased volatility. See the prospectus for details.
Fund returns shown for the 3-year, 5-year and 10-year periods reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.
The growth of $10,000 is cumulative.
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, and other Fund expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2010 to December 31, 2010).
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
For more information, please refer to the Fund's prospectus.
These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
During the 12-month period, the Fund provided a total return of 6.51% (Class A shares, unadjusted for contract charges), compared with the 6.54% return of its benchmark, the Barclays Capital US Aggregate Bond Index.
Kenneth R. Bowling, CFA
J. Kevin Horsley, CFA, CPA
J. Richard Robben, CFA
Barclays Capital US Aggregate Bond Index is an unmanaged index representing domestic taxable investment-grade bonds, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities with average maturities of one year or more.
Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.
Asset allocation and Interest Rate Sensitivity are subject to change.
Effective maturity is the weighted average of the bonds held by the Fund taking into consideration any maturity shortening features.
Effective duration is an approximate measure of the Fund's sensitivity to interest rate changes taking into consideration any maturity shortening features.
The quality ratings represent the lower of Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") credit ratings. The ratings of Moody's and S&P represent their opinions as to the quality of the securities they rate. Ratings are relative and subjective and are not absolute standards of quality. The Fund's credit quality does not remove market risk and is subject to change.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
AGC: Assured Guaranty Corp.
AGMC: Assured Guaranty Municipal Corp.
AMBAC: Ambac Financial Group, Inc.
FDIC: Federal Deposit Insurance Corp.
NATL: National Public Finance Guarantee Corp.
Included in the portfolio are investments in mortgage or asset-backed securities which are interests in separate pools of mortgages or assets. Effective maturities of these investments may be shorter than stated maturities due to prepayments. Some separate investments in the Federal Home Loan Mortgage Corp. and Federal National Mortgage Association issues which have similar coupon rates have been aggregated for presentation purposes in the investment portfolio.
For information on the Fund's policy and additional disclosures regarding futures contracts, please refer to Note B in the accompanying Notes to Financial Statements.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
There have been no significant transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2010.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce returns.
The gross expense ratio of the Fund, as stated in the fee table of the prospectus dated May 1, 2010 is 0.96% for Class A shares and may differ from the expense ratio disclosed in the Financial Highlights table in this report.
Investing in foreign securities, particularly those of emerging markets, presents certain risks, such as currency fluctuations, political and economic changes, and market risks. Stocks may decline in value. See the prospectus for details.
Fund returns for the 3-year, 5-year and 10-year periods shown reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.
The growth of $10,000 is cumulative.
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees and other Fund expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2010 to December 31, 2010).
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
For more information, please refer to the Fund's prospectus.
These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
International equities withstood both the European debt crisis and the sluggish growth in Japan to finish 2010 with a gain of 7.75%, as measured by the MSCI EAFE Index. The Class A shares of the Fund returned 10.93% (unadjusted for contract charges), comfortably outpacing the benchmark.
In managing the Fund, we use a top-down approach based on the principle that country and sector, rather than stock selection, are the primary drivers of return. We divide the universe of international stocks into "risk units" according to sector and country: "UK Financials," for example. We assign these units weights to maximize diversification potential, and we rebalance the portfolio on a quarterly basis to maintain diversification.
The Fund's largest detractors were generally its underweights in the most economically sensitive sectors of the market, such as the materials, industrials and consumer discretionary sectors. Among risk units, the largest negative contributions came from our underweights in UK materials, Japan industrials and Australia materials.
We believe our proprietary investment process makes this a unique product within the universe of international investments. For investors looking for a way to diversify their domestic portfolios, DWS Diversified International Equity VIP offers a compelling combination of extensive diversification, low turnover and an approach that looks beyond market capitalization to structure a more optimized portfolio.
The Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged, free float-adjusted, market capitalization index that tracks international stock performance in the 21 developed markets of Europe, Australasia and the Far East. The index is calculated using closing local market prices and translates into US dollars using the London close foreign exchange rates.
The Vanguard Emerging Markets invests in stocks of companies located in emerging markets around the world, such as Brazil, Russia, China, Korea and Taiwan. The fund seeks to closely track the return of the MSCI Emerging Markets Index over the long term.
The iShares MSCI Emerging Markets Index seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in emerging markets, as represented by the MSCI Emerging Markets Index.
The Morgan Stanley Capital International (MSCI) Emerging Markets Index is an unmanaged, capitalization-weighted index of companies in a universe of 26 emerging markets. The index is calculated using closing local market prices and translates into US dollars using the London close foreign exchange rates.
Index returns assume reinvested dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.
* In order to keep cash on hand to meet shareholder redemptions or other needs while maintaining exposure to the market, the Fund invests in futures contracts.
Asset allocation, sector and geographical diversifications are subject to change.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
For information on the Fund's policy and additional disclosures regarding futures contracts, please refer to Note B in the accompanying Notes to Financial Statements.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
There have been no significant transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2010.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce ret urns. While all share classes have the same underlying portfolio, their performance will differ.
The gross expense ratios of the Fund, as stated in the fee table of the prospectus dated May 1, 2010 are 0.79% and 1.14% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Any Fund that focuses in a particular segment of the market will generally be more volatile than a fund that invests more broadly. Stocks of small and medium-sized companies involve greater risk than securities of larger, more-established companies. Any decline in value of a Fund security that is out on loan by the Fund will adversely affect performance. Financial failure of the borrower may mean a delay in recovery or loss of rights in the collateral. Stocks may decline in value. See the prospectus for details.
Fund returns shown for the 3-year, 5-year and 10-year/Life of Class periods reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.
The growth of $10,000 is cumulative.
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Fund expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2010 to December 31, 2010).
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
For more information, please refer to the Fund's prospectus.
These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
Small- and mid-cap stocks performed very well in 2010, reflecting an environment of positive investor sentiment and gradually improving economic growth. The Class A shares of the Fund returned 23.07% for the year (unadjusted for contract charges), but lagged the 24.82% return of the fund's benchmark, the Russell 2500™ Value Index. Although the Fund underperformed, we are gratified that it largely kept pace with the index at a time in which the market's best performers were generally the type of richly valued, momentum-driven stocks that we seek to avoid.
We believe it is important to note that our value-focused approach has contributed to strong outperformance for the Fund over the long term, as it has outpaced the benchmark during both the 5- and 10-year periods ended December 31, 2010.
Our bottom-up stock selection process worked well in the information technology, materials and financial sectors during 2010, but we underperformed in the consumer discretionary segment. Our top individual performer in 2010 was CBL & Associates Properties, Inc., a real estate investment trust whose focus on retail properties positioned it to benefit from the improvement in consumer spending. Endo Pharmaceuticals Holdings, Inc., Pan American Silver Corp.* and Forest Oil Corp. also added significant value for the Fund. On the negative side, our leading detractors were ITT Educational Services, Inc.* and Alliant Techsystems, Inc.
David N. Dreman
E. Clifton Hoover, Jr., CFA
Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.
Asset allocation and sector diversification are subject to change.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
There have been no significant transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2010.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce ret urns. While all share classes have the same underlying portfolio, their performance will differ.
The gross expense ratios of the Fund, as stated in the fee table of the prospectus dated May 1, 2010 are 1.39% and 1.74% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. Investing in foreign securities, particularly those of emerging markets, presents certain risks, such as currency fluctuations, political and economic changes, and market risks. Any decline in value of a Fund security that is out on loan by the Fund will adversely affect performance. Financial failure of the borrower may mean a delay in recovery or loss of rights in the collateral. Stocks may decline in value. See the prospectus for details.
Fund returns shown for all periods reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.
The growth of $10,000 is cumulative.
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Fund expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Fund limited these expenses; had it not done so, expenses would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (Jul y 1, 2010 to December 31, 2010).
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
For more information, please refer to the Fund's prospectus.
These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
The Fund's Class A shares returned 13.65% during 2010, outpacing the 11.76% return of the MSCI World Index. The Fund also has outperformed its benchmark during the 5- and 10-year periods ended December 31, 2010.
In managing the Fund, we strive to identify the themes that we believe will be the important long-term drivers of the global business environment, then we use intensive fundamental research and a wide array of quantitative tools to invest in companies that can benefit as these themes unfold. All 13 of the Fund's themes produced positive absolute returns during 2010. On a relative basis, nine themes outperformed the broader market while just three lagged.
The smallest gain came from our theme Personalized Medicine, which is invested entirely in health care stocks — a sector that underperformed amid the momentum-driven market environment. We remain enthusiastic on the long-term prospects of this theme despite its recent underperformance, and we continue to add to the Fund's holdings in this area.
While we believe there is a good case for global equities as we move into 2011, we continue to spend time analyzing the potential adverse outcomes of various economic scenarios. Our investment framework remains guided by our well-researched themes and the core principle that investment management is a marathon and not a sprint.
The Morgan Stanley Capital International (MSCI) World Index is an unmanaged, capitalization-weighted measure of global stock markets including the US, Canada, Europe, Australia and the Far East. The index is calculated using closing local market prices and translates into US dollars using the London close foreign exchange rates.
Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees of expenses. It is not possible to invest directly into an index.
Asset allocation, sector and geographical diversification are subject to change.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
REG S: Securities sold under Regulation S may not be offered, sold or delivered within the United States or to, or for the account or benefit of, US persons, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
There have been no significant transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2010.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce ret urns. While all share classes have the same underlying portfolio, their performance will differ.
The gross expense ratios of the Fund, as stated in the fee table of the prospectus dated May 1, 2010 are 0.58% and 0.92% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Bond investments are subject to interest-rate and credit risks. When interest rates rise, bond prices generally fall. Credit risk refers to the ability of an issuer to make timely payments of principal and interest. In the current market environment, mortgage backed securities are experiencing increased volatility. The "full faith and credit" guarantee of the US government applies to the timely repayment of interest, and does not eliminate market risk. See the prospectus for details.
Fund returns shown for the 3-year, 5-year and 10-year/Life of Class periods reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.
The growth of $10,000 is cumulative.
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Fund expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2010 to December 31, 2010).
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
For more information, please refer to the Fund's prospectus.
These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
During the 12-month period ended December 31, 2010, the Fund provided a total return of 6.61% (Class A shares, unadjusted for contract charges), compared with the 6.67% return of its benchmark, the Barclays Capital GNMA Index.
During the year, investors tried to balance the potential impact of very low interest rates on mortgage prepayments against the implications of a tighter lending climate following the financial crisis and downturn in housing prices. The Fund held certain specified pools of seasoned and low-balance mortgages with favorable prepayment characteristics that held up well in the uncertain environment for mortgage-backed securities. We also had significant exposure to longer-duration mortgages, which performed well as interest rates continued to decline for most of the period. The Fund's exposure to higher-interest-rate mortgages was less favorable for relative performance. These issues trade at a premium, and trading in them was particularly impacted by proposals that emerged to enable underwater homeowners to prepay mortga ges at par and refinance at lower rates. With refinancing continuing to be difficult for many homeowners, given underwater mortgages and tightened lending standards, we remain comfortable with our overall focus on generating income by holding bonds with higher coupons and steady cash flows. We will continue to closely monitor the refinancing environment and various policy proposals with the potential to increase prepayments. With 30-year mortgage rates still near historically low levels, we will continue to look for opportunities to add floating-rate issues where we can find attractive pricing and other ways to position the Fund ahead of an eventual rise in interest rates.
John D. Ryan
The Barclays Capital GNMA Index is an unmanaged, market-value-weighted measure of all fixed-rate securities backed by mortgage pools of the Government National Mortgage Association.
Index returns, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.
Asset allocation, coupons and interest rate sensitivity are subject to change.
Effective maturity is the weighted average of the bonds held by the Fund taking into consideration any maturity shortening features.
Effective duration is an approximate measure of the Fund's sensitivity to interest rate changes taking into consideration any maturity shortening features.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
FDIC: Federal Deposit Insurance Corp.
Interest Only: Interest Only (IO) bonds represent the "interest only" portion of payments on a pool of underlying mortgages or mortgage-backed securities. IO securities are subject to prepayment risk of the pool of underlying mortgages.
IOettes: These securities represent the right to receive interest payments on an underlying pool of mortgages with similar features as those associated with IO securities. Unlike IO's, a nominal amount of principal is assigned to an IOette which is small in relation to the interest flow that constitutes almost all of the IOette cash flow. The effective yield of this security is lower than the stated interest rate.
Principal Only: Principal Only (PO) bonds represent the "principal only" portion of payments on a pool of underlying mortgages or mortgage-backed securities.
Included in the portfolio are investments in mortgage or asset-backed securities which are interests in separate pools of mortgages or assets. Effective maturities of these investments may be shorter than stated maturities due to prepayments. Some separate investments in the Federal Home Loan Mortgage Corp., Federal National Mortgage Association and Government National Mortgage Association issues which have similar coupon rates have been aggregated for presentation purposes in this investment portfolio.
For information on the Fund's policy and additional disclosures regarding futures contracts, interest rate swap contracts and total return swap contracts, please refer to the Derivatives section of Note B in the accompanying Notes to Financial Statements.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
There have been no significant transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2010.
The following is a reconciliation of the Fund's Level 3 investments for which significant unobservable inputs were used in determining value:
Transfers between price levels are recognized at the beginning of the reporting period.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce ret urns. While all share classes have the same underlying portfolio, their performance will differ.
The gross expense ratios of the Fund, as stated in the fee table of the prospectus dated May 1, 2010 are 0.67% and 0.94% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Bond investments are subject to interest-rate and credit risks. When interest rates rise, bond prices generally fall. Credit risk refers to the ability of an issuer to make timely payments of principal and interest. Investments in lower-quality and non-rated securities present greater risk of loss than investments in higher-quality securities. See the prospectus for details.
Fund returns shown for the 3-year, 5-year and 10-year/life of class periods reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.
The growth of $10,000 is cumulative.
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Fund expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2010 to December 31, 2010).
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
For more information, please refer to the Fund's prospectus.
These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
High-yield bonds — as gauged by the Fund's benchmark, the Credit Suisse High Yield Index — returned 14.42% in 2010 and outperformed the broader fixed-income market, as measured by the 6.54% return of the Barclays Capital US Aggregate Bond Index. High-yield bonds were energized by an environment of low government bond yields, improving balance sheets for high-yield companies and a steep decline in the default rate. The Class A shares of the Fund returned 14.00% (unadjusted for contract charges), underperforming the benchmark.
We maintain an upbeat outlook on high-yield bonds. Many positive factors remain in place, including accommodative monetary policy, new fiscal stimulus, strong corporate balance sheets and the high cash balances of large-cap corporations. The market is also benefiting from increased merger and acquisition activity, a receptive new issue environment, and a lower-than-expected default rate.
Given the supportive factors that characterize the current market backdrop, we believe the combination of attractive yields and a low single-digit default rate indicate a potentially favorable risk/return trade-off for high-yield bonds. However, bottom-up credit research and security selection will be more important than ever, given the substantial impact that individual defaults can have on performance in a low-default environment.
The Credit Suisse High Yield Index is an unmanaged, trader-priced portfolio constructed to mirror the global high-yield debt market.
The Barclays Capital US Aggregate Bond Index is an unmanaged, market-value-weighted measure of Treasury issues, agency issues, corporate bond issues and mortgage securities.
Index returns, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.
Asset allocation, sector diversification and interest rate sensitivity are subject to change.
The quality ratings represent the lower of Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") credit ratings. The ratings of Moody's and S&P represent their opinions as to the quality of the securities they rate. Ratings are relative and subjective and are not absolute standards of quality. The Fund's credit quality does not remove market risk and is subject to change.
Effective maturity is the weighted average of the bonds held by the Fund taking into consideration any maturity shortening features.
Effective duration is an approximate measure of the Fund's sensitivity to interest rate changes taking into consideration any maturity shortening features.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
PIK: Denotes that all or a portion of the income is paid in kind.
At December 31, 2010, the Fund had the following open forward foreign currency exchange contracts:
For information on the Fund's policy and additional disclosures regarding credit default swap contracts and forward foreign currency exchange contracts, please refer to Note A in the accompanying Notes to Financial Statements.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
There have been no significant transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2010.
The following is a reconciliation of the Fund's Level 3 investments for which significant unobservable inputs were used in determining value:
Transfers between price levels are recognized at the beginning of the reporting period.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
Performance Summary December 31, 2010
DWS Large Cap Value VIP
All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce ret urns. While all share classes have the same underlying portfolio, their performance will differ.
The gross expense ratios of the Fund, as stated in the fee table of the prospectus dated May 1, 2010 are 0.76% and 1.06% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Risk Considerations
Stocks may decline in value. See the prospectus for details.
Fund returns shown for the 3-year, 5-year and 10-year/Life of Class periods reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.
| Growth of an Assumed $10,000 Investment in DWS Large Cap Value VIP |
[] DWS Large Cap Value VIP — Class A [] Russell 1000® Value Index | The Russell 1000® Value Index is an unmanaged index that consists of those stocks in the Russell 1000 Index with less-than-average growth orientation. Russell 1000® Index is an unmanaged price-only index of the 1,000 largest capitalized companies that are domiciled in the US and whose common stocks are traded. Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index. |
| |
| Yearly periods ended December 31 | |
| Comparative Results | |
| DWS Large Cap Value VIP | | 1-Year | | | 3-Year | | | 5-Year | | | 10-Year | |
| Class A | Growth of $10,000 | | $ | 11,077 | | | $ | 8,833 | | | $ | 11,534 | | | $ | 14,865 | |
| Average annual total return | | | 10.77 | % | | | -4.05 | % | | | 2.90 | % | | | 4.04 | % |
| Russell 1000 Value Index | Growth of $10,000 | | $ | 11,551 | | | $ | 8,731 | | | $ | 10,654 | | | $ | 13,780 | |
| Average annual total return | | | 15.51 | % | | | -4.42 | % | | | 1.28 | % | | | 3.26 | % |
| DWS Large Cap Value VIP | | 1-Year | | | 3-Year | | | 5-Year | | | Life of Class* | |
| Class B | Growth of $10,000 | | $ | 11,053 | | | $ | 8,744 | | | $ | 11,335 | | | $ | 14,675 | |
| Average annual total return | | | 10.53 | % | | | -4.38 | % | | | 2.54 | % | | | 4.62 | % |
| Russell 1000 Value Index | Growth of $10,000 | | $ | 11,551 | | | $ | 8,731 | | | $ | 10,654 | | | $ | 15,327 | |
| Average annual total return | | | 15.51 | % | | | -4.42 | % | | | 1.28 | % | | | 5.15 | % |
The growth of $10,000 is cumulative.
* The Fund commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.
Information About Your Fund's Expenses
DWS Large Cap Value VIP
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Fund expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2010 to December 31, 2010).
The tables illustrate your Fund's expenses in two ways:
•Actual Fund Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Fund using the Fund's actual return during the period. To estimate the expenses 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 "Expenses Paid per $1,000" line under the share class you hold.
• Hypothetical 5% Fund Return. This helps you to compare your Fund's ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
Expenses and Value of a $1,000 Investment for the six months ended December 31, 2010 | |
| Actual Fund Return | | Class A | | | Class B | |
| Beginning Account Value 7/1/10 | | $ | 1,000.00 | | | $ | 1,000.00 | |
| Ending Account Value 12/31/10 | | $ | 1,194.30 | | | $ | 1,192.90 | |
| Expenses Paid per $1,000* | | $ | 4.48 | | | $ | 6.08 | |
| Hypothetical 5% Fund Return | | Class A | | | Class B | |
| Beginning Account Value 7/1/10 | | $ | 1,000.00 | | | $ | 1,000.00 | |
| Ending Account Value 12/31/10 | | $ | 1,021.12 | | | $ | 1,019.66 | |
| Expenses Paid per $1,000* | | $ | 4.13 | | | $ | 5.60 | |
* Expenses are equal to the Fund's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.
| Annualized Expense Ratios | Class A | | Class B | |
| DWS Variable Series II — DWS Large Cap Value VIP | .81% | | 1.10% | |
For more information, please refer to the Fund's prospectus.
These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
Management Summary December 31, 2010
DWS Large Cap Value VIP
The DWS Large Cap Value VIP delivered a total return of 10.77% in 2010 (Class A shares, unadjusted for contract charges) but underperformed the 15.51% return of the benchmark, the Russell 1000® Value Index. While we added quite a bit of value through our sector allocations — specifically, our underweight in financials and overweight in energy — this was more than offset by the underperformance of our individual stock picks.1
Although the Fund (Class A shares) lagged the Russell 1000 Value Index during the past year, it has outpaced the benchmark by a comfortable margin over the 3-, 5- and 10-year periods ended December 31, 2010.
An important reason for the Fund's underperformance was our preference for high-dividend-paying stocks with stable cash flows and our corresponding underweight in the higher-risk cyclical areas of the market. This positioning was based on our view that the economic recovery was largely the result of short-term, unsustainable fiscal and monetary stimuli rather than a sustainable, longer-term improvement in final demand. Expecting that this would ultimately result in a lower-growth, lower-return market environment, we shifted assets out of cyclical deep-value stocks into less cyclical stable-value stocks during the early part of the year. Unfortunately, cyclical higher-beta stocks, in fact, strongly outperformed the market by a substantial margin during the past 12 months.2
Although our defensive approach hurt performance in 2010, we believe it remains appropriate given our ongoing caution regarding the broader market. Additionally, it positions the Fund in the areas of the market with the most attractive valuations.3 Many cyclical stocks staged substantial rallies in the fourth quarter, leaving them vulnerable to potential disappointments. Conversely, many stocks that lagged during the recent run-up offer much more reasonable valuations. These types of out-of-favor, undervalued stocks are typically characterized by more muted investor expectations, meaning that they are both less vulnerable to disappointments and more likely to have upside potential. We therefore remain consistent in our strategy as we await the potential return to compelling performance for the market's most attractively valued companies.
Thomas Schuessler, PhD.
Lead Portfolio Manager
Volker Dosch
Oliver Pfeil, PhD.
Portfolio Managers
The Russell 1000® Value Index is an unmanaged index that consists of those stocks in the Russell 1000 Index with less-than-average growth orientation. Russell 1000® Index is an unmanaged price-only index of the 1,000 largest capitalized companies that are domiciled in the US and whose common stocks are traded.
Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.
1 "Overweight" means the Fund holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the Fund holds a lower weighting.
2 Beta is a measure of volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
3 "Valuation" refers to the price investors pay for a given security. An asset can be undervalued, meaning that it trades for less than its intrinsic value, or overvalued, which means that it trades at a more expensive price than its underlying worth.
Portfolio management market commentary is as of December 31, 2010, and may not come to pass. This information is subject to change at any time based on market and other conditions. Past performance does not guarantee future results. Current and future portfolio holdings are subject to risk.
Portfolio Summary
DWS Large Cap Value VIP
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | 12/31/10 | 12/31/09 |
| | | |
| Common Stocks | 98% | 99% |
| Cash Equivalents | 2% | 1% |
| | 100% | 100% |
Sector Diversification (As a % of Common Stocks) | 12/31/10 | 12/31/09 |
| | | |
| Energy | 18% | 15% |
| Financials | 13% | 15% |
| Health Care | 12% | 13% |
| Consumer Staples | 12% | 12% |
| Utilities | 10% | 11% |
| Telecommunication Services | 9% | 11% |
| Information Technology | 8% | 2% |
| Consumer Discretionary | 7% | 5% |
| Industrials | 6% | 10% |
| Materials | 5% | 6% |
| | 100% | 100% |
Asset allocation and sector diversification are subject to change.
For more complete details about the Fund's investment portfolio, see page 167.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
Investment Portfolio December 31, 2010
DWS Large Cap Value VIP
| | | Shares | | | Value ($) | |
| | | | |
| Common Stocks 97.8% | |
| Consumer Discretionary 7.2% | |
| Distributors 2.1% | |
| Genuine Parts Co. | | | 84,678 | | | | 4,347,369 | |
| Diversified Consumer Services 1.3% | |
| H&R Block, Inc. (a) | | | 217,813 | | | | 2,594,153 | |
| Hotels Restaurants & Leisure 1.3% | |
| Carnival Corp. (Units) | | | 59,867 | | | | 2,760,467 | |
| Media 1.4% | |
| News Corp. "A" | | | 197,872 | | | | 2,881,016 | |
| Textiles, Apparel & Luxury Goods 1.1% | |
| VF Corp. (a) | | | 26,538 | | | | 2,287,045 | |
| Consumer Staples 11.5% | |
| Beverages 1.4% | |
| PepsiCo, Inc. | | | 42,128 | | | | 2,752,222 | |
| Food & Staples Retailing 3.1% | |
| CVS Caremark Corp. | | | 103,849 | | | | 3,610,830 | |
| Kroger Co. | | | 123,703 | | | | 2,765,999 | |
| | | | | | | | 6,376,829 | |
| Food Products 2.9% | |
| General Mills, Inc. | | | 50,103 | | | | 1,783,166 | |
| Kellogg Co. | | | 43,279 | | | | 2,210,692 | |
| Mead Johnson Nutrition Co. | | | 32,885 | | | | 2,047,091 | |
| | | | | | | | 6,040,949 | |
| Tobacco 4.1% | |
| Altria Group, Inc. | | | 172,422 | | | | 4,245,030 | |
| Philip Morris International, Inc. | | | 73,171 | | | | 4,282,698 | |
| | | | | | | | 8,527,728 | |
| Energy 17.6% | |
| Energy Equipment & Services 4.7% | |
| Ensco PLC (ADR) | | | 64,045 | | | | 3,418,722 | |
| Noble Corp. | | | 90,557 | | | | 3,239,224 | |
| Transocean Ltd.* (a) | | | 44,883 | | | | 3,119,817 | |
| | | | | | | | 9,777,763 | |
| Oil, Gas & Consumable Fuels 12.9% | |
| Canadian Natural Resources Ltd. | | | 69,548 | | | | 3,089,322 | |
| Chevron Corp. | | | 49,457 | | | | 4,512,951 | |
| ConocoPhillips | | | 51,156 | | | | 3,483,723 | |
| Exxon Mobil Corp. | | | 50,290 | | | | 3,677,205 | |
| Marathon Oil Corp. (a) | | | 119,795 | | | | 4,436,009 | |
| Nexen, Inc. | | | 104,342 | | | | 2,389,432 | |
| Suncor Energy, Inc. | | | 131,220 | | | | 5,024,414 | |
| | | | | | | | 26,613,056 | |
| Financials 12.6% | |
| Diversified Financial Services 1.8% | |
| JPMorgan Chase & Co. | | | 85,723 | | | | 3,636,370 | |
| Insurance 10.8% | |
| Assurant, Inc. | | | 74,334 | | | | 2,863,346 | |
| Fidelity National Financial, Inc. "A" (a) | | | 148,069 | | | | 2,025,584 | |
| HCC Insurance Holdings, Inc. | | | 73,331 | | | | 2,122,199 | |
| Lincoln National Corp. (a) | | | 133,833 | | | | 3,721,896 | |
| MetLife, Inc. | | | 95,678 | | | | 4,251,930 | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| PartnerRe Ltd. (a) | | | 50,697 | | | | 4,073,504 | |
| Prudential Financial, Inc. | | | 57,640 | | | | 3,384,044 | |
| | | | | | | | 22,442,503 | |
| Health Care 12.0% | |
| Health Care Equipment & Supplies 3.1% | |
| Baxter International, Inc. | | | 72,472 | | | | 3,668,533 | |
| Becton, Dickinson & Co. (a) | | | 32,656 | | | | 2,760,085 | |
| | | | | | | | 6,428,618 | |
| Health Care Providers & Services 3.0% | |
| McKesson Corp. | | | 56,640 | | | | 3,986,323 | |
| WellPoint, Inc.* | | | 38,719 | | | | 2,201,562 | |
| | | | | | | | 6,187,885 | |
| Life Sciences Tools & Services 1.1% | |
| Thermo Fisher Scientific, Inc.* | | | 40,838 | | | | 2,260,792 | |
| Pharmaceuticals 4.8% | |
| Johnson & Johnson | | | 32,793 | | | | 2,028,247 | |
| Merck & Co., Inc. | | | 106,108 | | | | 3,824,132 | |
| Teva Pharmaceutical Industries Ltd. (ADR) | | | 77,764 | | | | 4,053,838 | |
| | | | | | | | 9,906,217 | |
| Industrials 5.6% | |
| Aerospace & Defense 3.8% | |
| Northrop Grumman Corp. | | | 42,452 | | | | 2,750,041 | |
| Raytheon Co. | | | 56,220 | | | | 2,605,235 | |
| United Technologies Corp. | | | 31,674 | | | | 2,493,377 | |
| | | | | | | | 7,848,653 | |
| Machinery 1.8% | |
| Dover Corp. (a) | | | 63,567 | | | | 3,715,491 | |
| Information Technology 8.0% | |
| Communications Equipment 1.7% | |
| Brocade Communications Systems, Inc.* | | | 254,336 | | | | 1,345,438 | |
| Cisco Systems, Inc.* | | | 104,962 | | | | 2,123,381 | |
| | | | | | | | 3,468,819 | |
| Computers & Peripherals 1.6% | |
| Hewlett-Packard Co. | | | 81,776 | | | | 3,442,769 | |
| IT Services 1.1% | |
| Automatic Data Processing, Inc. | | | 49,734 | | | | 2,301,689 | |
| Semiconductors & Semiconductor Equipment 1.7% | |
| Intel Corp. | | | 168,322 | | | | 3,539,812 | |
| Software 1.9% | |
| Microsoft Corp. | | | 138,377 | | | | 3,863,486 | |
| Materials 5.1% | |
| Chemicals 3.4% | |
| Air Products & Chemicals, Inc. | | | 45,671 | | | | 4,153,778 | |
| Praxair, Inc. (a) | | | 30,296 | | | | 2,892,359 | |
| | | | | | | | 7,046,137 | |
| Containers & Packaging 1.7% | |
| Sonoco Products Co. (a) | | | 101,372 | | | | 3,413,195 | |
| Telecommunication Services 8.5% | |
| Diversified Telecommunication Services 7.1% | |
| AT&T, Inc. | | | 163,617 | | | | 4,807,068 | |
| BCE, Inc. | | | 28,303 | | | | 1,003,624 | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| CenturyLink, Inc. (a) | | | 126,161 | | | | 5,824,853 | |
| Verizon Communications, Inc. | | | 82,706 | | | | 2,959,221 | |
| | | | | | | | 14,594,766 | |
| Wireless Telecommunication Services 1.4% | |
| Vodafone Group PLC (ADR) (a) | | | 113,690 | | | | 3,004,827 | |
| Utilities 9.7% | |
| Electric Utilities 7.7% | |
| Allegheny Energy, Inc. | | | 97,123 | | | | 2,354,262 | |
| American Electric Power Co., Inc. | | | 74,383 | | | | 2,676,300 | |
| Duke Energy Corp. (a) | | | 130,206 | | | | 2,318,969 | |
| Entergy Corp. | | | 34,093 | | | | 2,414,807 | |
| Exelon Corp. (a) | | | 30,886 | | | | 1,286,093 | |
| FirstEnergy Corp. (a) | | | 65,378 | | | | 2,420,294 | |
| Southern Co. (a) | | | 64,406 | | | | 2,462,241 | |
| | | | | | | | 15,932,966 | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| Multi-Utilities 2.0% | |
| PG&E Corp. | | | 87,684 | | | | 4,194,801 | |
Total Common Stocks (Cost $163,225,850) | | | | 202,188,393 | |
| | |
| Securities Lending Collateral 18.8% | |
| Daily Assets Fund Institutional, 0.27% (b) (c) (Cost $38,843,948) | | | 38,843,948 | | | | 38,843,948 | |
| | |
| Cash Equivalents 2.3% | |
| Central Cash Management Fund, 0.19% (b) (Cost $4,846,822) | | | 4,846,822 | | | | 4,846,822 | |
| | | % of Net Assets | | | Value ($) | |
| | | | |
Total Investment Portfolio (Cost $206,916,620)+ | | | 118.9 | | | | 245,879,163 | |
| Other Assets and Liabilities, Net | | | (18.9 | ) | | | (39,120,423 | ) |
| Net Assets | | | 100.0 | | | | 206,758,740 | |
* Non-income producing security.
+ The cost for federal income tax purposes was $209,013,049. At December 31, 2010, net unrealized appreciation for all securities based on tax cost was $36,866,114. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $42,154,718 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $5,288,604.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2010 amounted to $37,916,422, which is 18.3% of net assets.
(b) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(c) Represents collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates.
ADR: American Depositary Receipt
Fair Value Measurements
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
| Assets | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | |
| Common Stocks (d) | | $ | 202,188,393 | | | $ | — | | | $ | — | | | $ | 202,188,393 | |
| Short-Term Investments (d) | | | 43,690,770 | | | | — | | | | — | | | | 43,690,770 | |
| Total | | $ | 245,879,163 | | | $ | — | | | $ | — | | | $ | 245,879,163 | |
There have been no significant transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2010.
(d) See Investment Portfolio for additional detailed categorizations.
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities
| as of December 31, 2010 | |
| Assets | |
Investments: Investments in unaffiliated securities, at value (cost $163,225,850) — including $37,916,422 of securities loaned | | $ | 202,188,393 | |
| Investment in Daily Assets Fund Institutional (cost $38,843,948)* | | | 38,843,948 | |
| Investment in Central Cash Management Fund (cost $4,846,822) | | | 4,846,822 | |
| Total investments, at value (cost $206,916,620) | | | 245,879,163 | |
| Cash | | | 21,120 | |
| Foreign currency, at value (cost $10,034) | | | 11,513 | |
| Receivable for Fund shares sold | | | 150,489 | |
| Dividends receivable | | | 450,987 | |
| Interest receivable | | | 7,301 | |
| Foreign taxes recoverable | | | 22,127 | |
| Other assets | | | 1,106 | |
| Total assets | | | 246,543,806 | |
| Liabilities | |
| Payable upon return of securities loaned | | | 38,843,948 | |
| Payable for investments purchased | | | 628,063 | |
| Payable for Fund shares redeemed | | | 114,217 | |
| Accrued management fee | | | 106,533 | |
| Other accrued expenses and payables | | | 92,305 | |
| Total liabilities | | | 39,785,066 | |
| Net assets, at value | | $ | 206,758,740 | |
| Net Assets Consist of | |
| Undistributed net investment income | | | 4,084,211 | |
Net unrealized appreciation (depreciation) on: Investments | | | 38,962,543 | |
| Foreign currency | | | 6,252 | |
| Accumulated net realized gain (loss) | | | (43,182,951 | ) |
| Paid-in capital | | | 206,888,685 | |
| Net assets, at value | | $ | 206,758,740 | |
Class A Net Asset Value, offering and redemption price per share ($205,517,002 ÷ 17,416,427 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | | $ | 11.80 | |
Class B Net Asset Value, offering and redemption price per share ($1,241,738 ÷ 105,172 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | | $ | 11.81 | |
* Represents collateral on securities loaned.
The accompanying notes are an integral part of the financial statements.
Statement of Operations
| for the year ended December 31, 2010 | |
| Investment Income | |
Income: Dividends (net of foreign taxes withheld of $40,452) | | $ | 5,902,166 | |
| Income distributions — Central Cash Management Fund | | | 15,586 | |
| Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates | | | 32,223 | |
| Total income | | | 5,949,975 | |
Expenses: Management fee | | | 1,313,548 | |
| Administration fee | | | 202,084 | |
| Services to shareholders | | | 5,403 | |
| Distribution service fee (Class B) | | | 2,177 | |
| Record keeping fees (Class B) | | | 316 | |
| Custodian fee | | | 11,677 | |
| Professional fees | | | 62,232 | |
| Trustees' fees and expenses | | | 8,477 | |
| Reports to shareholders | | | 39,446 | |
| Other | | | 5,790 | |
| Total expenses | | | 1,651,150 | |
| Net investment income (loss) | | | 4,298,825 | |
| Realized and Unrealized Gain (Loss) | |
Net realized gain (loss) from: Investments | | | 7,964,499 | |
| Foreign currency | | | 1,697 | |
| Payment by affiliate (see Note I) | | | 62,550 | |
| | | | 8,028,746 | |
Change in net unrealized appreciation (depreciation) on: Investments | | | 7,886,334 | |
| Foreign currency | | | 3,358 | |
| | | | 7,889,692 | |
| Net gain (loss) | | | 15,918,438 | |
| Net increase (decrease) in net assets resulting from operations | | $ | 20,217,263 | |
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Net Assets
| | | Years Ended December 31, | |
| Increase (Decrease) in Net Assets | | 2010 | | | 2009 | |
Operations: Net investment income (loss) | | $ | 4,298,825 | | | $ | 3,970,664 | |
| Net realized gain (loss) | | | 8,028,746 | | | | (2,868,405 | ) |
| Change in net unrealized appreciation (depreciation) | | | 7,889,692 | | | | 44,336,276 | |
| Net increase (decrease) in net assets resulting from operations | | | 20,217,263 | | | | 45,438,535 | |
Distributions to shareholders from: Net investment income: Class A | | | (4,108,146 | ) | | | (2,847,989 | ) |
| Class B | | | (14,019 | ) | | | (9,025 | ) |
| Total distributions | | $ | (4,122,165 | ) | | $ | (2,857,014 | ) |
Fund share transactions: Class A Proceeds from shares sold | | | 8,671,405 | | | | 5,193,145 | |
| Net assets acquired in tax-free reorganization | | | — | | | | 107,453,089 | |
| Reinvestment of distributions | | | 4,108,146 | | | | 2,847,989 | |
| Payments for shares redeemed | | | (36,788,065 | ) | | | (62,359,106 | ) |
| Net increase (decrease) in net assets from Class A share transactions | | | (24,008,514 | ) | | | 53,135,117 | |
Class B Proceeds from shares sold | | | 506,629 | | | | 313,837 | |
| Net assets acquired in tax-free reorganization | | | — | | | | 202,242 | |
| Reinvestment of distributions | | | 14,019 | | | | 9,025 | |
| Payments for shares redeemed | | | (88,091 | ) | | | (238,487 | ) |
| Net increase (decrease) in net assets from Class B share transactions | | | 432,557 | | | | 286,617 | |
| Increase (decrease) in net assets | | | (7,480,859 | ) | | | 96,003,255 | |
| Net assets at beginning of period | | | 214,239,599 | | | | 118,236,344 | |
| Net assets at end of period (including undistributed net investment income of $4,084,211 and $3,905,854, respectively) | | $ | 206,758,740 | | | $ | 214,239,599 | |
| Other Information | |
Class A Shares outstanding at beginning of period | | | 19,667,770 | | | | 13,220,277 | |
| Shares sold | | | 778,508 | | | | 540,244 | |
| Shares issued in tax-free reorganization | | | — | | | | 12,224,432 | |
| Shares issued to shareholders in reinvestment of distributions | | | 366,145 | | | | 355,554 | |
| Shares redeemed | | | (3,395,996 | ) | | | (6,672,737 | ) |
| Net increase (decrease) in Class A shares | | | (2,251,343 | ) | | | 6,447,493 | |
| Shares outstanding at end of period | | | 17,416,427 | | | | 19,667,770 | |
Class B Shares outstanding at beginning of period | | | 66,594 | | | | 32,776 | |
| Shares sold | | | 45,434 | | | | 32,526 | |
| Shares issued in tax-free reorganization | | | — | | | | 22,957 | |
| Shares issued to shareholders in reinvestment of distributions | | | 1,246 | | | | 1,124 | |
| Shares redeemed | | | (8,102 | ) | | | (22,789 | ) |
| Net increase (decrease) in Class B shares | | | 38,578 | | | | 33,818 | |
| Shares outstanding at end of period | | | 105,172 | | | | 66,594 | |
The accompanying notes are an integral part of the financial statements.
Financial Highlights
Class A Years Ended December 31, | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| Selected Per Share Data | |
| Net asset value, beginning of period | | $ | 10.86 | | | $ | 8.92 | | | $ | 19.21 | | | $ | 17.96 | | | $ | 15.81 | |
Income (loss) from investment operations: Net investment income (loss)a | | | .23 | | | | .21 | | | | .21 | | | | .26 | | | | .29 | c |
| Net realized and unrealized gain (loss) | | | .93 | | | | 1.97 | | | | (5.68 | ) | | | 1.98 | | | | 2.12 | |
| Total from investment operations | | | 1.16 | | | | 2.18 | | | | (5.47 | ) | | | 2.24 | | | | 2.41 | |
Less distributions from: Net investment income | | | (.22 | ) | | | (.24 | ) | | | (.34 | ) | | | (.32 | ) | | | (.26 | ) |
| Net realized gains | | | — | | | | — | | | | (4.48 | ) | | | (.67 | ) | | | — | |
| Total distributions | | | (.22 | ) | | | (.24 | ) | | | (4.82 | ) | | | (.99 | ) | | | (.26 | ) |
| Net asset value, end of period | | $ | 11.80 | | | $ | 10.86 | | | $ | 8.92 | | | $ | 19.21 | | | $ | 17.96 | |
| Total Return (%) | | | 10.77 | | | | 25.37 | | | | (36.40 | )b | | | 13.15 | b,d | | | 15.41 | c |
| Ratios to Average Net Assets and Supplemental Data | |
| Net assets, end of period ($ millions) | | | 206 | | | | 214 | | | | 118 | | | | 229 | | | | 275 | |
| Ratio of expenses before expense reductions (%) | | | .82 | | | | .76 | | | | .87 | | | | .83 | | | | .83 | |
| Ratio of expenses after expense reductions (%) | | | .82 | | | | .76 | | | | .86 | | | | .82 | | | | .83 | |
| Ratio of net investment income (loss) (%) | | | 2.13 | | | | 2.22 | | | | 1.59 | | | | 1.43 | | | | 1.73 | c |
| Portfolio turnover rate (%) | | | 32 | | | | 76 | | | | 97 | | | | 103 | | | | 76 | |
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. c Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Funds. The non-recurring income resulted in an increase in net investment income of $0.008 per share and an increase in the ratio of net investment income of 0.04%. Excluding this non-recurring income, total return would have been 0.04% lower. d Includes a reimbursement from the Advisor to reimburse the effect of losses incurred as the result of certain operation errors during the period. Excluding this reimbursement, total return would have been 0.04% lower. | |
Class B Years Ended December 31, | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| Selected Per Share Data | |
| Net asset value, beginning of period | | $ | 10.86 | | | $ | 8.92 | | | $ | 19.20 | | | $ | 17.94 | | | $ | 15.79 | |
Income (loss) from investment operations: Net investment income (loss)a | | | .20 | | | | .19 | | | | .12 | | | | .19 | | | | .23 | c |
| Net realized and unrealized gain (loss) | | | .93 | | | | 1.96 | | | | (5.64 | ) | | | 1.99 | | | | 2.11 | |
| Total from investment operations | | | 1.13 | | | | 2.15 | | | | (5.52 | ) | | | 2.18 | | | | 2.34 | |
Less distributions from: Net investment income | | | (.18 | ) | | | (.21 | ) | | | (.28 | ) | | | (.25 | ) | | | (.19 | ) |
| Net realized gains | | | — | | | | — | | | | (4.48 | ) | | | (.67 | ) | | | — | |
| Total distributions | | | (.18 | ) | | | (.21 | ) | | | (4.76 | ) | | | (.92 | ) | | | (.19 | ) |
| Net asset value, end of period | | $ | 11.81 | | | $ | 10.86 | | | $ | 8.92 | | | $ | 19.20 | | | $ | 17.94 | |
| Total Return (%) | | | 10.53 | | | | 24.86 | | | | (36.64 | )b | | | 12.77 | b,d | | | 14.96 | c |
| Ratios to Average Net Assets and Supplemental Data | |
| Net assets, end of period ($ millions) | | | 1 | | | | 1 | | | | .29 | | | | 8 | | | | 40 | |
| Ratio of expenses before expense reductions (%) | | | 1.11 | | | | 1.06 | | | | 1.28 | | | | 1.21 | | | | 1.21 | |
| Ratio of expenses after expense reductions (%) | | | 1.11 | | | | 1.06 | | | | 1.26 | | | | 1.20 | | | | 1.21 | |
| Ratio of net investment income (loss) (%) | | | 1.84 | | | | 1.92 | | | | 1.20 | | | | 1.06 | | | | 1.35 | c |
| Portfolio turnover rate (%) | | | 32 | | | | 76 | | | | 97 | | | | 103 | | | | 76 | |
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. c Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Funds. The non-recurring income resulted in an increase in net investment income of $0.008 per share and an increase in the ratio of net investment income of 0.04%. Excluding this non-recurring income, total return would have been 0.04% lower. d Includes a reimbursement from the Advisor to reimburse the effect of losses incurred as the result of certain operation errors during the period. Excluding this reimbursement, total return would have been 0.04% lower. | |
Performance Summary December 31, 2010
DWS Mid Cap Growth VIP
All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce returns.
The gross expense ratio of the Fund, as stated in the fee table of the prospectus dated May 1, 2010 is 1.17% for Class A shares and may differ from the expense ratio disclosed in the Financial Highlights table in this report.
Risk Considerations
Stocks of medium-sized companies involve greater risk than securities of larger, more-established companies. Stocks may decline in value. See the prospectus for details.
Fund returns shown for all periods reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.
| Growth of an Assumed $10,000 Investment in DWS Mid Cap Growth VIP |
[] DWS Mid Cap Growth VIP — Class A [] Russell Midcap® Growth Index | The Russell Midcap® Growth Index is an unmanaged index that measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000® Growth Index. Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index. |
| |
| Yearly periods ended December 31 | |
| Comparative Results | |
| DWS Mid Cap Growth VIP | | 1-Year | | | 3-Year | | | 5-Year | | | 10-Year | |
| Class A | Growth of $10,000 | | $ | 12,795 | | | $ | 9,148 | | | $ | 10,998 | | | $ | 9,567 | |
| Average annual total return | | | 27.95 | % | | | -2.93 | % | | | 1.92 | % | | | -0.44 | % |
| Russell Midcap Growth Index | Growth of $10,000 | | $ | 12,638 | | | $ | 10,294 | | | $ | 12,692 | | | $ | 13,592 | |
| Average annual total return | | | 26.38 | % | | | 0.97 | % | | | 4.88 | % | | | 3.12 | % |
The growth of $10,000 is cumulative.
Information About Your Fund's Expenses
DWS Mid Cap Growth VIP
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees and other Fund expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Fund limited these expenses; had it not done so, expenses would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2010 to December 31, 2010).
The tables illustrate your Fund's expenses in two ways:
•Actual Fund Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Fund using the Fund's actual return during the period. To estimate the expenses 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 "Expenses Paid per $1,000" line under the share class you hold.
• Hypothetical 5% Fund Return. This helps you to compare your Fund's ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
Expenses and Value of a $1,000 Investment for the six months ended December 31, 2010 | |
| Actual Fund Return | | Class A | |
| Beginning Account Value 7/1/10 | | $ | 1,000.00 | |
| Ending Account Value 12/31/10 | | $ | 1,314.70 | |
| Expenses Paid per $1,000* | | $ | 5.83 | |
| Hypothetical 5% Fund Return | | Class A | |
| Beginning Account Value 7/1/10 | | $ | 1,000.00 | |
| Ending Account Value 12/31/10 | | $ | 1,020.16 | |
| Expenses Paid per $1,000* | | $ | 5.09 | |
* Expenses are equal to the Fund's annualized expense ratio, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.
| Annualized Expense Ratio | Class A | |
| DWS Variable Series II — DWS Mid Cap Growth VIP | 1.00% | |
For more information, please refer to the Fund's prospectus.
These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund of any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
Management Summary December 31, 2010
DWS Mid Cap Growth VIP
The year 2010 began on an optimistic note with a few bright spots in the economy — improving consumer confidence, the government reports showing strong fourth-quarter 2009 gross domestic product (GDP) growth and a six-year high in manufacturing activity — partially offset by growing concerns about the health of the European financial system.1 By May 2010, the US stock market had entered a period of significant volatility amid regulatory uncertainty (health care and financial reform) and fears of a possible double-dip recession. The market then staged a rebound during the last four months of the year amid increasing confidence that the US Federal Reserve Board's (the Fed's) second round of quantitative easing measures would suppo rt asset prices, along with evidence that the US economy was on a path to faster growth in 2011.
For the 12 months ended December 31, 2010, the Fund returned 27.95% (Class A shares, unadjusted for contract charges), compared with the 26.38% return of the Russell Midcap® Growth Index. These strong returns belie the elevated level of investor risk aversion that impacted the global equity markets during much of the summer months as high unemployment, European debt problems, a possible economic "hard landing" within China and some slippage for US economic indicators temporarily dampened enthusiasm for stocks.
The Fund's outperformance of the benchmark came primarily from favorable stock selection. During the period, stock selection was positive within the health care, information technology and consumer staples sectors. Other contributions to returns came from an overweight to energy and an underweight to telecom services.2 Stock selection in energy and consumer discretionary detracted from performance. In addition, underweight positions in materials, information technology and consumer discretionary weighed on returns.
Joseph Axtell, CFA
Rafaelina M. Lee
Portfolio Managers
The Russell Midcap Growth Index is an unmanaged index that measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000® Growth Index.
Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.
1 Gross domestic product is the value of goods and services produced in an economy.
2 "Overweight" means the Fund holds a higher weighting in a given sector than the benchmark index. "Underweight" means the Fund holds a lower weighting.
Portfolio management market commentary is as of December 31, 2010, and may not come to pass. This information is subject to change at any time based on market and other conditions. Past performance does not guarantee future results. Current and future portfolio holdings are subject to risk.
Portfolio Summary
DWS Mid Cap Growth VIP
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | 12/31/10 | 12/31/09 |
| | | |
| Common Stocks | 96% | 98% |
| Cash Equivalents | 4% | 2% |
| | 100% | 100% |
Sector Diversification (As a % of Common Stocks) | 12/31/10 | 12/31/09 |
| | | |
| Information Technology | 21% | 22% |
| Consumer Discretionary | 19% | 18% |
| Industrials | 14% | 14% |
| Health Care | 14% | 12% |
| Energy | 12% | 12% |
| Financials | 8% | 9% |
| Materials | 6% | 8% |
| Consumer Staples | 4% | 3% |
| Telecommunication Services | 2% | 2% |
| | 100% | 100% |
Asset allocation and sector diversification are subject to change.
For more complete details about the Fund's investment portfolio, see page 179.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
Investment Portfolio December 31, 2010
DWS Mid Cap Growth VIP
| | | Shares | | | Value ($) | |
| | | | |
| Common Stocks 96.6% | |
| Consumer Discretionary 18.1% | |
| Auto Components 2.8% | |
| BorgWarner, Inc.* | | | 5,556 | | | | 402,032 | |
| Gentex Corp. | | | 11,572 | | | | 342,068 | |
| | | | | | | | 744,100 | |
| Hotels Restaurants & Leisure 2.5% | |
| Darden Restaurants, Inc. | | | 8,015 | | | | 372,217 | |
| Panera Bread Co. "A"* (a) | | | 3,000 | | | | 303,630 | |
| | | | | | | | 675,847 | |
| Household Durables 1.0% | |
| Jarden Corp. | | | 8,300 | | | | 256,221 | |
| Internet & Catalog Retail 1.3% | |
| Priceline.com, Inc.* | | | 850 | | | | 339,618 | |
| Specialty Retail 7.4% | |
| Advance Auto Parts, Inc. | | | 5,500 | | | | 363,825 | |
| Children's Place Retail Stores, Inc.* | | | 7,300 | | | | 362,372 | |
| Guess?, Inc. | | | 8,900 | | | | 421,148 | |
| Tiffany & Co. (a) | | | 6,600 | | | | 410,982 | |
| Urban Outfitters, Inc.* (a) | | | 11,500 | | | | 411,815 | |
| | | | | | | | 1,970,142 | |
| Textiles, Apparel & Luxury Goods 3.1% | |
| Deckers Outdoor Corp.* | | | 6,654 | | | | 530,590 | |
| Hanesbrands, Inc.* | | | 11,286 | | | | 286,664 | |
| | | | | | | | 817,254 | |
| Consumer Staples 3.7% | |
| Food Products 1.2% | |
| Diamond Foods, Inc. (a) | | | 5,800 | | | | 308,444 | |
| Household Products 1.0% | |
| Church & Dwight Co., Inc. | | | 3,962 | | | | 273,457 | |
| Personal Products 1.5% | |
| Herbalife Ltd. | | | 6,053 | | | | 413,844 | |
| Energy 11.1% | |
| Energy Equipment & Services 6.7% | |
| Cameron International Corp.* | | | 3,713 | | | | 188,360 | |
| Complete Production Services, Inc.* | | | 9,387 | | | | 277,386 | |
| Core Laboratories NV (a) | | | 2,486 | | | | 221,378 | |
| Dresser-Rand Group, Inc.* | | | 5,050 | | | | 215,080 | |
| FMC Technologies, Inc.* | | | 4,880 | | | | 433,881 | |
| McDermott International, Inc.* | | | 14,000 | | | | 289,660 | |
| National Oilwell Varco, Inc. | | | 2,272 | | | | 152,792 | |
| | | | | | | | 1,778,537 | |
| Oil, Gas & Consumable Fuels 4.4% | |
| Alpha Natural Resources, Inc.* | | | 3,776 | | | | 226,673 | |
| Concho Resources, Inc.* | | | 2,916 | | | | 255,646 | |
| Pioneer Natural Resources Co. | | | 2,080 | | | | 180,586 | |
| Ultra Petroleum Corp.* (a) | | | 4,830 | | | | 230,729 | |
| Whiting Petroleum Corp.* | | | 2,442 | | | | 286,178 | |
| | | | | | | | 1,179,812 | |
| Financials 8.1% | |
| Capital Markets 4.7% | |
| Affiliated Managers Group, Inc.* (a) | | | 1,800 | | | | 178,596 | |
| Invesco Ltd. | | | 5,700 | | | | 137,142 | |
| Jefferies Group, Inc. | | | 8,900 | | | | 237,007 | |
| Lazard Ltd. "A" | | | 4,854 | | | | 191,684 | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| Och-Ziff Capital Management Group "A" (Limited Partnership) | | | 18,720 | | | | 291,658 | |
| TD Ameritrade Holding Corp. (a) | | | 10,891 | | | | 206,820 | |
| | | | | | | | 1,242,907 | |
| Commercial Banks 1.4% | |
| Huntington Bancshares, Inc. | | | 19,766 | | | | 135,792 | |
| Prosperity Bancshares, Inc. | | | 4,400 | | | | 172,832 | |
| Zions Bancorp. | | | 2,881 | | | | 69,807 | |
| | | | | | | | 378,431 | |
| Diversified Financial Services 1.3% | |
| Portfolio Recovery Associates, Inc.* (a) | | | 4,800 | | | | 360,960 | |
| Insurance 0.7% | |
| W.R. Berkley Corp. | | | 6,500 | | | | 177,970 | |
| Health Care 13.5% | |
| Biotechnology 2.7% | |
| Alexion Pharmaceuticals, Inc.* (a) | | | 2,483 | | | | 200,005 | |
| Human Genome Sciences, Inc.* (a) | | | 6,800 | | | | 162,452 | |
| Onyx Pharmaceuticals, Inc.* | | | 3,763 | | | | 138,742 | |
| Regeneron Pharmaceuticals, Inc.* | | | 6,300 | | | | 206,829 | |
| | | | | | | | 708,028 | |
| Health Care Equipment & Supplies 1.9% | |
| Kinetic Concepts, Inc.* | | | 6,700 | | | | 280,596 | |
| Thoratec Corp.* | | | 7,800 | | | | 220,896 | |
| | | | | | | | 501,492 | |
| Health Care Providers & Services 3.3% | |
| AmerisourceBergen Corp. | | | 8,900 | | | | 303,668 | |
| Fresenius Medical Care AG & Co. KGaA (ADR) | | | 5,230 | | | | 301,719 | |
| Laboratory Corp. of America Holdings* (a) | | | 3,200 | | | | 281,344 | |
| | | | | | | | 886,731 | |
| Health Care Technology 1.7% | |
| Cerner Corp.* (a) | | | 1,599 | | | | 151,489 | |
| SXC Health Solutions Corp.* | | | 7,233 | | | | 310,006 | |
| | | | | | | | 461,495 | |
| Life Sciences Tools & Services 2.4% | |
| ICON PLC (ADR)* | | | 5,824 | | | | 127,546 | |
| Life Technologies Corp.* | | | 5,500 | | | | 305,250 | |
| QIAGEN NV* (a) | | | 10,213 | | | | 199,664 | |
| | | | | | | | 632,460 | |
| Pharmaceuticals 1.5% | |
| Questcor Pharmaceuticals, Inc.* | | | 27,486 | | | | 404,869 | |
| Industrials 13.9% | |
| Aerospace & Defense 1.3% | |
| BE Aerospace, Inc.* | | | 9,400 | | | | 348,082 | |
| Commercial Services & Supplies 1.1% | |
| Stericycle, Inc.* (a) | | | 3,500 | | | | 283,220 | |
| Construction & Engineering 0.4% | |
| Aecom Technology Corp.* | | | 3,712 | | | | 103,825 | |
| Electrical Equipment 2.9% | |
| AMETEK, Inc. | | | 7,446 | | | | 292,255 | |
| Babcock & Wilcox Co.* | | | 4,950 | | | | 126,671 | |
| General Cable Corp.* | | | 10,200 | | | | 357,918 | |
| | | | | | | | 776,844 | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| Machinery 4.6% | |
| Flowserve Corp. | | | 1,801 | | | | 214,715 | |
| Gardner Denver, Inc. | | | 4,560 | | | | 313,819 | |
| Joy Global, Inc. | | | 4,000 | | | | 347,000 | |
| Terex Corp.* (a) | | | 11,175 | | | | 346,872 | |
| | | | | | | | 1,222,406 | |
| Professional Services 1.7% | |
| FTI Consulting, Inc.* (a) | | | 5,082 | | | | 189,457 | |
| Robert Half International, Inc. | | | 8,930 | | | | 273,258 | |
| | | | | | | | 462,715 | |
| Road & Rail 1.9% | |
| Genesee & Wyoming, Inc. "A"* | | | 4,960 | | | | 262,632 | |
| Kansas City Southern* | | | 4,945 | | | | 236,668 | |
| | | | | | | | 499,300 | |
| Information Technology 20.6% | |
| Communications Equipment 2.5% | |
| F5 Networks, Inc.* | | | 2,484 | | | | 323,317 | |
| Harris Corp. (a) | | | 2,700 | | | | 122,310 | |
| Juniper Networks, Inc.* | | | 6,166 | | | | 227,649 | |
| | | | | | | | 673,276 | |
| Computers & Peripherals 2.0% | |
| NetApp, Inc.* | | | 5,350 | | | | 294,036 | |
| SanDisk Corp.* | | | 4,728 | | | | 235,738 | |
| | | | | | | | 529,774 | |
| Electronic Equipment, Instruments & Components 0.8% | |
| Itron, Inc.* | | | 3,850 | | | | 213,482 | |
| Internet Software & Services 1.0% | |
| Equinix, Inc.* (a) | | | 3,356 | | | | 272,709 | |
| IT Services 1.3% | |
| Cognizant Technology Solutions Corp. "A"* | | | 4,610 | | | | 337,867 | |
| Semiconductors & Semiconductor Equipment 6.7% | |
| Analog Devices, Inc. | | | 3,500 | | | | 131,845 | |
| ARM Holdings PLC (ADR) | | | 11,965 | | | | 248,274 | |
| ASML Holding NV (NY Registered Shares) (a) | | | 3,669 | | | | 140,669 | |
| Broadcom Corp. "A" | | | 3,682 | | | | 160,351 | |
| Cavium Networks, Inc.* (a) | | | 6,741 | | | | 254,001 | |
| First Solar, Inc.* (a) | | | 1,679 | | | | 218,505 | |
| Marvell Technology Group Ltd.* | | | 13,728 | | | | 254,654 | |
| Netlogic Microsystems, Inc.* | | | 4,200 | | | | 131,922 | |
| Novellus Systems, Inc.* | | | 7,405 | | | | 239,330 | |
| | | | | | | | 1,779,551 | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| Software 6.3% | |
| BMC Software, Inc.* | | | 2,621 | | | | 123,554 | |
| Check Point Software Technologies Ltd.* | | | 2,905 | | | | 134,385 | |
| Concur Technologies, Inc.* | | | 5,913 | | | | 307,062 | |
| MICROS Systems, Inc.* | | | 2,868 | | | | 125,791 | |
| Red Hat, Inc.* | | | 6,789 | | | | 309,918 | |
| Rovi Corp.* (a) | | | 4,832 | | | | 299,632 | |
| Salesforce.com, Inc.* (a) | | | 2,705 | | | | 357,060 | |
| | | | | | | | 1,657,402 | |
| Materials 5.4% | |
| Chemicals 1.1% | |
| Scotts Miracle-Gro Co. "A" | | | 2,100 | | | | 106,617 | |
| Solutia, Inc.* | | | 7,452 | | | | 171,992 | |
| | | | | | | | 278,609 | |
| Containers & Packaging 0.8% | |
| Crown Holdings, Inc.* | | | 6,589 | | | | 219,941 | |
| Metals & Mining 2.6% | |
| Cliffs Natural Resources, Inc. | | | 3,000 | | | | 234,030 | |
| Kinross Gold Corp. | | | 10,400 | | | | 197,184 | |
| Thompson Creek Metals Co., Inc.* | | | 18,099 | | | | 266,417 | |
| | | | | | | | 697,631 | |
| Paper & Forest Products 0.9% | |
| Schweitzer-Mauduit International, Inc. | | | 3,968 | | | | 249,667 | |
| Telecommunication Services 2.2% | |
| Wireless Telecommunication Services | |
| American Tower Corp. "A"* | | | 6,078 | | | | 313,868 | |
| MetroPCS Communications, Inc.* (a) | | | 21,176 | | | | 267,453 | |
| | | | | | | | 581,321 | |
Total Common Stocks (Cost $17,324,405) | | | | 25,700,241 | |
| | |
| Securities Lending Collateral 20.0% | |
| Daily Assets Fund Institutional, 0.27% (b) (c) (Cost $5,310,295) | | | 5,310,295 | | | | 5,310,295 | |
| | |
| Cash Equivalents 3.9% | |
| Central Cash Management Fund, 0.19% (b) (Cost $1,025,897) | | | 1,025,897 | | | | 1,025,897 | |
| | | % of Net Assets | | | Value ($) | |
| | | | |
Total Investment Portfolio (Cost $23,660,597)+ | | | 120.5 | | | | 32,036,433 | |
| Other Assets and Liabilities, Net | | | (20.5 | ) | | | (5,439,897 | ) |
| Net Assets | | | 100.0 | | | | 26,596,536 | |
* Non-income producing security.
+ The cost for federal income tax purposes was $23,757,711. At December 31, 2010, net unrealized appreciation for all securities based on tax cost was $8,278,722. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $8,520,038 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $241,316.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2010 amounted to $5,167,474, which is 19.4% of net assets.
(b) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(c) Represents collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates.
ADR: American Depositary Receipt
Fair Value Measurements
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
| Assets | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | |
| Common Stocks (d) | | $ | 25,700,241 | | | $ | — | | | $ | — | | | $ | 25,700,241 | |
| Short-Term Investments (d) | | | 6,336,192 | | | | — | | | | — | | | | 6,336,192 | |
| Total | | $ | 32,036,433 | | | $ | — | | | $ | — | | | $ | 32,036,433 | |
There have been no significant transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2010.
(d) See Investment Portfolio for additional detailed categorizations.
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities
| as of December 31, 2010 | |
| Assets | |
Investments: Investments in unaffiliated securities, at value (cost $17,324,405) — including $5,167,474 of securities loaned | | $ | 25,700,241 | |
Investment in Daily Assets Fund Institutional (cost $5,310,295)* | | | 5,310,295 | |
| Investment in Central Cash Management Fund (cost $1,025,897) | | | 1,025,897 | |
| Total investments, at value (cost $23,660,597) | | | 32,036,433 | |
| Dividends receivable | | | 3,385 | |
| Interest receivable | | | 815 | |
| Foreign taxes recoverable | | | 319 | |
| Other assets | | | 124 | |
| Total assets | | | 32,041,076 | |
| Liabilities | |
| Payable upon return of securities loaned | | | 5,310,295 | |
| Payable for Fund shares redeemed | | | 50,783 | |
| Accrued management fee | | | 20,245 | |
| Other accrued expenses and payables | | | 63,217 | |
| Total liabilities | | | 5,444,540 | |
| Net assets, at value | | $ | 26,596,536 | |
| Net Assets Consist of | |
| Net unrealized appreciation (depreciation) on investments | | | 8,375,836 | |
| Accumulated net realized gain (loss) | | | (25,844,555 | ) |
| Paid-in capital | | | 44,065,255 | |
| Net assets, at value | | $ | 26,596,536 | |
Class A Net Asset Value, offering and redemption price per share ($26,596,536 ÷ 2,135,742 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | | $ | 12.45 | |
* Represents collateral on securities loaned.
The accompanying notes are an integral part of the financial statements.
Statement of Operations
| for the year ended December 31, 2010 | |
| Investment Income | |
| Dividends (net of foreign taxes withheld of $1,411) | | $ | 141,436 | |
| Income distributions — Central Cash Management Fund | | | 1,047 | |
| Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates | | | 8,700 | |
| Total income | | | 151,183 | |
Expenses: Management fee | | | 149,048 | |
| Administration fee | | | 22,413 | |
| Services to shareholders | | | 887 | |
| Custodian fee | | | 9,826 | |
| Legal fees | | | 9,140 | |
| Audit and tax fees | | | 46,898 | |
| Trustees' fees and expenses | | | 3,099 | |
| Reports to shareholders | | | 13,510 | |
| Other | | | 3,824 | |
| Total expenses before expense reductions | | | 258,645 | |
| Expense reductions | | | (24,596 | ) |
| Total expenses after expense reductions | | | 234,049 | |
| Net investment income (loss) | | | (82,866 | ) |
| Realized and Unrealized Gain (Loss) | |
| Net realized gain (loss) from investments | | | 2,083,999 | |
| Change in net unrealized appreciation (depreciation) on investments | | | 3,665,748 | |
| Net gain (loss) | | | 5,749,747 | |
| Net increase (decrease) in net assets resulting from operations | | $ | 5,666,881 | |
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Net Assets
| | | Years Ended December 31, | |
| Increase (Decrease) in Net Assets | | 2010 | | | 2009 | |
Operations: Net investment income (loss) | | $ | (82,866 | ) | | $ | (40,620 | ) |
| Net realized gain (loss) | | | 2,083,999 | | | | (3,073,291 | ) |
| Change in net unrealized appreciation (depreciation) | | | 3,665,748 | | | | 10,072,701 | |
| Net increase (decrease) in net assets resulting from operations | | | 5,666,881 | | | | 6,958,790 | |
Fund share transactions: Class A Proceeds from shares sold | | | 3,568,315 | | | | 2,976,222 | |
| Payments for shares redeemed | | | (5,044,677 | ) | | | (5,876,870 | ) |
| Shares converted* | | | — | | | | 17,354 | |
| Net increase (decrease) in net assets from Class A share transactions | | | (1,476,362 | ) | | | (2,883,294 | ) |
Class B Payments for shares redeemed | | | — | | | | (64 | ) |
| Shares converted* | | | — | | | | (17,354 | ) |
| Net increase (decrease) in net assets from Class B share transactions | | | — | | | | (17,418 | ) |
| Increase (decrease) in net assets | | | 4,190,519 | | | | 4,058,078 | |
| Net assets at beginning of period | | | 22,406,017 | | | | 18,347,939 | |
| Net assets at end of period (including net investment income and accumulated net investment loss of $0 and $4,978, respectively) | | $ | 26,596,536 | | | $ | 22,406,017 | |
| Other Information | |
Class A Shares outstanding at beginning of period | | | 2,302,964 | | | | 2,694,618 | |
| Shares sold | | | 322,729 | | | | 374,687 | |
| Shares redeemed | | | (489,951 | ) | | | (769,440 | ) |
| Shares converted* | | | — | | | | 3,099 | |
| Net increase (decrease) in Class A shares | | | (167,222 | ) | | | (391,654 | ) |
| Shares outstanding at end of period | | | 2,135,742 | | | | 2,302,964 | |
Class B Shares outstanding at beginning of period | | | — | | | | 3,171 | |
| Shares redeemed | | | — | | | | (10 | ) |
| Shares converted* | | | — | | | | (3,161 | ) |
| Net increase (decrease) in Class B shares | | | — | | | | (3,171 | ) |
| Shares outstanding at end of period | | | — | | | | — | |
* On March 6, 2009, Class B shares converted into Class A shares.
The accompanying notes are an integral part of the financial statements.
Financial Highlights
Class A Years Ended December 31, | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| Selected Per Share Data | |
| Net asset value, beginning of period | | $ | 9.73 | | | $ | 6.80 | | | $ | 13.61 | | | $ | 12.56 | | | $ | 11.32 | |
Income (loss) from investment operations: Net investment income (loss)a | | | (.04 | ) | | | (.02 | ) | | | (.02 | ) | | | (.05 | ) | | | (.06 | )c |
| Net realized and unrealized gain (loss) | | | 2.76 | | | | 2.95 | | | | (6.79 | ) | | | 1.10 | | | | 1.30 | |
| Total from investment operations | | | 2.72 | | | | 2.93 | | | | (6.81 | ) | | | 1.05 | | | | 1.24 | |
| Net asset value, end of period | | $ | 12.45 | | | $ | 9.73 | | | $ | 6.80 | | | $ | 13.61 | | | $ | 12.56 | |
Total Return (%)b | | | 27.95 | | | | 43.09 | | | | (50.04 | ) | | | 8.36 | | | | 10.95 | c |
| Ratios to Average Net Assets and Supplemental Data | |
| Net assets, end of period ($ millions) | | | 27 | | | | 22 | | | | 18 | | | | 51 | | | | 53 | |
| Ratio of expenses before expense reductions (%) | | | 1.15 | | | | 1.17 | | | | 1.17 | | | | 1.05 | | | | 1.03 | |
| Ratio of expenses after expense reductions (%) | | | 1.04 | | | | .92 | | | | 1.02 | | | | .90 | | | | .93 | |
| Ratio of net investment income (loss) (%) | | | (.37 | ) | | | (.21 | ) | | | (.19 | ) | | | (.38 | ) | | | (.51 | )c |
| Portfolio turnover rate (%) | | | 57 | | | | 89 | | | | 82 | | | | 68 | | | | 46 | |
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. c Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Funds. The non-recurring income resulted in an increase in net investment income of $0.003 per share and an increase in the ratio of net investment income of 0.03%. Excluding this non-recurring income, total return would have been 0.03% lower. | |
Performance Summary December 31, 2010
DWS Money Market VIP
All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce ret urns. The yield quotation more closely reflects the current earnings of the Fund than the total return quotation.
Risk Considerations
An investment in this Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or by any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. The share price of money market funds can fall below the $1.00 share price. You should not rely on or expect the Advisor to enter into support agreements or take other actions to maintain the Fund's $1.00 share price. The credit quality of the Fund's holdings can change rapidly in certain markets, and the default of a single holding could have an adverse impact on the Fund's share price. The Fund's share price can also be negatively affected during periods of high redemption pressures and/or illiquid markets. The actions of a few large investors in the Fund may have a significant adverse effect on the share price of the Fund. See the prospectus for specific details regarding the Fund's risk profile.
| Fund's Class A Shares Yield | 7-day current yield |
| December 31, 2010 | 0.01%* |
| December 31, 2009 | 0.02% |
* The investment advisor has agreed to waive fees/reimburse expenses. This waiver may be changed or terminated at anytime without notice. Without such fee waivers/expense reimbursements, the 7-day current yield would have been -0.14% as of December 31, 2010.
Yields are historical, will fluctuate and do not guarantee future performance. The 7-day current yield refers to the income paid by the Fund over a 7-day period expressed as an annual percentage rate of the Fund's shares outstanding.
Information About Your Fund's Expenses
DWS Money Market VIP
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees and other Fund expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period the Fund limited these expenses; had it not done so, expenses would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2010 to December 31, 2010).
The tables illustrate your Fund's expenses in two ways:
•Actual Fund Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Fund using the Fund's actual return during the period. To estimate the expenses 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 "Expenses Paid per $1,000" line under the share class you hold.
• Hypothetical 5% Fund Return. This helps you to compare your Fund's ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
Expenses and Value of a $1,000 Investment for the six months ended December 31, 2010 | |
| Actual Fund Return | | Class A | |
| Beginning Account Value 7/1/10 | | $ | 1,000.00 | |
| Ending Account Value 12/31/10 | | $ | 1,000.10 | |
| Expenses Paid per $1,000* | | $ | 1.87 | |
| Hypothetical 5% Fund Return | | Class A | |
| Beginning Account Value 7/1/10 | | $ | 1,000.00 | |
| Ending Account Value 12/31/10 | | $ | 1,023.34 | |
| Expenses Paid per $1,000* | | $ | 1.89 | |
* Expenses are equal to the Fund's annualized expense ratio, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.
| Annualized Expense Ratio | Class A | |
| DWS Variable Series II — DWS Money Market VIP | .37% | |
For more information, please refer to the Fund's prospectus.
These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
Management Summary December 31, 2010
DWS Money Market VIP
At the start of 2010, the money market yield curve began to change configuration as — for the first time in 12 months — short-term money market rates rose somewhat.1 The slight increase in rates came in response to several market dynamics, including Congress's raising of the nation's debt ceiling and political and budgetary concerns within peripheral countries in the Eurozone.2 By mid-June, the crisis in Europe had eased somewhat as the European Central Bank and the International Monetary Fund collaborated in order to offer loans and liquidity facilities to banks in fiscally troubled countries such as Greece, Spain and Italy. In September, investors r esponded positively to US Federal Reserve Board (the Fed) Chairman Bernanke's statement that the Fed would take additional steps in the form of "quantitative easing" to prop up the US economy as needed. By the close of the year, the Treasury yield curve began to steepen — as fixed-income issues sold off — in response to improved economic data and investor anxiety over possible inflationary pressures.
During the 12-month period ended December 31, 2010, the Fund provided a total return of 0.01% (Class A shares, unadjusted for contract charges), compared with the 0.01% average return for the 102 funds in the Lipper Money Market Variable Annuity Funds category for the same period, according to Lipper Inc.
We were able to maintain a competitive yield for the Fund during the period. (All performance is historical and does not guarantee future results. Yields fluctuate and are not guaranteed.) Over the period, we continued to hold a large percentage of fixed-rate, short-maturity investments. The Fund also held a percentage in floating-rate securities (whose yields adjust periodically in response to changes in interest rates) to track any increases in LIBOR rate levels.3 Lastly, any investments the Fund has made in slightly longer maturities have been in Treasury, agency and top-quality corporate money market securities. The Fund holds a significant amount of its short-term liquidity in overnight and 7-day investments.
A group of investment professionals is responsible for the day-to-day management of the Fund. These investment professionals have a broad range of experience managing money market funds.
The Lipper Money Market Variable Annuity Funds category includes funds that invest in high-quality financial instruments rated in the top two grades with dollar-weighted average maturities of less than 90 days, and that intend to keep a constant net asset value. It is not possible to invest directly in a Lipper category. For the 1-, 3-, 5- and 10-year periods, this category's average return was 0.01% (102 funds), 0.81% (99 funds), 2.34% (96 funds) and 2.11% (76 funds), respectively, as of 12/31/10.
1 The yield curve is a graphical representation of how yields on bonds of different maturities compare. Normally, yield curves slant up, as bonds with longer maturities typically offer higher yields than short-term bonds.
2 The Eurozone refers to a currency union among the European Union member states that have adopted the euro as their sole currency.
3 LIBOR, or the London Interbank Offered Rate, is the most widely used benchmark or reference rate for short-term interest rates. LIBOR is the rate of interest at which banks borrow funds from other banks, in large volume, in the international market.
Portfolio management market commentary is as of December 31, 2010, and may not come to pass. This information is subject to change at any time based on market and other conditions. Past performance does not guarantee future results. Current and future portfolio holdings are subject to risk.
Portfolio Summary
DWS Money Market VIP
Asset Allocation (As a % of Investment Portfolio) | 12/31/10 | 12/31/09 |
| | | |
| Commercial Paper | 31% | 33% |
| Short-Term Notes | 21% | 21% |
| Repurchase Agreements | 20% | 13% |
| Government & Agency Obligations | 14% | 10% |
| Certificates of Deposit and Bank Notes | 14% | 22% |
| Supranational | — | 1% |
| | 100% | 100% |
| Weighted Average Maturity* | | |
| | | |
| DWS Variable Series II — DWS Money Market VIP | 51 days | 48 days |
| First Tier Retail Money Fund Average | 39 days | 47 days |
* The Fund is compared to its respective iMoneyNet Category: First Tier Retail Money Fund Average — Category includes a widely recognized composite of money market funds that invest in only first tier (highest rating) securities. Portfolio Holdings of First Tier funds include US Treasury, US Other, Repos, Time Deposits, Domestic Bank Obligations, Foreign Bank Obligations, First Tier Commercial Paper, Floating Rate Notes and Asset Backed Commercial Paper.
Weighted average maturity, also known as effective maturity, is the weighted average of the bonds held by the Fund taking into consideration any maturity shortening features.
Asset allocation and weighted average maturity are subject to change.
For more complete details about the Fund's investment portfolio, see page 192.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. In addition, each month, information about the Fund and its portfolio holdings is filed with the SEC on Form N-MFP. The SEC delays the public availability of the information filed on Form N-MFP for 60 days after the end of the reporting period included in the filing. These forms will be available on the SEC's Web site at www.sec.gov, and they may also be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
Investment Portfolio December 31, 2010
DWS Money Market VIP
| | | Principal Amount ($) | | | Value ($) | |
| | | | |
| Certificates of Deposit and Bank Notes 14.0% | |
| Abbey National Treasury Services PLC, 0.46%, 2/2/2011 | | | 2,000,000 | | | | 2,000,000 | |
| Banco Bilbao Vizcaya Argentaria SA, 0.5%, 2/14/2011 | | | 750,000 | | | | 750,000 | |
| Bank of Tokyo-Mitsubishi UFJ Ltd., 0.38%, 5/16/2011 | | | 2,000,000 | | | | 2,000,000 | |
| BNP Paribas: | |
| 0.41%, 3/17/2011 | | | 800,000 | | | | 800,017 | |
| 0.55%, 5/13/2011 | | | 750,000 | | | | 750,109 | |
| 0.63%, 1/27/2011 | | | 1,500,000 | | | | 1,500,000 | |
| Credit Agricole SA, 0.3%, 1/19/2011 | | | 2,000,000 | | | | 2,000,000 | |
| Dexia Credit Local, 144A, 2.375%, 9/23/2011 | | | 665,000 | | | | 673,485 | |
| International Finance Corp., 3.0%, 11/15/2011 | | | 500,000 | | | | 511,262 | |
| KBC Bank NV: | |
| 0.4%, 1/18/2011 | | | 1,000,000 | | | | 1,000,000 | |
| 0.4%, 1/19/2011 | | | 1,000,000 | | | | 1,000,000 | |
| Kommuninvest I Sverige, 0.55%, 4/19/2011 | | | 1,000,000 | | | | 1,000,623 | |
| Landeskreditbank Baden- Wuerttemberg Foerderbank, 2.5%, 2/14/2011 | | | 1,500,000 | | | | 1,503,785 | |
| Mizuho Corporate Bank Ltd., 0.3%, 3/7/2011 | | | 2,000,000 | | | | 2,000,000 | |
| Natixis, 0.3%, 1/20/2011 | | | 3,000,000 | | | | 3,000,000 | |
| Nordea Bank Finland PLC: | |
| 0.26%, 1/12/2011 | | | 1,500,000 | | | | 1,499,999 | |
| 0.27%, 1/12/2011 | | | 2,000,000 | | | | 2,000,000 | |
| 0.44%, 6/30/2011 | | | 1,000,000 | | | | 1,000,149 | |
| Skandinaviska Enskilda Banken AB: | |
| 0.29%, 1/4/2011 | | | 1,000,000 | | | | 1,000,000 | |
| 0.3%, 2/4/2011 | | | 1,000,000 | | | | 1,000,000 | |
| Societe Generale, 0.41%, 4/26/2011 | | | 900,000 | | | | 900,000 | |
| Sumitomo Mitsui Banking Corp.: | |
| 0.3%, 1/31/2011 | | | 1,000,000 | | | | 1,000,000 | |
| 0.3%, 3/3/2011 | | | 2,000,000 | | | | 2,000,000 | |
Total Certificates of Deposit and Bank Notes (Cost $30,889,429) | | | | 30,889,429 | |
| | |
| Commercial Paper 30.7% | |
| Issued at Discount** | |
| Abbey National North America LLC: | |
| 0.455%, 2/1/2011 | | | 2,000,000 | | | | 1,999,216 | |
| 0.46%, 2/16/2011 | | | 1,000,000 | | | | 999,412 | |
| 0.9%, 1/19/2011 | | | 2,000,000 | | | | 1,999,100 | |
| Argento Variable Funding: | |
| 144A, 0.32%, 2/4/2011 | | | 1,750,000 | | | | 1,749,471 | |
| 144A, 0.33%, 1/28/2011 | | | 1,500,000 | | | | 1,499,629 | |
| 144A, 0.36%, 2/9/2011 | | | 1,500,000 | | | | 1,499,415 | |
| 144A, 0.37%, 2/24/2011 | | | 700,000 | | | | 699,612 | |
| ASB Finance Ltd., 0.501%, 2/9/2011 | | | 1,200,000 | | | | 1,199,350 | |
| | | Principal Amount ($) | | | Value ($) | |
| | | | | | | | | |
| Banco Bilbao Vizcaya Argentaria SA: | | | | | | | | |
| 0.49%, 2/4/2011 | | | 1,200,000 | | | | 1,199,445 | |
| 0.5%, 2/16/2011 | | | 700,000 | | | | 699,553 | |
| 0.5%, 2/18/2011 | | | 600,000 | | | | 599,600 | |
| BNZ International Funding Ltd., 144A, 0.52%, 1/21/2011 | | | 2,500,000 | | | | 2,499,278 | |
| Caisse D'Amortissement de la Dette Sociale: | | | | | | | | |
| 0.25%, 2/7/2011 | | | 750,000 | | | | 749,807 | |
| 0.26%, 2/22/2011 | | | 800,000 | | | | 799,700 | |
| 0.26%, 3/15/2011 | | | 1,200,000 | | | | 1,199,367 | |
| Cancara Asset Securitisation LLC: | |
| 144A, 0.3%, 1/10/2011 | | | 2,000,000 | | | | 1,999,850 | |
| 144A, 0.3%, 1/18/2011 | | | 2,000,000 | | | | 1,999,717 | |
| Google, Inc., 0.4%, 9/16/2011 | | | 800,000 | | | | 797,707 | |
| Grampian Funding LLC: | |
| 144A, 0.3%, 2/11/2011 | | | 1,000,000 | | | | 999,658 | |
| 144A, 0.34%, 1/10/2011 | | | 1,000,000 | | | | 999,915 | |
| 144A, 0.36%, 2/3/2011 | | | 1,250,000 | | | | 1,249,588 | |
| 144A, 0.36%, 2/11/2011 | | | 1,500,000 | | | | 1,499,385 | |
| 144A, 0.37%, 2/17/2011 | | | 1,150,000 | | | | 1,149,445 | |
| 144A, 0.37%, 3/1/2011 | | | 1,500,000 | | | | 1,499,090 | |
| Johnson & Johnson: | |
| 144A, 0.18%, 1/18/2011 | | | 800,000 | | | | 799,932 | |
| 144A, 0.22%, 4/7/2011 | | | 1,750,000 | | | | 1,748,973 | |
| Kells Funding LLC: | |
| 144A, 0.3%, 3/18/2011 | | | 1,200,000 | | | | 1,199,240 | |
| 144A, 0.31%, 3/21/2011 | | | 2,000,000 | | | | 1,998,639 | |
| Kreditanstalt fuer Wiederaufbau: | |
| 144A, 0.23%, 2/15/2011 | | | 800,000 | | | | 799,770 | |
| 144A, 0.245%, 2/24/2011 | | | 800,000 | | | | 799,706 | |
| Nieuw Amsterdam Receivables Corp., 144A, 0.27%, 1/6/2011 | | | 1,000,000 | | | | 999,963 | |
| NRW.Bank: | |
| 0.27%, 1/4/2011 | | | 1,150,000 | | | | 1,149,974 | |
| 0.32%, 3/8/2011 | | | 1,350,000 | | | | 1,349,208 | |
| 0.42%, 3/31/2011 | | | 2,400,000 | | | | 2,397,508 | |
| 0.43%, 3/31/2011 | | | 750,000 | | | | 749,203 | |
| Oesterreichische Kontrollbank AG, 0.245%, 2/28/2011 | | | 800,000 | | | | 799,684 | |
| PepsiCo, Inc, 0.18%, 2/11/2011 | | | 2,300,000 | | | | 2,299,529 | |
| Regency Markets No. 1 LLC, 144A, 0.27%, 1/20/2011 | | | 2,375,000 | | | | 2,374,662 | |
| Romulus Funding Corp., 144A, 0.36%, 1/13/2011 | | | 2,000,000 | | | | 1,999,760 | |
| Santander Central Hispano Finance Delaware, Inc., 0.5%, 3/11/2011 | | | 1,350,000 | | | | 1,348,706 | |
| Shell International Finance BV: | |
| 0.4%, 5/2/2011 | | | 800,000 | | | | 798,924 | |
| 0.5%, 2/4/2011 | | | 800,000 | | | | 799,622 | |
| Societe de Prise de Participation de l'Etat, 144A, 0.24%, 2/24/2011 | | | 800,000 | | | | 799,712 | |
| Societe Generale North America, Inc., 0.33%, 2/1/2011 | | | 1,000,000 | | | | 999,716 | |
| Standard Chartered Bank: | |
| 0.3%, 2/22/2011 | | | 1,200,000 | | | | 1,199,480 | |
| 0.33%, 1/13/2011 | | | 2,000,000 | | | | 1,999,780 | |
| | | Principal Amount ($) | | | Value ($) | |
| | | | | | | | | |
| Straight-A Funding LLC, 144A, 0.25%, 3/10/2011 | | | 1,200,000 | | | | 1,199,433 | |
| Swedbank AB, 0.31%, 1/5/2011 | | | 1,150,000 | | | | 1,149,960 | |
| Toyota Motor Credit Corp., 0.25%, 1/13/2011 | | | 2,000,000 | | | | 1,999,833 | |
| Victory Receivables Corp., 144A, 0.29%, 1/31/2011 | | | 2,200,000 | | | | 2,199,468 | |
Total Commercial Paper (Cost $67,546,695) | | | | 67,546,695 | |
| | |
| Short Term Notes* 21.3% | |
| Abbey National Treasury Services PLC: | |
| 0.439%, 3/7/2011 | | | 1,000,000 | | | | 1,000,000 | |
| 0.59%, 11/2/2011 | | | 1,000,000 | | | | 1,000,000 | |
| Australia & New Zealand Banking Group Ltd., 144A, 0.43%, 1/20/2012 | | | 1,200,000 | | | | 1,200,000 | |
| Bank of Nova Scotia: | |
| 0.37%, 9/12/2011 | | | 800,000 | | | | 800,000 | |
| 0.45%, 12/8/2011 | | | 800,000 | | | | 800,000 | |
| Barclays Bank PLC: | |
| 0.58%, 7/19/2011 | | | 2,000,000 | | | | 2,000,000 | |
| 0.66%, 4/21/2011 | | | 2,200,000 | | | | 2,200,000 | |
| BNP Paribas, 0.538%, 4/26/2011 | | | 1,800,000 | | | | 1,800,000 | |
| Canadian Imperial Bank of Commerce: | | | | | | | | |
| 0.28%, 5/12/2011 | | | 1,400,000 | | | | 1,400,000 | |
| 0.29%, 4/26/2011 | | | 1,000,000 | | | | 1,000,000 | |
| 0.46%, 4/26/2011 | | | 2,000,000 | | | | 2,000,000 | |
| Commonwealth Bank of Australia, 144A, 0.323%, 1/3/2011 | | | 1,380,000 | | | | 1,380,000 | |
| DnB NOR Bank ASA, 144A, 0.295%, 4/26/2011 | | | 1,500,000 | | | | 1,500,000 | |
| Intesa Sanpaolo SpA, 0.37%, 10/27/2011 | | | 1,000,000 | | | | 1,000,000 | |
| JPMorgan Chase Bank NA, 0.26%, 5/31/2011 | | | 1,300,000 | | | | 1,300,000 | |
| Kells Funding LLC, 144A, 0.4%, 12/1/2011 | | | 1,000,000 | | | | 1,000,000 | |
| National Australia Bank Ltd.: | |
| 144A, 0.29%, 1/27/2011 | | | 1,000,000 | | | | 1,000,000 | |
| 0.322%, 6/10/2011 | | | 1,500,000 | | | | 1,500,000 | |
| Nordea Bank Finland PLC: | |
| 0.589%, 10/14/2011 | | | 2,000,000 | | | | 2,004,577 | |
| 0.589%, 10/20/2011 | | | 2,000,000 | | | | 2,004,688 | |
| Rabobank Nederland NV: | |
| 0.262%, 3/11/2011 | | | 1,800,000 | | | | 1,800,000 | |
| 144A, 1.79%, 4/7/2011 | | | 4,000,000 | | | | 4,000,000 | |
| Royal Bank of Canada: | |
| 0.26%, 2/24/2011 | | | 675,000 | | | | 675,000 | |
| 0.41%, 8/12/2011 | | | 1,200,000 | | | | 1,200,000 | |
| Societe Generale: | |
| 0.42%, 4/21/2011 | | | 900,000 | | | | 900,000 | |
| 0.42%, 5/19/2011 | | | 2,200,000 | | | | 2,200,000 | |
| Toronto-Dominion Bank, 0.265%, 2/4/2011 | | | 1,500,000 | | | | 1,500,000 | |
| Westpac Banking Corp.: | |
| 0.289%, 4/14/2011 | | | 1,800,000 | | | | 1,800,000 | |
| 0.3%, 1/10/2011 | | | 1,300,000 | | | | 1,300,000 | |
| 0.307%, 6/1/2011 | | | 2,000,000 | | | | 2,000,000 | |
| 0.46%, 1/10/2012 | | | 1,500,000 | | | | 1,500,000 | |
Total Short Term Notes (Cost $46,764,265) | | | | 46,764,265 | |
| | |
| | | Principal Amount ($) | | | Value ($) | |
| | | | | | | | | |
| Government & Agency Obligations 14.2% | |
| Foreign Government Obligations 0.4% | |
| Kingdom of Denmark, 2.75%, 11/15/2011 | | | 1,000,000 | | | | 1,020,058 | |
| Other Government Related (a) 1.0% | |
| European Investment Bank: | |
| 0.23%, 2/16/2011 | | | 800,000 | | | | 799,765 | |
| 2.625%, 5/16/2011 | | | 750,000 | | | | 756,392 | |
| 2.625%, 11/15/2011 | | | 600,000 | | | | 611,562 | |
| | | | | 2,167,719 | |
| US Government Sponsored Agencies 5.4% | |
| Federal Farm Credit Bank, 0.241%*, 11/2/2011 | | | 750,000 | | | | 749,969 | |
| Federal Home Loan Bank: | |
| 0.24%, 10/28/2011 | | | 1,800,000 | | | | 1,799,054 | |
| 0.25%, 10/28/2011 | | | 750,000 | | | | 749,949 | |
| 0.269%**, 9/12/2011 | | | 2,500,000 | | | | 2,495,237 | |
| 0.4%, 1/4/2011 | | | 700,000 | | | | 699,999 | |
| 0.43%, 2/22/2011 | | | 800,000 | | | | 800,002 | |
| 0.54%, 5/24/2011 | | | 1,100,000 | | | | 1,100,034 | |
| Federal National Mortgage Association: | | | | | | | | |
| 0.161%*, 7/27/2011 | | | 1,200,000 | | | | 1,199,551 | |
| 0.284%**, 1/18/2011 | | | 1,500,000 | | | | 1,499,787 | |
| 4.68%, 6/15/2011 | | | 750,000 | | | | 764,946 | |
| | | | | 11,858,528 | |
| US Treasury Obligations 7.4% | |
| US Treasury Bills: | |
| 0.16%**, 3/10/2011 | | | 2,000,000 | | | | 1,999,396 | |
| 0.217%**, 10/20/2011 | | | 1,000,000 | | | | 998,236 | |
| US Treasury Notes: | |
| 1.0%, 9/30/2011 | | | 2,000,000 | | | | 2,010,794 | |
| 1.0%, 10/31/2011 | | | 1,000,000 | | | | 1,006,244 | |
| 1.125%, 6/30/2011 | | | 2,500,000 | | | | 2,508,627 | |
| 1.125%, 12/15/2011 | | | 1,200,000 | | | | 1,209,364 | |
| 4.5%, 2/28/2011 | | | 650,000 | | | | 654,239 | |
| 4.625%, 8/31/2011 | | | 1,800,000 | | | | 1,851,794 | |
| 4.625%, 10/31/2011 | | | 1,000,000 | | | | 1,035,746 | |
| 4.75%, 3/31/2011 | | | 2,300,000 | | | | 2,325,601 | |
| 5.125%, 6/30/2011 | | | 650,000 | | | | 665,784 | |
| | | | | 16,265,825 | |
Total Government & Agency Obligations (Cost $31,312,130) | | | | 31,312,130 | |
| | |
| Repurchase Agreements 20.5% | |
| Banc of America Securities LLC, 0.25%, dated 12/31/2010, to be repurchased at $20,526,652 on 1/3/2011 (b) | | | 20,526,224 | | | | 20,526,224 | |
| JPMorgan Securities, Inc., 0.17%, dated 12/31/2010, to be repurchased at $14,447,499 on 1/3/2011 (c) | | | 14,447,294 | | | | 14,447,294 | |
| JPMorgan Securities, Inc., 0.20%, dated 12/31/2010, to be repurchased at $8,000,133 on 1/3/2011 (d) | | | 8,000,000 | | | | 8,000,000 | |
| The Goldman Sachs & Co., 0.17%, dated 12/31/2010, to be repurchased at $2,000,028 on 1/3/2011 (e) | | | 2,000,000 | | | | 2,000,000 | |
Total Repurchase Agreements (Cost $44,973,518) | | | | 44,973,518 | |
| | | % of Net Assets | | | Value ($) | |
| | | | |
Total Investment Portfolio (Cost $221,486,037)+ | | | 100.7 | | | | 221,486,037 | |
| Other Assets and Liabilities, Net | | | (0.7 | ) | | | (1,569,492 | ) |
| Net Assets | | | 100.0 | | | | 219,916,545 | |
* These securities are shown at their current rate as of December 31, 2010. Floating rate securities' yields vary with a designated market index or market rate, such as the coupon-equivalent of the US Treasury bill rate.
** Annualized yield at time of purchase; not a coupon rate.
+ The cost for federal income tax purposes was $221,486,037.
(a) Government-backed debt issued by financial companies or government sponsored enterprises.
(b) Collateralized by $16,238,000 Federal National Mortgage Association, with various coupon rates from 5.0-7.25%, with various maturity dates of 5/11/2017-5/15/2030 with a value of $20,937,401.
(c) Collateralized by $23,120,000 US Treasury STRIPS, maturing on 5/15/2022 with a value of $14,737,612.
(d) Collateralized by $8,197,133 Federal National Mortgage Association, 1.75%, maturing on 8/25/2020 with a value of $8,172,037.
(e) Collateralized by $1,977,493 Federal Home Loan Mortgage Corp., with various coupon rates from 1.875-4.07%, with various maturity dates of 9/1/2015-6/1/2032 with a value of $2,040,000.
144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
STRIPS: Separate Trading of Registered Interest and Principal Securities
Fair Value Measurements
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Securities held by a money market fund are reflected as Level 2 because the securities are valued at amortized cost (which a pproximates fair value) and, accordingly, the inputs used to determine value are not quoted prices in an active market.
The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
| Assets | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | |
| Investments in Securities (f) | | $ | — | | | $ | 176,512,519 | | | $ | — | | | $ | 176,512,519 | |
| Repurchase Agreements | | | — | | | | 44,973,518 | | | | — | | | | 44,973,518 | |
| Total | | $ | — | | | $ | 221,486,037 | | | $ | — | | | $ | 221,486,037 | |
There have been no transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2010.
(f) See Investment Portfolio for additional detailed categorizations.
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities
| as of December 31, 2010 | |
| Assets | |
Investments: Investment in unaffiliated securities, valued at amortized cost | | $ | 176,512,519 | |
| Repurchase agreements, valued at amortized cost | | | 44,973,518 | |
| Total investments, valued at amortized cost | | | 221,486,037 | |
| Cash | | | 14 | |
| Receivable for Fund shares sold | | | 60,705 | |
| Due from Advisor | | | 15,381 | |
| Interest receivable | | | 197,386 | |
| Other assets | | | 1,349 | |
| Total assets | | | 221,760,872 | |
| Liabilities | |
| Payable for Fund shares redeemed | | | 1,754,575 | |
| Distributions payable | | | 1,007 | |
| Other accrued expenses and payables | | | 88,745 | |
| Total liabilities | | | 1,844,327 | |
| Net assets, at value | | $ | 219,916,545 | |
| Net Assets Consist of | |
| Distributions in excess of net investment income | | | (1,007 | ) |
| Paid-in capital | | | 219,917,552 | |
| Net assets, at value | | $ | 219,916,545 | |
Class A Net Asset Value, offering and redemption price per share ($219,916,545 ÷ 220,001,268 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | | $ | 1.00 | |
The accompanying notes are an integral part of the financial statements.
Statement of Operations
| for the year ended December 31, 2010 | |
| Investment Income | |
Income: Interest | | $ | 862,229 | |
Expenses: Management fee | | | 704,427 | |
| Administration fee | | | 247,168 | |
| Services to shareholders | | | 1,924 | |
| Custodian fee | | | 27,571 | |
| Professional fees | | | 64,438 | |
| Trustees' fee and expenses | | | 10,980 | |
| Reports to shareholders | | | 60,076 | |
| Other | | | 13,636 | |
| Total expenses | | | 1,130,220 | |
| Expense reductions | | | (292,806 | ) |
| Total expenses after expense reductions | | | 837,414 | |
| Net investment income | | | 24,815 | |
| Net realized gain (loss) | | | 1,201 | |
| Net increase (decrease) in net assets resulting from operations | | $ | 26,016 | |
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Net Assets
| | | Years Ended December 31, | |
| Increase (Decrease) in Net Assets | | 2010 | | | 2009 | |
Operations: Net investment income | | $ | 24,815 | | | $ | 1,242,942 | |
| Net realized gain (loss) | | | 1,201 | | | | 23,268 | |
| Net increase (decrease) in net assets resulting from operations | | | 26,016 | | | | 1,266,210 | |
Distributions to shareholders from: Net investment income Class A | | | (24,815 | ) | | | (1,233,793 | ) |
| Class B | | | — | | | | (37 | ) |
| Total distributions | | $ | (24,815 | ) | | $ | (1,233,830 | ) |
Fund share transactions: Class A Proceeds from shares sold | | | 111,590,276 | | | | 102,195,146 | |
| Shares converted* | | | — | | | | 41,096 | |
| Reinvestment of distributions | | | 26,864 | | | | 1,523,848 | |
| Payments for shares redeemed | | | (161,340,354 | ) | | | (231,903,870 | ) |
| Net increase (decrease) in net assets from Class A share transactions | | | (49,723,214 | ) | | | (128,143,780 | ) |
Class B Proceeds from shares sold | | | — | | | | 50 | |
| Shares converted* | | | — | | | | (41,096 | ) |
| Reinvestment of distributions | | | — | | | | 58 | |
| Payments for shares redeemed | | | — | | | | (49 | ) |
| Net increase (decrease) in net assets from Class B share transactions | | | — | | | | (41,037 | ) |
| Increase (decrease) in net assets | | | (49,722,013 | ) | | | (128,152,437 | ) |
| Net assets at beginning of period | | | 269,638,558 | | | | 397,790,995 | |
| Net assets at end of period (including distributions in excess of net investment income of $1,007 and $16,402, respectively) | | $ | 219,916,545 | | | $ | 269,638,558 | |
| Other Information | |
Class A Shares outstanding at beginning of period | | | 269,724,482 | | | | 397,868,262 | |
| Shares sold | | | 111,590,276 | | | | 102,195,146 | |
| Shares converted* | | | — | | | | 41,096 | |
| Shares issued to shareholders in reinvestment of distributions | | | 26,864 | | | | 1,523,848 | |
| Shares redeemed | | | (161,340,354 | ) | | | (231,903,870 | ) |
| Net increase (decrease) in Class A shares | | | (49,723,214 | ) | | | (128,143,780 | ) |
| Shares outstanding at end of period | | | 220,001,268 | | | | 269,724,482 | |
Class B Shares outstanding at beginning of period | | | — | | | | 41,037 | |
| Shares sold | | | — | | | | 50 | |
| Shares converted* | | | — | | | | (41,096 | ) |
| Shares issued to shareholders in reinvestment of distributions | | | — | | | | 58 | |
| Shares redeemed | | | — | | | | (49 | ) |
| Net increase (decrease) in Class B shares | | | — | | | | (41,037 | ) |
| Shares outstanding at end of period | | | — | | | | — | |
* On February 3, 2009, Class B shares converted into Class A shares.
The accompanying notes are an integral part of the financial statements.
Financial Highlights
Class A Years Ended December 31, | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| Selected Per Share Data | |
| Net asset value, beginning of period | | $ | 1.000 | | | $ | 1.000 | | | $ | 1.000 | | | $ | 1.000 | | | $ | 1.000 | |
Income from investment operations: Net investment income | | | .000 | * | | | .003 | | | | .026 | | | | .049 | | | | .046 | |
| Total from investment operations | | | .000 | * | | | .003 | | | | .026 | | | | .049 | | | | .046 | |
Less distributions from: Net investment income | | | .000 | * | | | (.003 | ) | | | (.026 | ) | | | (.049 | ) | | | (.046 | ) |
| Net asset value, end of period | | $ | 1.000 | | | $ | 1.000 | | | $ | 1.000 | | | $ | 1.000 | | | $ | 1.000 | |
| Total Return (%) | | | .01 | a | | | .34 | | | | 2.64 | a | | | 5.00 | a | | | 4.65 | a |
| Ratios to Average Net Assets and Supplemental Data | |
| Net assets, end of period ($ millions) | | | 220 | | | | 270 | | | | 398 | | | | 355 | | | | 294 | |
| Ratio of expenses before expense reductions (%) | | | .46 | | | | .43 | | | | .52 | | | | .46 | | | | .52 | |
| Ratio of expenses after expense reductions (%) | | | .34 | | | | .43 | | | | .50 | | | | .45 | | | | .51 | |
| Ratio of net investment income (%) | | | .01 | | | | .37 | | | | 2.56 | | | | 4.88 | | | | 4.58 | |
a Total return would have been lower had certain expenses not been reduced. * Amount is less than $.0005. | |
Performance Summary December 31, 2010
DWS Small Cap Growth VIP
All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce returns.
The gross expense ratio of the Fund, as stated in the fee table of the prospectus dated May 1, 2010 is 0.77% for Class A shares and may differ from the expense ratio disclosed in the Financial Highlights table in this report.
Risk Considerations
Stocks of smaller companies involve greater risk than securities of larger, more-established companies. Stocks may decline in value. See the prospectus for details.
Fund returns shown for the 3-year, 5-year and 10-year periods reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.
| Growth of an Assumed $10,000 Investment in DWS Small Cap Growth VIP |
[] DWS Small Cap Growth VIP — Class A [] Russell 2000® Growth Index | The Russell 2000® Growth Index is an unmanaged, capitalization-weighted measure of 2,000 of the smallest capitalized US companies with a greater-than-average growth orientation and whose common stocks trade on the NYSE, NYSE Alternext US (formerly known as "Amex") and Nasdaq. Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index. |
| |
| Yearly periods ended December 31 | |
| Comparative Results | |
| DWS Small Cap Growth VIP | | 1-Year | | | 3-Year | | | 5-Year | | | 10-Year | |
| Class A | Growth of $10,000 | | $ | 12,944 | | | $ | 9,190 | | | $ | 10,274 | | | $ | 7,692 | |
| Average annual total return | | | 29.44 | % | | | -2.77 | % | | | 0.54 | % | | | -2.59 | % |
| Russell 2000 Growth Index | Growth of $10,000 | | $ | 12,909 | | | $ | 10,668 | | | $ | 12,944 | | | $ | 14,491 | |
| Average annual total return | | | 29.09 | % | | | 2.18 | % | | | 5.30 | % | | | 3.78 | % |
The growth of $10,000 is cumulative.
Information About Your Fund's Expenses
DWS Small Cap Growth VIP
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees and other Fund expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2010 to December 31, 2010).
The tables illustrate your Fund's expenses in two ways:
•Actual Fund Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Fund using the Fund's actual return during the period. To estimate the expenses 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 "Expenses Paid per $1,000" line under the share class you hold.
• Hypothetical 5% Fund Return. This helps you to compare your Fund's ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
Expenses and Value of a $1,000 Investment for the six months ended December 31, 2010 | |
| Actual Fund Return | | Class A | |
| Beginning Account Value 7/1/10 | | $ | 1,000.00 | |
| Ending Account Value 12/31/10 | | $ | 1,333.00 | |
| Expenses Paid per $1,000* | | $ | 4.06 | |
| Hypothetical 5% Fund Return | | Class A | |
| Beginning Account Value 7/1/10 | | $ | 1,000.00 | |
| Ending Account Value 12/31/10 | | $ | 1,021.73 | |
| Expenses Paid per $1,000* | | $ | 3.52 | |
* Expenses are equal to the Fund's annualized expense ratio, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.
| Annualized Expense Ratio | Class A | |
| DWS Variable Series II — DWS Small Cap Growth VIP | .69% | |
For more information, please refer to the Fund's prospectus.
These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
Management Summary December 31, 2010
DWS Small Cap Growth VIP
The year 2010 began on an optimistic note with a few bright spots in the economy — improving consumer confidence, the government's report showing strong fourth-quarter 2009 gross domestic product GDP growth and a six-year high in manufacturing activity — partially offset by growing concerns about the health of the European financial system.1 By May 2010, the US stock market had entered a period of significant volatility amid regulatory uncertainty (health care and financial reform) and fears of a possible double-dip recession. The market then staged a rebound during the last four months of the year amid increasing confidence that the US Federal Reserve Board's (the Fed's) second round of quantitative easing measures would suppor t asset prices, along with evidence that the US economy was on a path to faster growth in 2011.
For the 12 months ended December 31, 2010, the Fund returned 29.44% (Class A shares, unadjusted for contract charges), compared with the 29.09% return of the Russell 2000® Growth Index. These strong returns belie the elevated level of investor risk aversion that impacted the global equity markets during much of the summer months as high unemployment, European debt problems, a possible economic "hard landing" within China and some slippage for US economic indicators temporarily dampened enthusiasm for stocks.
The Fund's outperformance of the benchmark came primarily from favorable stock selection. During the period, stock selection was positive within the health care, information technology and consumer staples sectors. Other contributions to return came from an overweight to energy and an underweight to telecom services.2 Stock selection in energy and consumer discretionary detracted from performance. In addition, underweight positions in materials, information technology and consumer discretionary weighed on returns.
We continue to maintain a long-term perspective, investing in quality small-cap growth stocks. Effective on or about May 1, 2011, the name of the Fund will be changed to DWS Small Mid Cap Growth VIP. The Fund's investment objective will also change to long-term capital appreciation. For a description of the new investment objective, please see the supplement dated January 19, 2011 to the Fund's current prospectus posted on www.dws-investments.com.
Joseph Axtell, CFA
Rafaelina M. Lee
Portfolio Managers
The Russell 2000 Growth Index is an unmanaged, capitalization-weighted measure of 2,000 of the smallest capitalized US companies with a greater-than-average growth orientation and whose common stocks trade on the NYSE, NYSE Alternext US (formerly known as "Amex") and Nasdaq.
Index returns assume reinvestment of dividends and, unlike funds returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.
1 Gross domestic product is the value of goods and services produced in an economy.
2 "Overweight" means that a Fund holds a higher weighting in a given sector compared with its benchmark index. "Underweight" means that a Fund holds a lower weighting in a given sector.
Portfolio management market commentary is as of December 31, 2010, and may not come to pass. This information is subject to change at any time based on market and other conditions. Past performance does not guarantee future results. Current and future portfolio holdings are subject to risk.
Portfolio Summary
DWS Small Cap Growth VIP
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | 12/31/10 | 12/31/09 |
| | | |
| Common Stocks | 97% | 98% |
| Cash Equivalents | 3% | 2% |
| | 100% | 100% |
Sector Diversification (As a % of Common Stocks) | 12/31/10 | 12/31/09 |
| | | |
| Information Technology | 25% | 24% |
| Health Care | 20% | 17% |
| Consumer Discretionary | 16% | 16% |
| Industrials | 16% | 19% |
| Energy | 9% | 9% |
| Financials | 6% | 7% |
| Materials | 5% | 2% |
| Consumer Staples | 3% | 5% |
| Telecommunication Services | — | 1% |
| | 100% | 100% |
Asset allocation and sector diversification are subject to change.
For more complete details about the Fund's investment portfolio, see page 205.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
Investment Portfolio December 31, 2010
DWS Small Cap Growth VIP
| | | Shares | | | Value ($) | |
| | | | |
| Common Stocks 97.6% | |
| Consumer Discretionary 15.9% | |
| Auto Components 0.9% | |
| Gentex Corp. | | | 27,633 | | | | 816,831 | |
| Diversified Consumer Services 0.6% | |
| Capella Education Co.* (a) | | | 7,900 | | | | 525,982 | |
| Hotels Restaurants & Leisure 1.4% | |
| Buffalo Wild Wings, Inc.* | | | 18,902 | | | | 828,853 | |
| Red Robin Gourmet Burgers, Inc.* (a) | | | 18,900 | | | | 405,783 | |
| | | | | | | | 1,234,636 | |
| Internet & Catalog Retail 0.2% | |
| Mecox Lane Ltd. (ADR)* (a) | | | 22,883 | | | | 169,563 | |
| Media 1.4% | |
| Cinemark Holdings, Inc. | | | 70,334 | | | | 1,212,558 | |
| Specialty Retail 8.5% | |
| Advance Auto Parts, Inc. | | | 19,700 | | | | 1,303,155 | |
| Children's Place Retail Stores, Inc.* | | | 23,300 | | | | 1,156,612 | |
| DSW, Inc. "A"* (a) | | | 39,161 | | | | 1,531,195 | |
| Guess?, Inc. | | | 31,500 | | | | 1,490,580 | |
| hhgregg, Inc.* (a) | | | 44,600 | | | | 934,370 | |
| Urban Outfitters, Inc.* | | | 31,821 | | | | 1,139,510 | |
| | | | | | | | 7,555,422 | |
| Textiles, Apparel & Luxury Goods 2.9% | |
| Carter's, Inc.* (a) | | | 22,600 | | | | 666,926 | |
| Deckers Outdoor Corp.* (a) | | | 12,448 | | | | 992,604 | |
| True Religion Apparel, Inc.* (a) | | | 39,109 | | | | 870,566 | |
| | | | | | | | 2,530,096 | |
| Consumer Staples 3.1% | |
| Food Products | |
| Diamond Foods, Inc. (a) | | | 24,355 | | | | 1,295,199 | |
| Green Mountain Coffee Roasters, Inc.* (a) | | | 43,050 | | | | 1,414,623 | |
| | | | | | | | 2,709,822 | |
| Energy 8.4% | |
| Energy Equipment & Services 2.4% | |
| Complete Production Services, Inc.* | | | 26,075 | | | | 770,516 | |
| Dril-Quip, Inc.* | | | 17,678 | | | | 1,373,934 | |
| | | | | | | | 2,144,450 | |
| Oil, Gas & Consumable Fuels 6.0% | |
| Carrizo Oil & Gas, Inc.* (a) | | | 36,299 | | | | 1,251,952 | |
| Clean Energy Fuels Corp.* | | | 27,300 | | | | 377,832 | |
| Cloud Peak Energy, Inc.* | | | 22,911 | | | | 532,223 | |
| Concho Resources, Inc.* | | | 11,469 | | | | 1,005,487 | |
| Northern Oil & Gas, Inc.* | | | 44,689 | | | | 1,215,988 | |
| Rosetta Resources, Inc.* | | | 24,500 | | | | 922,180 | |
| | | | | | | | 5,305,662 | |
| Financials 5.7% | |
| Capital Markets 1.3% | |
| Stifel Financial Corp.* (a) | | | 17,900 | | | | 1,110,516 | |
| Commercial Banks 0.9% | |
| Prosperity Bancshares, Inc. | | | 21,100 | | | | 828,808 | |
| Consumer Finance 1.9% | |
| Dollar Financial Corp.* (a) | | | 56,842 | | | | 1,627,386 | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| Diversified Financial Services 1.6% | |
| Portfolio Recovery Associates, Inc.* (a) | | | 19,268 | | | | 1,448,954 | |
| Health Care 19.6% | |
| Biotechnology 5.6% | |
| Alexion Pharmaceuticals, Inc.* | | | 10,651 | | | | 857,938 | |
| Halozyme Therapeutics, Inc.* | | | 106,100 | | | | 840,312 | |
| Human Genome Sciences, Inc.* | | | 20,000 | | | | 477,800 | |
| ImmunoGen, Inc.* (a) | | | 65,600 | | | | 607,456 | |
| Onyx Pharmaceuticals, Inc.* | | | 12,559 | | | | 463,051 | |
| Regeneron Pharmaceuticals, Inc.* | | | 31,600 | | | | 1,037,428 | |
| United Therapeutics Corp.* | | | 10,600 | | | | 670,132 | |
| | | | | | | | 4,954,117 | |
| Health Care Equipment & Supplies 3.4% | |
| Accuray, Inc.* | | | 88,274 | | | | 595,850 | |
| Kinetic Concepts, Inc.* | | | 23,700 | | | | 992,556 | |
| NxStage Medical, Inc.* | | | 19,107 | | | | 475,382 | |
| Thoratec Corp.* (a) | | | 32,500 | | | | 920,400 | |
| | | | | | | | 2,984,188 | |
| Health Care Providers & Services 2.4% | |
| ExamWorks Group, Inc.* | | | 27,635 | | | | 510,695 | |
| Gentiva Health Services, Inc.* | | | 31,400 | | | | 835,240 | |
| Universal American Financial Corp. | | | 40,107 | | | | 820,188 | |
| | | | | | | | 2,166,123 | |
| Health Care Technology 1.9% | |
| SXC Health Solutions Corp.* | | | 40,470 | | | | 1,734,544 | |
| Life Sciences Tools & Services 1.2% | |
| ICON PLC (ADR)* | | | 27,058 | | | | 592,570 | |
| QIAGEN NV* (a) | | | 22,367 | | | | 437,275 | |
| | | | | | | | 1,029,845 | |
| Pharmaceuticals 5.1% | |
| Auxilium Pharmaceuticals, Inc.* | | | 20,048 | | | | 423,013 | |
| Flamel Technologies SA (ADR)* (a) | | | 55,700 | | | | 380,988 | |
| Par Pharmaceutical Companies, Inc.* | | | 25,900 | | | | 997,409 | |
| Questcor Pharmaceuticals, Inc.* (a) | | | 146,192 | | | | 2,153,408 | |
| VIVUS, Inc.* (a) | | | 56,355 | | | | 528,046 | |
| | | | | | | | 4,482,864 | |
| Industrials 15.7% | |
| Aerospace & Defense 2.6% | |
| AAR Corp.* | | | 39,331 | | | | 1,080,423 | |
| BE Aerospace, Inc.* | | | 33,200 | | | | 1,229,396 | |
| | | | | | | | 2,309,819 | |
| Commercial Services & Supplies 0.9% | |
| EnerNOC, Inc.* (a) | | | 34,100 | | | | 815,331 | |
| Construction & Engineering 0.6% | |
| MYR Group, Inc.* | | | 23,600 | | | | 495,600 | |
| Electrical Equipment 1.4% | |
| General Cable Corp.* (a) | | | 34,893 | | | | 1,224,395 | |
| Machinery 6.1% | |
| Altra Holdings, Inc.* | | | 15,383 | | | | 305,506 | |
| Ampco-Pittsburgh Corp. | | | 21,334 | | | | 598,419 | |
| Badger Meter, Inc. (a) | | | 15,702 | | | | 694,343 | |
| Columbus McKinnon Corp.* | | | 28,675 | | | | 582,676 | |
| RBC Bearings, Inc.* | | | 32,677 | | | | 1,277,017 | |
| Sauer-Danfoss, Inc.* | | | 24,876 | | | | 702,747 | |
| Terex Corp.* | | | 39,400 | | | | 1,222,976 | |
| | | | | | | | 5,383,684 | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| Professional Services 2.1% | |
| FTI Consulting, Inc.* (a) | | | 17,924 | | | | 668,207 | |
| TrueBlue, Inc.* | | | 68,240 | | | | 1,227,637 | |
| | | | | | | | 1,895,844 | |
| Road & Rail 1.2% | |
| Genesee & Wyoming, Inc. "A"* | | | 19,456 | | | | 1,030,195 | |
| Trading Companies & Distributors 0.8% | |
| United Rentals, Inc.* (a) | | | 30,937 | | | | 703,817 | |
| Information Technology 24.2% | |
| Communications Equipment 3.5% | |
| Aruba Networks, Inc.* | | | 15,850 | | | | 330,948 | |
| Comverse Technology, Inc.* | | | 64,655 | | | | 469,395 | |
| Polycom, Inc.* | | | 24,371 | | | | 949,982 | |
| Riverbed Technology, Inc.* (a) | | | 29,190 | | | | 1,026,612 | |
| Sycamore Networks, Inc. | | | 16,900 | | | | 347,971 | |
| | | | | | | | 3,124,908 | |
Electronic Equipment, Instruments & Components 0.8% | |
| Itron, Inc.* | | | 12,482 | | | | 692,127 | |
| Internet Software & Services 3.5% | |
| Digital River, Inc.* | | | 29,245 | | | | 1,006,613 | |
| GSI Commerce, Inc.* | | | 35,526 | | | | 824,203 | |
| MercadoLibre, Inc.* | | | 12,509 | | | | 833,725 | |
| NIC, Inc. | | | 45,100 | | | | 437,921 | |
| | | | | | | | 3,102,462 | |
| IT Services 6.9% | |
| Cardtronics, Inc.* | | | 42,700 | | | | 755,790 | |
| FleetCor Technologies, Inc.* | | | 19,144 | | | | 591,932 | |
| Forrester Research, Inc. | | | 40,300 | | | | 1,422,187 | |
| iGATE Corp. (a) | | | 67,043 | | | | 1,321,418 | |
| iSoftStone Holdings Ltd. (ADR)* | | | 25,781 | | | | 468,441 | |
| Syntel, Inc. | | | 18,437 | | | | 881,104 | |
| Telvent GIT SA* (a) | | | 25,117 | | | | 663,591 | |
| | | | | | | | 6,104,463 | |
| Semiconductors & Semiconductor Equipment 3.5% | |
| Atheros Communications* | | | 12,405 | | | | 445,588 | |
| Cavium Networks, Inc.* (a) | | | 31,533 | | | | 1,188,163 | |
| Netlogic Microsystems, Inc.* (a) | | | 23,500 | | | | 738,135 | |
| Novellus Systems, Inc.* | | | 21,144 | | | | 683,374 | |
| | | | | | | | 3,055,260 | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| Software 6.0% | |
| CommVault Systems, Inc.* | | | 24,732 | | | | 707,830 | |
| Concur Technologies, Inc.* (a) | | | 26,337 | | | | 1,367,681 | |
| NICE Systems Ltd. (ADR)* | | | 23,649 | | | | 825,350 | |
| QLIK Technologies, Inc.* | | | 18,888 | | | | 487,499 | |
| Sourcefire, Inc.* | | | 15,400 | | | | 399,322 | |
| Taleo Corp. "A"* | | | 30,930 | | | | 855,215 | |
| TiVo, Inc.* | | | 30,084 | | | | 259,625 | |
| VanceInfo Technologies, Inc. (ADR)* | | | 12,021 | | | | 415,205 | |
| | | | | | | | 5,317,727 | |
| Materials 5.0% | |
| Chemicals 1.8% | |
| Solutia, Inc.* | | | 42,631 | | | | 983,924 | |
| STR Holdings, Inc.* (a) | | | 32,210 | | | | 644,200 | |
| | | | | | | | 1,628,124 | |
| Metals & Mining 2.3% | |
| Molycorp, Inc.* (a) | | | 14,006 | | | | 698,899 | |
| Randgold Resources Ltd. (ADR) (a) | | | 3,100 | | | | 255,223 | |
| Thompson Creek Metals Co., Inc.* | | | 73,000 | | | | 1,074,560 | |
| | | | | | | | 2,028,682 | |
| Paper & Forest Products 0.9% | |
| Schweitzer-Mauduit International, Inc. (a) | | | 12,681 | | | | 797,889 | |
Total Common Stocks (Cost $58,328,703) | | | | 86,282,694 | |
| | |
| Securities Lending Collateral 24.8% | |
| Daily Assets Fund Institutional, 0.27% (b) (c) (Cost $21,950,973) | | | 21,950,973 | | | | 21,950,973 | |
| | |
| Cash Equivalents 2.9% | |
| Central Cash Management Fund, 0.19% (b) (Cost $2,532,069) | | | 2,532,069 | | | | 2,532,069 | |
| | | % of Net Assets | | | Value ($) | |
| | | | |
Total Investment Portfolio (Cost $82,811,745)+ | | | 125.3 | | | | 110,765,736 | |
| Other Assets and Liabilities, Net | | | (25.3 | ) | | | (22,336,473 | ) |
| Net Assets | | | 100.0 | | | | 88,429,263 | |
* Non-income producing security.
+ The cost for federal income tax purposes was $83,216,134. At December 31, 2010, net unrealized appreciation for all securities based on tax cost was $27,549,602. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $28,627,462 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $1,077,860.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2010 amounted to $21,144,795, which is 23.9% of net assets.
(b) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(c) Represents collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates.
ADR: American Depositary Receipt
Fair Value Measurements
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
| Assets | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | |
| Common Stocks (d) | | $ | 86,282,694 | | | $ | — | | | $ | — | | | $ | 86,282,694 | |
| Short-Term Investments (d) | | | 24,483,042 | | | | — | | | | — | | | | 24,483,042 | |
| Total | | $ | 110,765,736 | | | $ | — | | | $ | — | | | $ | 110,765,736 | |
There have been no significant transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2010.
(d) See Investment Portfolio for additional detailed categorizations.
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities
| as of December 31, 2010 | |
| Assets | |
Investments: Investments in unaffiliated securities, at value (cost $58,328,703) — including $21,144,795 of securities loaned | | $ | 86,282,694 | |
Investment in Daily Assets Fund Institutional (cost $21,950,973)* | | | 21,950,973 | |
| Investment in Central Cash Management Fund (cost $2,532,069) | | | 2,532,069 | |
| Total investments, at value (cost $82,811,745) | | | 110,765,736 | |
| Cash | | | 10,000 | |
| Receivable for Fund shares sold | | | 105 | |
| Dividends receivable | | | 2,288 | |
| Interest receivable | | | 6,480 | |
| Other assets | | | 439 | |
| Total assets | | | 110,785,048 | |
| Liabilities | |
| Payable upon return of securities loaned | | | 21,950,973 | |
| Payable for Fund shares redeemed | | | 272,959 | |
| Accrued management fee | | | 42,627 | |
| Other accrued expenses and payables | | | 89,226 | |
| Total liabilities | | | 22,355,785 | |
| Net assets, at value | | $ | 88,429,263 | |
| Net Assets Consist of | |
| Undistributed net investment income | | | 516,412 | |
| Net unrealized appreciation (depreciation) on investments | | | 27,953,991 | |
| Accumulated net realized gain (loss) | | | (42,803,640 | ) |
| Paid-in capital | | | 102,762,500 | |
| Net assets, at value | | $ | 88,429,263 | |
Class A Net Asset Value, offering and redemption price per share ($88,429,263 ÷ 6,384,947 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | | $ | 13.85 | |
* Represents collateral on securities loaned.
The accompanying notes are an integral part of the financial statements.
Statement of Operations
| for the year ended December 31, 2010 | |
| Investment Income | |
Income: Dividends (net of foreign taxes withheld of $1,244) | | $ | 442,311 | |
| Income distributions — Central Cash Management Fund | | | 3,293 | |
| Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates | | | 78,166 | |
| Total income | | | 523,770 | |
Expenses: Management fee | | | 434,077 | |
| Administration fee | | | 78,923 | |
| Services to shareholders | | | 4,365 | |
| Custodian fee and other | | | 10,831 | |
| Legal fees | | | 8,644 | |
| Audit and tax fees | | | 58,410 | |
| Trustees' fees and expenses | | | 5,538 | |
| Reports to shareholders | | | 10,959 | |
| Total expenses | | | 611,747 | |
| Net investment income (loss) | | | (87,977 | ) |
| Realized and Unrealized Gain (Loss) | |
| Net realized gain (loss) from investments | | | 11,959,891 | |
| Change in net unrealized appreciation (depreciation) on investments | | | 8,823,086 | |
| Net gain (loss) | | | 20,782,977 | |
| Net increase (decrease) in net assets resulting from operations | | $ | 20,695,000 | |
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Net Assets
| | | Years Ended December 31, | |
| Increase (Decrease) in Net Assets | | 2010 | | | 2009 | |
Operations: Net investment income (loss) | | $ | (87,977 | ) | | $ | (146,790 | ) |
| Net realized gain (loss) | | | 11,959,891 | | | | (20,542,495 | ) |
| Change in net unrealized appreciation (depreciation) | | | 8,823,086 | | | | 44,155,860 | |
| Net increase (decrease) in net assets resulting from operations | | | 20,695,000 | | | | 23,466,575 | |
Fund share transactions: Class A Proceeds from shares sold | | | 6,051,148 | | | | 3,738,488 | |
| Payments for shares redeemed | | | (17,902,129 | ) | | | (17,049,742 | ) |
Shares converted* | | | — | | | | 10,873 | |
| Net increase (decrease) in net assets from Class A share transactions | | | (11,850,981 | ) | | | (13,300,381 | ) |
Class B Proceeds from shares sold | | | — | | | | 244 | |
| Payments for shares redeemed | | | — | | | | (33 | ) |
Shares converted* | | | — | | | | (10,873 | ) |
| Net increase (decrease) in net assets from Class B share transactions | | | — | | | | (10,662 | ) |
| Increase (decrease) in net assets | | | 8,844,019 | | | | 10,155,532 | |
| Net assets at beginning of period | | | 79,585,244 | | | | 69,429,712 | |
| Net assets at end of period (including undistributed net investment income of $516,412 and accumulated net investment loss of $14,597, respectively) | | $ | 88,429,263 | | | $ | 79,585,244 | |
| Other Information | |
Class A Shares outstanding at beginning of period | | | 7,439,067 | | | | 9,122,504 | |
| Shares sold | | | 517,480 | | | | 442,413 | |
| Shares redeemed | | | (1,571,600 | ) | | | (2,127,728 | ) |
Shares converted* | | | — | | | | 1,878 | |
| Net increase (decrease) in Class A shares | | | (1,054,120 | ) | | | (1,683,437 | ) |
| Shares outstanding at end of period | | | 6,384,947 | | | | 7,439,067 | |
Class B Shares outstanding at beginning of period | | | — | | | | 1,867 | |
| Shares sold | | | — | | | | 38 | |
| Shares redeemed | | | — | | | | (5 | ) |
Shares converted* | | | — | | | | (1,900 | ) |
| Net increase (decrease) in Class B shares | | | — | | | | (1,867 | ) |
| Shares outstanding at end of period | | | — | | | | — | |
* On March 6, 2009, Class B shares converted into Class A shares.
The accompanying notes are an integral part of the financial statements.
Financial Highlights
Class A Years Ended December 31, | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| Selected Per Share Data | |
| Net asset value, beginning of period | | $ | 10.70 | | | $ | 7.61 | | | $ | 15.07 | | | $ | 14.19 | | | $ | 13.48 | |
Income (loss) from investment operations: Net investment income (loss)a | | | (.01 | ) | | | (.02 | ) | | | (.01 | ) | | | (.01 | ) | | | (.04 | )c |
| Net realized and unrealized gain (loss) | | | 3.16 | | | | 3.11 | | | | (7.45 | ) | | | .89 | | | | .75 | |
| Total from investment operations | | | 3.15 | | | | 3.09 | | | | (7.46 | ) | | | .88 | | | | .71 | |
| Net asset value, end of period | | $ | 13.85 | | | $ | 10.70 | | | $ | 7.61 | | | $ | 15.07 | | | $ | 14.19 | |
| Total Return (%) | | | 29.44 | | | | 40.60 | | | | (49.50 | )b | | | 6.20 | b | | | 5.27 | b,c |
| Ratios to Average Net Assets and Supplemental Data | |
| Net assets, end of period ($ millions) | | | 88 | | | | 80 | | | | 69 | | | | 174 | | | | 208 | |
| Ratio of expenses before expense reductions (%) | | | .78 | | | | .77 | | | | .88 | | | | .75 | | | | .73 | |
| Ratio of expenses after expense reductions (%) | | | .78 | | | | .77 | | | | .85 | | | | .72 | | | | .72 | |
| Ratio of net investment income (loss) (%) | | | (.12 | ) | | | (.22 | ) | | | (.04 | ) | | | (.09 | ) | | | (.32 | )c |
| Portfolio turnover rate (%) | | | 64 | | | | 93 | | | | 67 | | | | 67 | | | | 73 | |
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. c Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Funds. The non-recurring income resulted in an increase in net investment income of $0.008 per share and an increase in the ratio of net investment income of 0.06%. Excluding this non-recurring income, total return would have been 0.06% lower. | |
Performance Summary December 31, 2010
DWS Strategic Income VIP
All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce returns.
The gross expense ratio of the Fund, as stated in the fee table of the prospectus dated May 1, 2010 is 0.86% for Class A shares and may differ from the expense ratio disclosed in the Financial Highlights table in this report.
Risk Considerations
Bond investments are subject to interest-rate and credit risks. When interest rates rise, bond prices generally fall. Credit risk refers to the ability of an issuer to make timely payments of principal and interest. Investments in lower-quality and non-rated securities present greater risk of loss than investments in higher-quality securities. The Fund may use derivatives, including as part of its global alpha strategy. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. Investing in foreign securities, particularly those of emerging markets, presents certain risks, such as currency fluctuations, political and economic changes, and market risks. See the prospectus for details.
Fund returns for all periods shown reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.
| Growth of an Assumed $10,000 Investment in DWS Strategic Income VIP |
[] DWS Strategic Income VIP — Class A [] Barclays Capital US Government/Credit Index [] Blended Index | The Barclays Capital US Government/Credit Index is an unmanaged index comprising intermediate- and long-term government and investment-grade corporate debt securities. The Blended Index consists of the Credit Suisse High Yield Index (35%), Barclays Capital US Government/Credit Index (35%), JPMorgan Emerging Markets Bond Index Global Diversified (15%) and Citigroup Non US Hedged World Government Bond Index ("WGBI") (15%). The Advisor believes this blended benchmark, which is a secondary benchmark, more accurately reflects typical portfolio asset allocations and represents the overall investment process. Index returns, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index. |
| |
| Yearly periods ended December 31 | |
| Comparative Results | |
| DWS Strategic Income VIP | | 1-Year | | | 3-Year | | | 5-Year | | | 10-Year | |
| Class A | Growth of $10,000 | | $ | 11,005 | | | $ | 12,460 | | | $ | 14,317 | | | $ | 20,107 | |
| Average annual total return | | | 10.05 | % | | | 7.61 | % | | | 7.44 | % | | | 7.23 | % |
| Barclays Capital US Government/Credit Index | Growth of $10,000 | | $ | 10,659 | | | $ | 11,777 | | | $ | 13,105 | | | $ | 17,626 | |
| Average annual total return | | | 6.59 | % | | | 5.60 | % | | | 5.56 | % | | | 5.83 | % |
| Blended Index | Growth of $10,000 | | $ | 10,954 | | | $ | 12,399 | | | $ | 14,000 | | | $ | 20,969 | |
| Average annual total return | | | 9.54 | % | | | 7.43 | % | | | 6.96 | % | | | 7.69 | % |
The growth of $10,000 is cumulative.
Information About Your Fund's Expenses
DWS Strategic Income VIP
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees and other Fund expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Fund limited these expenses; had it not done so, expenses would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2010 to December 31, 2010).
The tables illustrate your Fund's expenses in two ways:
•Actual Fund Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Fund using the Fund's actual return during the period. To estimate the expenses 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 "Expenses Paid per $1,000" line under the share class you hold.
• Hypothetical 5% Fund Return. This helps you to compare your Fund's ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
Expenses and Value of a $1,000 Investment for the six months ended December 31, 2010 | |
| Actual Fund Return | | Class A | |
| Beginning Account Value 7/1/10 | | $ | 1,000.00 | |
| Ending Account Value 12/31/10 | | $ | 1,051.90 | |
| Expenses Paid per $1,000* | | $ | 4.29 | |
| Hypothetical 5% Fund Return | | Class A | |
| Beginning Account Value 7/1/10 | | $ | 1,000.00 | |
| Ending Account Value 12/31/10 | | $ | 1,021.02 | |
| Expenses Paid per $1,000* | | $ | 4.23 | |
* Expenses are equal to the Fund's annualized expense ratio, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.
| Annualized Expense Ratio | Class A | |
| DWS Variable Series II — DWS Strategic Income VIP | .83% | |
For more information, please refer to the Fund's prospectus.
These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
Management Summary December 31, 2010
DWS Strategic Income VIP
The Class A shares of the Fund returned 10.05% (unadjusted for contract charges) during the 12-month period ended December 31, 2010. This compares with returns of 9.54% for the Fund's blended benchmark and 6.59% for the Barclays Capital US Government/Credit Index.
The primary positive factor in the Fund's performance was its overweight in high-yield bonds, which outpaced the broader market by a wide margin.1 We continued to add to this market segment throughout the year, bringing the Fund's weighting in high yield from about 45% at the beginning of 2010 to approximately 55% at year end. Given the outperformance of high-yield bonds, this decision proved helpful to performance. The Fund's weighting in domestic investment-grade bonds also delivered a positive return, thanks to the solid performance of our positions in corporate bonds and mortgage-backed securities.2 On the negative side, our relative performance in the Fund's domestic segment was held back somewhat by our smaller-than-normal position in commercial mortgage-backed securities.3
Turning our attention to the Fund's overseas allocation, our position in emerging-markets debt produced a strong absolute return, which seeks to generate positive returns independent of market direction, but had only a modest impact on performance due to our small average weighting of about 6% to 8% of assets. The Fund's position in non-US developed-market bonds was a modest detractor. While we generated positive performance through our investments in euro-denominated corporate debt, our positions in Greece and Spain weighed significantly on performance during the first half of the year. Our currency positioning and global tactical asset allocation overlay strategy were also modest detractors from performance.4
We believe the year ahead will prove challenging for government bonds, given the extremely low absolute yields in the developed markets. In such an environment, we would expect to see continued outperformance from the "spread sectors" such as high-yield and investment-grade corporate bonds.5 Accordingly, about 80% of the Fund is now invested in these areas — up from about 60% at the start of the year. This allocation includes not just domestic corporates, but also bonds issued by corporations domiciled in Europe, Asia and the emerging markets.
As always, our investment process remains focused on using credit research to identify the most compelling investment opportunities for the Fund. At a time in which government bonds are offering paltry yields, we believe our global, multi-asset-class approach provides us with the best chance to strike this favorable balance over time.
Gary Russell, CFA
William Chepolis, CFA
John D. Ryan
Portfolio Managers, Deutsche Investment Management Americas Inc.
Thomas Picciochi
Robert Wang
Portfolio Managers, QS Investors, LLC
Subadvisor to the Fund
The Blended Index consists of the Credit Suisse High Yield Index (35%), Barclays Capital US Government/Credit Index (35%), JPMorgan Emerging Markets Bond Index Global Diversified (15%) and Citigroup Non US Hedged WBGI (15%). The Advisor believes this blended benchmark, which is a secondary benchmark, more accurately reflects typical portfolio asset allocations and represents the overall investment process.
The Barclays Capital US Government/Credit Index is an unmanaged index comprising intermediate- and long-term government and investment-grade corporate debt securities.
Index returns, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.
1 "Overweight" means the Fund holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the Fund holds a lower weighting.
2 Mortgage-backed securities (MBS) are secured by loans on residential property.
3 Commercial mortgage-backed securities (CMBS) are secured by loans on a commercial property.
4 The global tactical asset allocation (GTAA) strategy is a total return strategy designed to add value by benefiting from global market inefficiencies. The strategy combines diverse macro investment views to determine the positions, using a disciplined, risk-managed process. The result is a collection of long and short investment positions within global markets designed to generate excess returns that have little correlation to major markets. These positions are then implemented through futures and forward contracts.
5 "Spread sectors" refers to all segments of the bond market other than government bonds. They are named as such because they are priced on the yield spread, or difference in yield, relative to Treasuries.
Portfolio management market commentary is as of December 31, 2010, and may not come to pass. This information is subject to change at any time based on market and other conditions. Past performance does not guarantee future results. Current and future portfolio holdings are subject to risk.
Portfolio Summary
DWS Strategic Income VIP
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | 12/31/10 | 12/31/09 |
| | | |
| Corporate Bonds | 62% | 62% |
| Government & Agency Obligations | 17% | 18% |
| Cash Equivalents | 5% | 8% |
| Mortgage-Backed Securities Pass-Throughs | 5% | 4% |
| Loan Participations and Assignments | 4% | 3% |
| Collateralized Mortgage Obligations | 3% | 2% |
| Commercial Mortgage-Backed Securities | 3% | 1% |
| Preferred Securities | 1% | 1% |
| Asset Backed | — | 1% |
| | 100% | 100% |
Quality (Excludes Cash Equivalents and Securities Lending Collateral) | 12/31/10 | 12/31/09 |
| | | |
| AAA | 20% | 13% |
| AA | 2% | 9% |
| A | 5% | 7% |
| BBB | 16% | 15% |
| BB | 16% | 20% |
| B | 28% | 23% |
| CCC | 11% | 9% |
| Below CCC | — | 2% |
| Not Rated | 2% | 2% |
| | 100% | 100% |
| Interest Rate Sensitivity | 12/31/10 | 12/31/09 |
| | | |
| Effective Maturity | 7.2 years | 6.6 years |
| Effective Duration | 4.7 years | 3.7 years |
Asset allocation and interest rate sensitivity are subject to change.
The quality ratings represent the lower of Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") credit ratings. The ratings of Moody's and S&P represent their opinions as to the quality of the securities they rate. Ratings are relative and subjective and are not absolute standards of quality. The Fund's credit quality does not remove market risk and is subject to change.
Effective maturity is the weighted average of the bonds held by the Fund taking into consideration any maturity shortening features.
Effective duration is an approximate measure of the Fund's sensitivity to interest rate changes taking into consideration any maturity shortening features.
For more complete details about the Fund's investment portfolio, see page 218.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
Investment Portfolio December 31, 2010
DWS Strategic Income VIP
| | | Principal Amount ($) (a) | | | Value ($) | |
| | | | |
| Corporate Bonds 64.0% | |
| Consumer Discretionary 7.9% | |
| AMC Entertainment, Inc., 8.0%, 3/1/2014 | | | | 105,000 | | | | 106,050 | |
| American Achievement Corp., 144A, 10.875%, 4/15/2016 | | | | 110,000 | | | | 112,750 | |
| Ameristar Casinos, Inc., 9.25%, 6/1/2014 | | | | 115,000 | | | | 123,050 | |
| Asbury Automotive Group, Inc.: | |
| 7.625%, 3/15/2017 | | | | 65,000 | | | | 65,650 | |
| 144A, 8.375%, 11/15/2020 | | | | 80,000 | | | | 82,600 | |
| Ashtead Holdings PLC, 144A, 8.625%, 8/1/2015 | | | | 120,000 | | | | 124,350 | |
| Avis Budget Car Rental LLC: | |
| 144A, 8.25%, 1/15/2019 | | | | 95,000 | | | | 95,950 | |
| 9.625%, 3/15/2018 | | | | 45,000 | | | | 48,488 | |
| Beazer Homes USA, Inc., 144A, 9.125%, 5/15/2019 | | | | 50,000 | | | | 47,500 | |
| Bon-Ton Department Stores, Inc., 10.25%, 3/15/2014 | | | | 30,000 | | | | 30,600 | |
| Brunswick Corp., 144A, 11.25%, 11/1/2016 | | | | 45,000 | | | | 53,550 | |
| Cablevision Systems Corp.: | |
| 7.75%, 4/15/2018 | | | | 10,000 | | | | 10,475 | |
| 144A, 8.0%, 12/15/2018 | | | | 95,000 | | | | 97,850 | |
| 8.0%, 4/15/2020 | | | | 10,000 | | | | 10,700 | |
| CanWest MediaWorks LP, 144A, 9.25%, 8/1/2015** | | | | 50,000 | | | | 8,500 | |
| Carnival Corp., 6.65%, 1/15/2028 | | | | 285,000 | | | | 292,317 | |
| Carrols Corp., 9.0%, 1/15/2013 | | | | 30,000 | | | | 30,075 | |
| CCO Holdings LLC: | |
| 7.25%, 10/30/2017 | | | | 90,000 | | | | 91,350 | |
| 7.875%, 4/30/2018 | | | | 40,000 | | | | 41,400 | |
| 8.125%, 4/30/2020 | | | | 25,000 | | | | 26,313 | |
| Cequel Communications Holdings I LLC, 144A, 8.625%, 11/15/2017 | | | | 215,000 | | | | 224,675 | |
| Clear Channel Worldwide Holdings, Inc.: | | |
| Series A, 9.25%, 12/15/2017 | | | | 15,000 | | | | 16,313 | |
| Series B, 9.25%, 12/15/2017 | | | | 25,000 | | | | 27,375 | |
| DineEquity, Inc., 144A, 9.5%, 10/30/2018 | | | | 150,000 | | | | 159,000 | |
| DISH DBS Corp.: | |
| 6.625%, 10/1/2014 | | | | 65,000 | | | | 67,437 | |
| 7.125%, 2/1/2016 | | | | 155,000 | | | | 160,037 | |
| Fontainebleau Las Vegas Holdings LLC, 144A, 11.0%, 6/15/2015** | | | | 65,000 | | | | 228 | |
| Ford Motor Co., 7.45%, 7/16/2031 | | | | 65,000 | | | | 69,631 | |
| General Electric Co., 144A, 4.375%, 4/1/2021 | | | | 145,000 | | | | 140,738 | |
| Goodyear Tire & Rubber Co., 10.5%, 5/15/2016 | | | | 25,000 | | | | 28,500 | |
| Great Canadian Gaming Corp., 144A, 7.25%, 2/15/2015 | | | | 55,000 | | | | 56,237 | |
| Group 1 Automotive, Inc., 144A, 3.0%, 3/15/2020 | | | | 65,000 | | | | 80,844 | |
| | | Principal Amount ($) (a) | | | Value ($) | |
| | | | | | | | | |
| Harrah's Operating Co., Inc.: | |
| 10.0%, 12/15/2018 | | | | 135,000 | | | | 123,187 | |
| 11.25%, 6/1/2017 | | | | 240,000 | | | | 270,000 | |
| 144A, 12.75%, 4/15/2018 | | | | 55,000 | | | | 55,275 | |
| Hertz Corp.: | |
| 144A, 7.5%, 10/15/2018 | | | | 155,000 | | | | 160,812 | |
| 8.875%, 1/1/2014 | | | | 183,000 | | | | 187,117 | |
| Hyundai Motor Manufacturing Czech, 144A, 4.5%, 4/15/2015 | | | | 145,000 | | | | 148,787 | |
| Lear Corp.: | |
| 7.875%, 3/15/2018 | | | | 40,000 | | | | 42,800 | |
| 8.125%, 3/15/2020 | | | | 40,000 | | | | 43,500 | |
| Limited Brands, Inc., 7.0%, 5/1/2020 | | | | 20,000 | | | | 21,100 | |
| Macy's Retail Holdings, Inc., 8.375%, 7/15/2015 | | | | 10,000 | | | | 11,700 | |
| Mediacom Broadband LLC, 8.5%, 10/15/2015 | | | | 110,000 | | | | 110,550 | |
| Mediacom LLC, 9.125%, 8/15/2019 | | | | 30,000 | | | | 30,600 | |
| MGM Resorts International: | |
| 144A, 9.0%, 3/15/2020 | | | | 65,000 | | | | 71,500 | |
| 144A, 10.0%, 11/1/2016 | | | | 15,000 | | | | 15,413 | |
| 10.375%, 5/15/2014 | | | | 45,000 | | | | 50,512 | |
| 11.125%, 11/15/2017 | | | | 50,000 | | | | 57,500 | |
| Michaels Stores, Inc., Step-up Coupon, 0% to 11/1/2011, 13.0% to 11/1/2016 | | | | 25,000 | | | | 24,750 | |
| Neiman Marcus Group, Inc., 10.375%, 10/15/2015 | | | | 25,000 | | | | 26,406 | |
| Norcraft Holdings LP, 9.75%, 9/1/2012 | | | | 71,000 | | | | 71,444 | |
| Penske Automotive Group, Inc., 7.75%, 12/15/2016 | | | | 175,000 | | | | 178,500 | |
| PETCO Animal Supplies, Inc., 144A, 9.25%, 12/1/2018 | | | | 60,000 | | | | 63,225 | |
| Phillips-Van Heusen Corp., 7.375%, 5/15/2020 | | | | 25,000 | | | | 26,563 | |
| Regal Entertainment Group, 9.125%, 8/15/2018 | | | | 25,000 | | | | 26,625 | |
| Sabre Holdings Corp., 8.35%, 3/15/2016 | | | | 160,000 | | | | 153,600 | |
| Sears Holdings Corp., 144A, 6.625%, 10/15/2018 | | | | 60,000 | | | | 55,950 | |
| Seminole Indian Tribe of Florida: | |
| 144A, 7.75%, 10/1/2017 | | | | 40,000 | | | | 41,300 | |
| 144A, 7.804%, 10/1/2020 | | | | 70,000 | | | | 68,215 | |
| Simmons Bedding Co., 144A, 11.25%, 7/15/2015 | | | | 50,000 | | | | 54,000 | |
| Sirius XM Radio, Inc., 144A, 8.75%, 4/1/2015 | | | | 55,000 | | | | 59,537 | |
| Sonic Automotive, Inc.: | |
| 5.0%, 10/1/2029 | | | | 25,000 | | | | 31,063 | |
| Series B, 9.0%, 3/15/2018 | | | | 95,000 | | | | 99,987 | |
| Standard Pacific Corp.: | |
| 8.375%, 5/15/2018 | | | | 10,000 | | | | 10,000 | |
| 144A, 8.375%, 5/15/2018 | | | | 65,000 | | | | 65,000 | |
| 10.75%, 9/15/2016 | | | | 80,000 | | | | 92,200 | |
| Toys "R" Us-Delaware, Inc., 144A, 7.375%, 9/1/2016 | | | | 35,000 | | | | 36,750 | |
| | | Principal Amount ($) (a) | | | Value ($) | |
| | | | | | | | | |
| Travelport LLC: | |
| 4.921%***, 9/1/2014 | | | | 45,000 | | | | 39,825 | |
| 9.0%, 3/1/2016 | | | | 65,000 | | | | 62,969 | |
| 9.875%, 9/1/2014 | | | | 45,000 | | | | 43,819 | |
| Unitymedia Hessen GmbH & Co., KG, 144A, 8.125%, 12/1/2017 | | | | 200,000 | | | | 209,000 | |
| Univision Communications, Inc., 144A, 7.875%, 11/1/2020 | | | | 25,000 | | | | 26,250 | |
| UPC Holding BV, 144A, 8.0%, 11/1/2016 | EUR | | | 100,000 | | | | 138,975 | |
| Vertis, Inc., 13.5%, 4/1/2014 (PIK)** | | | | 24,348 | | | | 730 | |
| Visant Corp., 144A, 10.0%, 10/1/2017 | | | | 80,000 | | | | 85,000 | |
| Wyndham Worldwide Corp., 5.75%, 2/1/2018 | | | | 210,000 | | | | 213,536 | |
| Wynn Las Vegas LLC, 7.75%, 8/15/2020 | | | | 50,000 | | | | 54,125 | |
| Young Broadcasting, Inc., 8.75%, 1/15/2014** | | | | 275,000 | | | | 3 | |
| | | | | 5,990,233 | |
| Consumer Staples 2.2% | |
| Alliance One International, Inc., 10.0%, 7/15/2016 | | | | 25,000 | | | | 25,625 | |
| Altria Group, Inc., 9.95%, 11/10/2038 | | | | 145,000 | | | | 204,324 | |
| B&G Foods, Inc., 7.625%, 1/15/2018 | | | | 25,000 | | | | 26,313 | |
| Central Garden & Pet Co., 8.25%, 3/1/2018 | | | | 35,000 | | | | 35,437 | |
| Darling International, Inc., 144A, 8.5%, 12/15/2018 | | | | 80,000 | | | | 83,400 | |
| Dole Food Co., Inc., 144A, 8.0%, 10/1/2016 | | | | 35,000 | | | | 36,925 | |
| FAGE Dairy Industry SA, 144A, 9.875%, 2/1/2020 | | | | 85,000 | | | | 85,000 | |
| General Nutrition Centers, Inc., 5.75%***, 3/15/2014 (PIK) | | | | 40,000 | | | | 39,600 | |
| NBTY, Inc., 144A, 9.0%, 10/1/2018 | | | | 25,000 | | | | 26,688 | |
| North Atlantic Trading Co., 144A, 10.0%, 3/1/2012 | | | | 223,000 | | | | 209,620 | |
| Pilgrim's Pride Corp., 144A, 7.875%, 12/15/2018 | | | | 60,000 | | | | 59,700 | |
| Reynolds American, Inc., 6.75%, 6/15/2017 | | | | 200,000 | | | | 223,543 | |
| Rite Aid Corp.: | |
| 7.5%, 3/1/2017 | | | | 60,000 | | | | 57,675 | |
| 8.0%, 8/15/2020 | | | | 100,000 | | | | 104,125 | |
| Smithfield Foods, Inc.: | |
| 7.75%, 7/1/2017 | | | | 220,000 | | | | 228,800 | |
| 144A, 10.0%, 7/15/2014 | | | | 85,000 | | | | 97,962 | |
| Stater Bros. Holdings, Inc., 144A, 7.375%, 11/15/2018 | | | | 30,000 | | | | 30,750 | |
| SUPERVALU, Inc., 8.0%, 5/1/2016 | | | | 35,000 | | | | 33,513 | |
| TreeHouse Foods, Inc., 7.75%, 3/1/2018 | | | | 25,000 | | | | 27,094 | |
| | | | | 1,636,094 | |
| Energy 7.4% | |
| Allis-Chalmers Energy, Inc., 9.0%, 1/15/2014 | | | | 55,000 | | | | 55,825 | |
| Anadarko Petroleum Corp., 6.375%, 9/15/2017 | | | | 215,000 | | | | 234,201 | |
| | | Principal Amount ($) (a) | | | Value ($) | |
| | | | | | | | | |
| Arch Coal, Inc., 7.25%, 10/1/2020 | | | | 20,000 | | | | 21,100 | |
| Atlas Energy Operating Co., LLC, 12.125%, 8/1/2017 | | | | 55,000 | | | | 69,575 | |
| Belden & Blake Corp., 8.75%, 7/15/2012 | | | | 310,000 | | | | 296,050 | |
| Berry Petroleum Co., 6.75%, 11/1/2020 | | | | 90,000 | | | | 90,450 | |
| Bill Barrett Corp., 9.875%, 7/15/2016 | | | | 40,000 | | | | 43,900 | |
| BreitBurn Energy Partners LP, 144A, 8.625%, 10/15/2020 | | | | 50,000 | | | | 50,250 | |
| Bristow Group, Inc., 7.5%, 9/15/2017 | | | | 70,000 | | | | 73,850 | |
| Chaparral Energy, Inc., 8.5%, 12/1/2015 | | | | 230,000 | | | | 234,025 | |
| Chesapeake Energy Corp.: | |
| 6.625%, 8/15/2020 | | | | 60,000 | | | | 59,100 | |
| 6.875%, 8/15/2018 | | | | 30,000 | | | | 30,450 | |
| 6.875%, 11/15/2020 | | | | 75,000 | | | | 75,937 | |
| 7.25%, 12/15/2018 | | | | 100,000 | | | | 103,500 | |
| 9.5%, 2/15/2015 | | | | 185,000 | | | | 208,587 | |
| CITGO Petroleum Corp., 144A, 11.5%, 7/1/2017 | | | | 105,000 | | | | 117,600 | |
| Colorado Interstate Gas Co., 6.8%, 11/15/2015 | | | | 30,000 | | | | 34,561 | |
| CONSOL Energy, Inc.: | |
| 144A, 8.0%, 4/1/2017 | | | | 115,000 | | | | 122,475 | |
| 144A, 8.25%, 4/1/2020 | | | | 60,000 | | | | 64,800 | |
| Continental Resources, Inc.: | |
| 144A, 7.125%, 4/1/2021 | | | | 30,000 | | | | 31,500 | |
| 7.375%, 10/1/2020 | | | | 35,000 | | | | 37,100 | |
| 8.25%, 10/1/2019 | | | | 20,000 | | | | 22,200 | |
| Crosstex Energy LP, 8.875%, 2/15/2018 | | | | 55,000 | | | | 58,919 | |
| El Paso Corp.: | |
| 7.25%, 6/1/2018 | | | | 55,000 | | | | 58,878 | |
| 9.625%, 5/15/2012 | | | | 132,000 | | | | 140,681 | |
| El Paso Pipeline Partners Operating Co., LLC, 6.5%, 4/1/2020 | | | | 155,000 | | | | 162,625 | |
| Energy Transfer Equity LP, 7.5%, 10/15/2020 | | | | 35,000 | | | | 36,050 | |
| Frontier Oil Corp., 6.875%, 11/15/2018 | | | | 55,000 | | | | 56,100 | |
| Genesis Energy LP, 144A, 7.875%, 12/15/2018 | | | | 65,000 | | | | 64,675 | |
| Global Geophysical Services, Inc., 10.5%, 5/1/2017 | | | | 130,000 | | | | 129,350 | |
| Harvest Operations Corp., 144A, 6.875%, 10/1/2017 | | | | 25,000 | | | | 25,750 | |
| Holly Energy Partners LP, 144A, 8.25%, 3/15/2018 | | | | 55,000 | | | | 57,475 | |
| Inergy LP, 144A, 7.0%, 10/1/2018 | | | | 60,000 | | | | 60,450 | |
| KCS Energy, Inc., 7.125%, 4/1/2012 | | | | 240,000 | | | | 240,600 | |
| Linn Energy LLC: | |
| 144A, 7.75%, 2/1/2021 | | | | 60,000 | | | | 61,500 | |
| 144A, 8.625%, 4/15/2020 | | | | 55,000 | | | | 59,263 | |
| 11.75%, 5/15/2017 | | | | 75,000 | | | | 85,875 | |
| Newfield Exploration Co., 7.125%, 5/15/2018 | | | | 90,000 | | | | 94,725 | |
| Nexen, Inc., 5.875%, 3/10/2035 | | | | 75,000 | | | | 69,738 | |
| Niska Gas Storage US LLC, 144A, 8.875%, 3/15/2018 | | | | 55,000 | | | | 58,850 | |
| OPTI Canada, Inc., 7.875%, 12/15/2014 | | | | 125,000 | | | | 88,281 | |
| | | Principal Amount ($) (a) | | | Value ($) | |
| | | | | | | | | |
| Petrohawk Energy Corp.: | |
| 7.25%, 8/15/2018 | | | | 50,000 | | | | 50,500 | |
| 7.875%, 6/1/2015 | | | | 30,000 | | | | 31,238 | |
| Plains Exploration & Production Co.: | | |
| 7.0%, 3/15/2017 | | | | 60,000 | | | | 61,650 | |
| 7.625%, 6/1/2018 | | | | 110,000 | | | | 115,775 | |
| 8.625%, 10/15/2019 | | | | 55,000 | | | | 60,225 | |
| Quicksilver Resources, Inc., 11.75%, 1/1/2016 | | | | 15,000 | | | | 17,475 | |
| Range Resources Corp., 6.75%, 8/1/2020 | | | | 20,000 | | | | 20,625 | |
| Regency Energy Partners LP: | |
| 6.875%, 12/1/2018 | | | | 35,000 | | | | 35,438 | |
| 9.375%, 6/1/2016 | | | | 115,000 | | | | 126,212 | |
| Reliance Holdings USA, Inc., 144A, 4.5%, 10/19/2020 | | | | 250,000 | | | | 238,538 | |
| Sabine Pass LNG LP: | |
| 7.25%, 11/30/2013 | | | | 115,000 | | | | 111,837 | |
| 7.5%, 11/30/2016 | | | | 100,000 | | | | 93,750 | |
| SandRidge Energy, Inc., 8.625%, 4/1/2015 (PIK) | | | | 25,000 | | | | 25,594 | |
| Southwestern Energy Co., 7.5%, 2/1/2018 | | | | 85,000 | | | | 95,837 | |
| Stone Energy Corp.: | |
| 6.75%, 12/15/2014 | | | | 95,000 | | | | 92,625 | |
| 8.625%, 2/1/2017 | | | | 25,000 | | | | 25,375 | |
| Transocean, Inc., 6.5%, 11/15/2020 | | | | 360,000 | | | | 382,218 | |
| Valero Energy Corp., 6.125%, 2/1/2020 | | | | 160,000 | | | | 169,931 | |
| Williams Partners LP, 4.125%, 11/15/2020 | | | | 190,000 | | | | 179,966 | |
| | | | | 5,621,630 | |
| Financials 16.7% | |
| Algoma Acquisition Corp., 144A, 9.875%, 6/15/2015 | | | | 125,000 | | | | 112,500 | |
| Ally Financial, Inc.: | |
| 144A, 6.25%, 12/1/2017 | | | | 95,000 | | | | 95,000 | |
| 6.875%, 9/15/2011 | | | | 297,000 | | | | 305,167 | |
| 7.0%, 2/1/2012 | | | | 185,000 | | | | 191,475 | |
| 7.25%, 3/2/2011 | | | | 455,000 | | | | 457,275 | |
| 144A, 7.5%, 9/15/2020 | | | | 120,000 | | | | 125,850 | |
| 8.0%, 3/15/2020 | | | | 115,000 | | | | 125,637 | |
| 8.0%, 11/1/2031 | | | | 75,000 | | | | 80,813 | |
| 8.3%, 2/12/2015 | | | | 35,000 | | | | 38,500 | |
| American International Group, Inc., Series G, 5.6%, 10/18/2016 | | | | 290,000 | | | | 298,757 | |
| Antero Resources Finance Corp., 9.375%, 12/1/2017 | | | | 10,000 | | | | 10,463 | |
| Ashton Woods USA LLC, 144A, Step-up Coupon, 0% to 6/30/2012, 11.0% to 6/30/2015 | | | | 75,400 | | | | 41,847 | |
| Barclays Bank PLC: | |
| 5.125%, 1/8/2020 | | | | 145,000 | | | | 148,082 | |
| 5.14%, 10/14/2020 | | | | 185,000 | | | | 166,453 | |
| BBVA Bancomer SA, 144A, 7.25%, 4/22/2020 | | | | 115,000 | | | | 121,647 | |
| Blue Acquisition Sub, Inc., 144A, 9.875%, 10/15/2018 | | | | 30,000 | | | | 31,950 | |
| BP Capital Markets PLC, 4.5%, 10/1/2020 | | | | 120,000 | | | | 119,711 | |
| Bumble Bee Acquisition Corp., 144A, 9.0%, 12/15/2017 | | | | 130,000 | | | | 135,200 | |
| | | Principal Amount ($) (a) | | | Value ($) | |
| | | | | | | | | |
| Calpine Construction Finance Co., LP, 144A, 8.0%, 6/1/2016 | | | | 120,000 | | | | 127,500 | |
| Case New Holland, Inc., 7.75%, 9/1/2013 | | | | 45,000 | | | | 48,375 | |
| CIT Group, Inc.: | |
| 7.0%, 5/1/2013 | | | | 80,000 | | | | 81,600 | |
| 7.0%, 5/1/2015 | | | | 105,970 | | | | 106,235 | |
| 7.0%, 5/1/2017 | | | | 355,000 | | | | 355,887 | |
| Citigroup Funding, Inc., 5.0%, 4/7/2013 | | | | 295,000 | | | | 295,000 | |
| Credit Agricole SA, 144A, 3.5%, 4/13/2015 | | | | 171,000 | | | | 172,136 | |
| Discover Bank, 7.0%, 4/15/2020 | | | | 145,000 | | | | 155,881 | |
| Dunkin Finance Corp., 144A, 9.625%, 12/1/2018 | | | | 45,000 | | | | 45,450 | |
| E*TRADE Financial Corp., 7.375%, 9/15/2013 | | | | 120,000 | | | | 119,400 | |
| Express LLC, 8.75%, 3/1/2018 | | | | 45,000 | | | | 47,813 | |
| FCE Bank PLC, 9.375%, 1/17/2014 | EUR | | | 100,000 | | | | 148,663 | |
| Ford Motor Credit Co., LLC: | |
| 7.25%, 10/25/2011 | | | | 60,000 | | | | 62,013 | |
| 7.375%, 2/1/2011 | | | | 45,000 | | | | 45,135 | |
| 7.5%, 8/1/2012 | | | | 500,000 | | | | 531,604 | |
| 9.875%, 8/10/2011 | | | | 145,000 | | | | 150,936 | |
| GE Capital European Funding, 4.25%, 3/1/2017 | EUR | | | 290,000 | | | | 393,485 | |
| GenOn Escrow Corp., 144A, 9.5%, 10/15/2018 | | | | 25,000 | | | | 24,844 | |
| Giraffe Acquisition Corp., 144A, 9.125%, 12/1/2018 | | | | 55,000 | | | | 57,338 | |
| Hartford Financial Services Group, Inc., 5.5%, 3/30/2020 | | | | 290,000 | | | | 294,181 | |
| Hellas Telecommunications Finance SCA, 144A, 8.985%, 7/15/2015 (PIK)* | EUR | | | 109,187 | | | | 88 | |
| Hexion US Finance Corp., 8.875%, 2/1/2018 | | | | 340,000 | | | | 363,375 | |
| Hospitality Properties Trust, (REIT), 7.875%, 8/15/2014 | | | | 200,000 | | | | 221,218 | |
| Host Hotels & Resorts LP, (REIT), 6.875%, 11/1/2014 | | | | 165,000 | | | | 169,950 | |
| HSBC Finance Corp., 144A, 6.676%, 1/15/2021 | | | | 120,000 | | | | 121,234 | |
| Hutchison Whampoa Finance 09 Ltd., 4.75%, 11/14/2016 | EUR | | | 150,000 | | | | 208,874 | |
| Intergas Finance BV, REG S, 6.875%, 11/4/2011 | | | | 275,000 | | | | 285,312 | |
| International Finance Corp., 5.75%, 3/16/2015 | AUD | | | 285,000 | | | | 289,497 | |
| International Lease Finance Corp.: | | |
| 144A, 8.625%, 9/15/2015 | | | | 40,000 | | | | 43,000 | |
| 144A, 8.75%, 3/15/2017 | | | | 180,000 | | | | 193,050 | |
| iPayment, Inc., 9.75%, 5/15/2014 | | | | 45,000 | | | | 42,300 | |
| Lincoln National Corp., 7.0%, 6/15/2040 | | | | 290,000 | | | | 315,367 | |
| Lloyds TSB Bank PLC, 144A, 6.5%, 9/14/2020 | | | | 290,000 | | | | 266,809 | |
| Manulife Financial Corp., 4.9%, 9/17/2020 | | | | 290,000 | | | | 275,987 | |
| Morgan Stanley, 3.45%, 11/2/2015 | | | | 220,000 | | | | 214,490 | |
| | | Principal Amount ($) (a) | | | Value ($) | |
| | | | | | | | | |
| Navios Maritime Acquisition Corp., 144A, 8.625%, 11/1/2017 | | | | 25,000 | | | | 25,563 | |
| Nielsen Finance LLC: | |
| Step-up Coupon, 0% to 8/1/2011, 12.5% to 8/1/2016 | | | | 45,000 | | | | 47,250 | |
| 144A, 7.75%, 10/15/2018 | | | | 25,000 | | | | 25,875 | |
| 11.5%, 5/1/2016 | | | | 20,000 | | | | 23,100 | |
| Nomura Holdings, Inc., 6.7%, 3/4/2020 | | | | 90,000 | | | | 96,326 | |
| Nuveen Investments, Inc., 10.5%, 11/15/2015 | | | | 130,000 | | | | 132,925 | |
| OMEGA Healthcare Investors, Inc., 144A, (REIT), 6.75%, 10/15/2022 | | | | 55,000 | | | | 54,519 | |
| Pacific Life Global Funding, 144A, 3.32%***, 2/6/2016 | | | | 386,000 | | | | 382,580 | |
| Pinafore LLC, 144A, 9.0%, 10/1/2018 | | | | 40,000 | | | | 43,200 | |
| Pinnacle Foods Finance LLC: | |
| 8.25%, 9/1/2017 | | | | 70,000 | | | | 71,575 | |
| 9.25%, 4/1/2015 | | | | 35,000 | | | | 36,444 | |
| PNC Bank NA, 6.875%, 4/1/2018 | | | | 180,000 | | | | 205,751 | |
| Prudential Financial, Inc., 4.5%, 11/15/2020 | | | | 135,000 | | | | 132,023 | |
| Qtel International Finance Ltd., 144A, 4.75%, 2/16/2021 | | | | 200,000 | | | | 190,814 | |
| Rainbow National Services LLC, 144A, 10.375%, 9/1/2014 | | | | 13,000 | | | | 13,488 | |
| Reynolds Group Issuer, Inc.: | |
| 144A, 7.125%, 4/15/2019 | | | | 100,000 | | | | 101,750 | |
| 144A, 8.5%, 5/15/2018 | | | | 195,000 | | | | 195,975 | |
| 144A, 9.0%, 4/15/2019 | | | | 105,000 | | | | 108,806 | |
| Roadhouse Financing, Inc., 144A, 10.75%, 10/15/2017 | | | | 40,000 | | | | 43,200 | |
| Santander US Debt SA Unipersonal, 144A, 3.724%, 1/20/2015 | | | | 145,000 | | | | 137,382 | |
| SLM Corp., 8.0%, 3/25/2020 | | | | 25,000 | | | | 25,348 | |
| Societe Generale, 144A, 3.5%, 1/15/2016 | | | | 290,000 | | | | 285,645 | |
| Sprint Capital Corp.: | |
| 7.625%, 1/30/2011 | | | | 50,000 | | | | 50,125 | |
| 8.375%, 3/15/2012 | | | | 135,000 | | | | 142,762 | |
| Susser Holdings LLC, 8.5%, 5/15/2016 | | | | 30,000 | | | | 32,175 | |
| Telecom Italia Capital SA, 4.95%, 9/30/2014 | | | | 174,000 | | | | 178,270 | |
| Toys "R" Us Property Co. I, LLC, 10.75%, 7/15/2017 | | | | 50,000 | | | | 57,000 | |
| Tropicana Entertainment LLC, 9.625%, 12/15/2014** | | | | 150,000 | | | | 77 | |
| UCI Holdco, Inc., 9.25%***, 12/15/2013 (PIK) | | | | 83,525 | | | | 83,316 | |
| Ventas Realty LP, (REIT), 3.125%, 11/30/2015 | | | | 95,000 | | | | 91,531 | |
| Virgin Media Finance PLC, Series 1, 9.5%, 8/15/2016 | | | | 300,000 | | | | 339,000 | |
| Virgin Media Secured Finance PLC, 6.5%, 1/15/2018 | | | | 375,000 | | | | 394,687 | |
| WMG Acquisition Corp., 9.5%, 6/15/2016 | | | | 45,000 | | | | 48,263 | |
| | | | | 12,677,099 | |
| | | Principal Amount ($) (a) | | | Value ($) | |
| | | | | | | | | |
| Health Care 3.8% | |
| Celgene Corp., 3.95%, 10/15/2020 | | | | 170,000 | | | | 161,625 | |
| Community Health Systems, Inc., 8.875%, 7/15/2015 | | | | 80,000 | | | | 84,000 | |
| DaVita, Inc.: | |
| 6.375%, 11/1/2018 | | | | 20,000 | | | | 19,900 | |
| 6.625%, 11/1/2020 | | | | 20,000 | | | | 19,800 | |
| Genzyme Corp., 5.0%, 6/15/2020 | | | | 155,000 | | | | 162,729 | |
| Hanger Orthopedic Group, Inc., 7.125%, 11/15/2018 | | | | 25,000 | | | | 24,937 | |
| HCA Holdings, Inc., 144A, 7.75%, 5/15/2021 | | | | 105,000 | | | | 105,000 | |
| HCA, Inc.: | |
| 7.875%, 2/15/2020 | | | | 365,000 | | | | 390,550 | |
| 8.5%, 4/15/2019 | | | | 45,000 | | | | 49,275 | |
| 9.125%, 11/15/2014 | | | | 155,000 | | | | 162,556 | |
| 9.25%, 11/15/2016 | | | | 310,000 | | | | 330,731 | |
| 9.625%, 11/15/2016 (PIK) | | | | 152,000 | | | | 162,830 | |
| IASIS Healthcare LLC, 8.75%, 6/15/2014 | | | | 95,000 | | | | 97,494 | |
| Laboratory Corp. of America Holdings, 4.625%, 11/15/2020 | | | | 215,000 | | | | 213,061 | |
| Life Technologies Corp., 6.0%, 3/1/2020 | | | | 215,000 | | | | 230,294 | |
| Mylan, Inc., 144A, 7.875%, 7/15/2020 | | | | 15,000 | | | | 16,163 | |
| The Cooper Companies, Inc., 7.125%, 2/15/2015 | | | | 95,000 | | | | 97,850 | |
| Valeant Pharmaceuticals International: | | |
| 144A, 6.75%, 10/1/2017 | | | | 40,000 | | | | 39,800 | |
| 144A, 7.0%, 10/1/2020 | | | | 65,000 | | | | 64,187 | |
| Vanguard Health Holding Co. II, LLC: | | |
| 8.0%, 2/1/2018 | | | | 55,000 | | | | 56,375 | |
| 144A, 8.0%, 2/1/2018 | | | | 45,000 | | | | 45,900 | |
| Warner Chilcott Co., LLC, 144A, 7.75%, 9/15/2018 | | | | 75,000 | | | | 75,750 | |
| Watson Pharmaceuticals, Inc., 6.125%, 8/15/2019 | | | | 220,000 | | | | 243,615 | |
| | | | | 2,854,422 | |
| Industrials 4.6% | |
| Accuride Corp., 144A, 9.5%, 8/1/2018 | | | | 75,000 | | | | 81,187 | |
| Actuant Corp., 6.875%, 6/15/2017 | | | | 40,000 | | | | 40,900 | |
| AMGH Merger Sub, Inc., 144A, 9.25%, 11/1/2018 | | | | 30,000 | | | | 31,500 | |
| ARAMARK Corp., 8.5%, 2/1/2015 | | | | 20,000 | | | | 20,900 | |
| Armored Autogroup, Inc., 144A, 9.25%, 11/1/2018 | | | | 105,000 | | | | 104,212 | |
| ArvinMeritor, Inc.: | |
| 8.125%, 9/15/2015 | | | | 55,000 | | | | 57,544 | |
| 10.625%, 3/15/2018 | | | | 60,000 | | | | 67,500 | |
| BE Aerospace, Inc.: | |
| 6.875%, 10/1/2020 | | | | 35,000 | | | | 36,138 | |
| 8.5%, 7/1/2018 | | | | 105,000 | | | | 114,975 | |
| Belden, Inc.: | |
| 7.0%, 3/15/2017 | | | | 45,000 | | | | 45,563 | |
| 9.25%, 6/15/2019 | | | | 40,000 | | | | 43,850 | |
| Bombardier, Inc., 144A, 7.75%, 3/15/2020 | | | | 55,000 | | | | 59,262 | |
| | | Principal Amount ($) (a) | | | Value ($) | |
| | | | | | | | | |
| Briggs & Stratton Corp., 6.875%, 12/15/2020 | | | | 35,000 | | | | 35,700 | |
| Cenveo Corp.: | |
| 8.875%, 2/1/2018 | | | | 100,000 | | | | 96,750 | |
| 144A, 10.5%, 8/15/2016 | | | | 55,000 | | | | 54,038 | |
| Clean Harbors, Inc., 7.625%, 8/15/2016 | | | | 32,000 | | | | 34,000 | |
| Congoleum Corp., 9.0%, 12/31/2017 (PIK) | | | | 41,250 | | | | 28,437 | |
| Corrections Corp. of America, 7.75%, 6/1/2017 | | | | 30,000 | | | | 31,838 | |
| DynCorp International, Inc., 144A, 10.375%, 7/1/2017 | | | | 85,000 | | | | 87,125 | |
| FTI Consulting, Inc., 144A, 6.75%, 10/1/2020 | | | | 145,000 | | | | 143,912 | |
| Garda World Security Corp., 144A, 9.75%, 3/15/2017 | | | | 60,000 | | | | 64,350 | |
| Great Lakes Dredge & Dock Co., 7.75%, 12/15/2013 | | | | 50,000 | | | | 50,438 | |
| Hutchison Whampoa International 09/19 Ltd., 144A, 5.75%, 9/11/2019 | | | | 225,000 | | | | 240,956 | |
| Interline Brands, Inc., 144A, 7.0%, 11/15/2018 | | | | 50,000 | | | | 50,750 | |
| K. Hovnanian Enterprises, Inc., 8.875%, 4/1/2012 | | | | 55,000 | | | | 53,900 | |
| Kansas City Southern de Mexico SA de CV: | | |
| 7.375%, 6/1/2014 | | | | 115,000 | | | | 120,175 | |
| 8.0%, 2/1/2018 | | | | 105,000 | | | | 113,662 | |
| Kansas City Southern Railway Co., 8.0%, 6/1/2015 | | | | 100,000 | | | | 107,500 | |
| Masco Corp., 7.125%, 3/15/2020 | | | | 145,000 | | | | 151,689 | |
| Navios Maritime Holdings, Inc., 9.5%, 12/15/2014 | | | | 75,000 | | | | 78,000 | |
| Oshkosh Corp.: | |
| 8.25%, 3/1/2017 | | | | 10,000 | | | | 10,875 | |
| 8.5%, 3/1/2020 | | | | 25,000 | | | | 27,438 | |
| Owens Corning, Inc., 9.0%, 6/15/2019 | | | | 217,000 | | | | 254,583 | |
| Ply Gem Industries, Inc., 13.125%, 7/15/2014 | | | | 95,000 | | | | 100,937 | |
| RailAmerica, Inc., 9.25%, 7/1/2017 | | | | 36,000 | | | | 39,555 | |
| RBS Global & Rexnord Corp., 8.5%, 5/1/2018 | | | | 120,000 | | | | 127,500 | |
| Sitel LLC, 144A, 11.5%, 4/1/2018 | | | | 95,000 | | | | 78,375 | |
| Spirit AeroSystems Holdings, Inc., 144A, 6.75%, 12/15/2020 | | | | 75,000 | | | | 75,187 | |
| SPX Corp., 144A, 6.875%, 9/1/2017 | | | | 20,000 | | | | 21,250 | |
| Textron, Inc., 7.25%, 10/1/2019 | | | | 145,000 | | | | 166,163 | |
| Titan International, Inc., 144A, 7.875%, 10/1/2017 | | | | 160,000 | | | | 168,800 | |
| TransDigm, Inc., 144A, 7.75%, 12/15/2018 | | | | 65,000 | | | | 67,275 | |
| Tutor Perini Corp., 144A, 7.625%, 11/1/2018 | | | | 55,000 | | | | 55,275 | |
| USG Corp., 144A, 9.75%, 8/1/2014 | | | | 45,000 | | | | 47,475 | |
| | | | | 3,487,439 | |
| | | Principal Amount ($) (a) | | | Value ($) | |
| | | | | | | | | |
| Information Technology 2.5% | |
| Alcatel-Lucent USA, Inc., 6.45%, 3/15/2029 | | | | 70,000 | | | | 55,300 | |
| Allen Systems Group, Inc., 144A, 10.5%, 11/15/2016 | | | | 35,000 | | | | 35,263 | |
| Amkor Technology, Inc., 7.375%, 5/1/2018 | | | | 45,000 | | | | 46,800 | |
| Aspect Software, Inc., 144A, 10.625%, 5/15/2017 | | | | 60,000 | | | | 61,575 | |
| CDW LLC, 11.0%, 10/12/2015 | | | | 155,000 | | | | 160,812 | |
| Equinix, Inc., 8.125%, 3/1/2018 | | | | 120,000 | | | | 125,400 | |
| Fidelity National Information Services, Inc.: | | |
| 144A, 7.625%, 7/15/2017 | | | | 20,000 | | | | 21,050 | |
| 144A, 7.875%, 7/15/2020 | | | | 25,000 | | | | 26,438 | |
| First Data Corp., 144A, 8.875%, 8/15/2020 | | | | 85,000 | | | | 89,675 | |
| Freescale Semiconductor, Inc., 144A, 9.25%, 4/15/2018 | | | | 265,000 | | | | 291,500 | |
| Jabil Circuit, Inc., 7.75%, 7/15/2016 | | | | 30,000 | | | | 33,675 | |
| L-3 Communications Corp.: | |
| 5.875%, 1/15/2015 | | | | 105,000 | | | | 106,969 | |
| Series B, 6.375%, 10/15/2015 | | | | 80,000 | | | | 82,400 | |
| MasTec, Inc., 7.625%, 2/1/2017 | | | | 65,000 | | | | 64,675 | |
| NXP BV, 3.039%***, 10/15/2013 | | | | 150,000 | | | | 147,750 | |
| SunGard Data Systems, Inc.: | |
| 144A, 7.375%, 11/15/2018 | | | | 25,000 | | | | 25,125 | |
| 10.25%, 8/15/2015 | | | | 225,000 | | | | 236,531 | |
| Unisys Corp., 144A, 12.75%, 10/15/2014 | | | | 80,000 | | | | 94,600 | |
| Vangent, Inc., 9.625%, 2/15/2015 | | | | 35,000 | | | | 31,675 | |
| Western Union Co., 6.2%, 6/21/2040 | | | | 145,000 | | | | 143,446 | |
| | | | | 1,880,659 | |
| Materials 8.1% | |
| Agrium, Inc., 6.125%, 1/15/2041 | | | | 290,000 | | | | 307,140 | |
| Albemarle Corp., 4.5%, 12/15/2020 | | | | 100,000 | | | | 98,422 | |
| Appleton Papers, Inc., 144A, 11.25%, 12/15/2015 | | | | 25,000 | | | | 20,000 | |
| ArcelorMittal, 6.125%, 6/1/2018 | | | | 250,000 | | | | 266,372 | |
| Ashland, Inc., 9.125%, 6/1/2017 | | | | 55,000 | | | | 63,387 | |
| Ball Corp.: | |
| 7.125%, 9/1/2016 | | | | 30,000 | | | | 32,325 | |
| 7.375%, 9/1/2019 | | | | 25,000 | | | | 26,875 | |
| Berry Plastics Corp.: | |
| 9.5%, 5/15/2018 | | | | 65,000 | | | | 65,162 | |
| 144A, 9.75%, 1/15/2021 | | | | 80,000 | | | | 79,200 | |
| Boise Paper Holdings LLC, 8.0%, 4/1/2020 | | | | 30,000 | | | | 32,100 | |
| BWAY Parent Co., Inc., 144A, 10.125%, 11/1/2015 (PIK) | | | | 40,000 | | | | 40,400 | |
| Celanese US Holdings LLC, 144A, 6.625%, 10/15/2018 | | | | 35,000 | | | | 36,138 | |
| Clearwater Paper Corp., 144A, 7.125%, 11/1/2018 | | | | 65,000 | | | | 67,112 | |
| Cliffs Natural Resources, Inc., 6.25%, 10/1/2040 | | | | 290,000 | | | | 282,325 | |
| Clondalkin Acquisition BV, 144A, 2.302%***, 12/15/2013 | | | | 75,000 | | | | 71,812 | |
| | | Principal Amount ($) (a) | | | Value ($) | |
| | | | | | | | | |
| Corporacion Nacional del Cobre de Chile, 144A, 3.75%, 11/4/2020 | | | | 130,000 | | | | 123,180 | |
| CPG International I, Inc., 10.5%, 7/1/2013 | | | | 130,000 | | | | 132,600 | |
| Crown Americas LLC, 7.625%, 5/15/2017 | | | | 30,000 | | | | 32,250 | |
| Crown European Holdings SA, 144A, 7.125%, 8/15/2018 | EUR | | | 50,000 | | | | 69,655 | |
| Dow Chemical Co.: | |
| 8.55%, 5/15/2019 | | | | 290,000 | | | | 363,442 | |
| 9.4%, 5/15/2039 | | | | 145,000 | | | | 210,457 | |
| Essar Steel Algoma, Inc., 144A, 9.375%, 3/15/2015 | | | | 240,000 | | | | 241,500 | |
| Exopack Holding Corp., 11.25%, 2/1/2014 | | | | 160,000 | | | | 166,000 | |
| FMG Resources August 2006 Pty Ltd., 144A, 7.0%, 11/1/2015 | | | | 25,000 | | | | 25,625 | |
| GEO Specialty Chemicals, Inc.: | |
| 144A, 7.5%, 3/31/2015 (PIK) | | | | 120,175 | | | | 103,350 | |
| 10.0%, 3/31/2015 | | | | 119,040 | | | | 108,326 | |
| Georgia-Pacific LLC: | |
| 144A, 5.4%, 11/1/2020 | | | | 145,000 | | | | 143,358 | |
| 144A, 7.125%, 1/15/2017 | | | | 35,000 | | | | 37,275 | |
| 144A, 8.25%, 5/1/2016 | | | | 65,000 | | | | 73,369 | |
| Graphic Packaging International, Inc.: | | |
| 7.875%, 10/1/2018 | | | | 10,000 | | | | 10,475 | |
| 9.5%, 6/15/2017 | | | | 130,000 | | | | 141,862 | |
| Greif, Inc., 7.75%, 8/1/2019 | | | | 195,000 | | | | 213,525 | |
Hexcel Corp., 6.75%, 2/1/2015 | | | | 280,000 | | | | 285,600 | |
| Huntsman International LLC: | |
| 8.625%, 3/15/2020 | | | | 60,000 | | | | 65,250 | |
| 144A, 8.625%, 3/15/2021 | | | | 25,000 | | | | 27,000 | |
| International Paper Co., 7.95%, 6/15/2018 | | | | 145,000 | | | | 172,545 | |
| Lyondell Chemical Co., 144A, 8.0%, 11/1/2017 | | | | 100,000 | | | | 110,625 | |
| Millar Western Forest Products Ltd., 7.75%, 11/15/2013 | | | | 35,000 | | | | 33,163 | |
| Momentive Performance Materials, Inc., 144A, 9.0%, 1/15/2021 | | | | 230,000 | | | | 242,650 | |
| Nalco Co., 144A, 6.625%, 1/15/2019 | | | | 45,000 | | | | 46,013 | |
| NewMarket Corp., 7.125%, 12/15/2016 | | | | 110,000 | | | | 112,475 | |
| Novelis, Inc.: | |
| 144A, 8.375%, 12/15/2017 | | | | 140,000 | | | | 144,900 | |
| 144A, 8.75%, 12/15/2020 | | | | 110,000 | | | | 114,125 | |
| Owens-Brockway Glass Container, Inc., 7.375%, 5/15/2016 | | | | 110,000 | | | | 116,875 | |
| Radnor Holdings Corp., 11.0%, 3/15/2010** | | | | 25,000 | | | | 3 | |
| Rain CII Carbon LLC, 144A, 8.0%, 12/1/2018 | | | | 45,000 | | | | 46,125 | |
| Silgan Holdings, Inc., 7.25%, 8/15/2016 | | | | 50,000 | | | | 53,250 | |
| Solo Cup Co., 10.5%, 11/1/2013 | | | | 170,000 | | | | 177,650 | |
| Teck Resources Ltd., 4.5%, 1/15/2021 | | | | 310,000 | | | | 315,181 | |
| Texas Industries, Inc., 144A, 9.25%, 8/15/2020 | | | | 75,000 | | | | 79,687 | |
| | | Principal Amount ($) (a) | | | Value ($) | |
| | | | | | | | | |
| United States Steel Corp., 7.375%, 4/1/2020 | | | | 80,000 | | | | 82,000 | |
| Viskase Companies, Inc., 144A, 9.875%, 1/15/2018 | | | | 145,000 | | | | 151,163 | |
| Wolverine Tube, Inc., 15.0%, 3/31/2012 (PIK)** | | | | 91,631 | | | | 49,481 | |
| | | | | 6,110,780 | |
| Telecommunication Services 7.1% | |
| American Tower Corp., 4.5%, 1/15/2018 | | | | 270,000 | | | | 267,642 | |
| Buccaneer Merger Sub, Inc., 144A, 9.125%, 1/15/2019 | | | | 25,000 | | | | 25,813 | |
| CC Holdings GS V LLC, 144A, 7.75%, 5/1/2017 | | | | 350,000 | | | | 382,375 | |
| Cincinnati Bell, Inc.: | |
| 8.375%, 10/15/2020 | | | | 180,000 | | | | 172,800 | |
| 8.75%, 3/15/2018 | | | | 170,000 | | | | 159,375 | |
| Clearwire Communications LLC: | | |
| 144A, 12.0%, 12/1/2015 | | | | 20,000 | | | | 21,550 | |
| 144A, 12.0%, 12/1/2017 | | | | 60,000 | | | | 62,100 | |
| Cricket Communications, Inc.: | |
| 144A, 7.75%, 10/15/2020 | | | | 250,000 | | | | 238,125 | |
| 10.0%, 7/15/2015 | | | | 100,000 | | | | 107,125 | |
| Crown Castle International Corp., 9.0%, 1/15/2015 | | | | 195,000 | | | | 214,987 | |
| Digicel Group Ltd., 144A, 10.5%, 4/15/2018 | | | | 100,000 | | | | 110,000 | |
| Digicel Ltd., 144A, 8.25%, 9/1/2017 | | | | 300,000 | | | | 307,500 | |
| ERC Ireland Preferred Equity Ltd., 144A, 8.05%***, 2/15/2017 (PIK) | EUR | | | 78,745 | | | | 9,538 | |
Frontier Communications Corp.: | | |
| 6.25%, 1/15/2013 | | | | 36,000 | | | | 37,980 | |
| 7.875%, 4/15/2015 | | | | 10,000 | | | | 10,925 | |
| 8.25%, 4/15/2017 | | | | 70,000 | | | | 76,825 | |
| 8.5%, 4/15/2020 | | | | 90,000 | | | | 98,325 | |
| 8.75%, 4/15/2022 | | | | 10,000 | | | | 10,900 | |
| Grupo Iusacell Celular SA de CV, 10.0%, 3/31/2012** | | | | 29,280 | | | | 10,834 | |
| Hughes Network Systems LLC, 9.5%, 4/15/2014 | | | | 150,000 | | | | 154,687 | |
| Intelsat Corp., 9.25%, 6/15/2016 | | | | 380,000 | | | | 410,400 | |
| Intelsat Jackson Holdings SA: | |
| 144A, 7.25%, 10/15/2020 | | | | 120,000 | | | | 121,200 | |
| 11.25%, 6/15/2016 | | | | 60,000 | | | | 64,650 | |
| Intelsat Luxembourg SA, 11.5%, 2/4/2017 (PIK) | | | | 200,000 | | | | 221,000 | |
| Intelsat Subsidiary Holding Co. SA, 8.875%, 1/15/2015 | | | | 195,000 | | | | 200,362 | |
| iPCS, Inc., 2.412%***, 5/1/2013 | | | | 35,000 | | | | 33,687 | |
| MetroPCS Wireless, Inc.: | |
| 6.625%, 11/15/2020 | | | | 90,000 | | | | 85,725 | |
| 7.875%, 9/1/2018 | | | | 25,000 | | | | 25,938 | |
| Nextel Communications, Inc., Series E, 6.875%, 10/31/2013 | | | | 60,000 | | | | 60,150 | |
| Qwest Communications International, Inc.: | | |
| 144A, 7.125%, 4/1/2018 | | | | 55,000 | | | | 56,925 | |
| 8.0%, 10/1/2015 | | | | 60,000 | | | | 64,500 | |
| Qwest Corp., 7.5%, 10/1/2014 | | | | 285,000 | | | | 319,200 | |
| | | Principal Amount ($) (a) | | | Value ($) | |
| | | | | | | | | |
| SBA Telecommunications, Inc.: | |
| 8.0%, 8/15/2016 | | | | 35,000 | | | | 37,887 | |
| 8.25%, 8/15/2019 | | | | 25,000 | | | | 27,313 | |
| Sprint Nextel Corp., 8.375%, 8/15/2017 (b) | | | | 115,000 | | | | 123,337 | |
| Telefonica Emisiones SAU, 6.421%, 6/20/2016 | | | | 290,000 | | | | 316,968 | |
| Telesat Canada, 11.0%, 11/1/2015 | | | | 180,000 | | | | 202,050 | |
| Verizon Communications, Inc., 8.95%, 3/1/2039 | | | | 110,000 | | | | 156,760 | |
| West Corp.: | |
| 144A, 7.875%, 1/15/2019 | | | | 50,000 | | | | 50,875 | |
| 144A, 8.625%, 10/1/2018 | | | | 15,000 | | | | 15,900 | |
| Windstream Corp.: | |
| 7.0%, 3/15/2019 | | | | 60,000 | | | | 59,100 | |
| 7.875%, 11/1/2017 | | | | 135,000 | | | | 141,919 | |
| 8.125%, 9/1/2018 | | | | 70,000 | | | | 73,500 | |
| 8.625%, 8/1/2016 | | | | 10,000 | | | | 10,525 | |
| | | | | 5,359,277 | |
| Utilities 3.7% | |
| AES Corp.: | |
| 8.0%, 10/15/2017 | | | | 10,000 | | | | 10,575 | |
| 8.0%, 6/1/2020 | | | | 175,000 | | | | 185,500 | |
| Calpine Corp.: | |
| 144A, 7.5%, 2/15/2021 | | | | 80,000 | | | | 78,800 | |
| 144A, 7.875%, 7/31/2020 | | | | 95,000 | | | | 96,187 | |
| Edison Mission Energy, 7.0%, 5/15/2017 | | | | 65,000 | | | | 51,513 | |
| Ferrellgas LP, 144A, 6.5%, 5/1/2021 | | | | 20,000 | | | | 19,500 | |
| Korea Gas Corp., 144A, 4.25%, 11/2/2020 | | | | 185,000 | | | | 175,520 | |
| Mirant Americas Generation LLC, 8.3%, 5/1/2011 | | | | 230,000 | | | | 233,450 | |
| Mirant North America LLC, 7.375%, 12/31/2013 | | | | 60,000 | | | | 61,130 | |
| NRG Energy, Inc.: | |
| 7.25%, 2/1/2014 | | | | 390,000 | | | | 397,800 | |
| 7.375%, 2/1/2016 | | | | 660,000 | | | | 676,500 | |
| 7.375%, 1/15/2017 | | | | 90,000 | | | | 92,700 | |
| 144A, 8.25%, 9/1/2020 | | | | 85,000 | | | | 87,125 | |
| Oncor Electric Delivery Co., 144A, 5.25%, 9/30/2040 | | | | 130,000 | | | | 124,871 | |
| RRI Energy, Inc., 7.875%, 6/15/2017 | | | | 25,000 | | | | 24,250 | |
| San Diego Gas & Electric Co., 6.0%, 6/1/2026 | | | | 180,000 | | | | 207,521 | |
| Suburban Propane Partners LP, 7.375%, 3/15/2020 | | | | 15,000 | | | | 16,013 | |
| Toledo Edison Co., 7.25%, 5/1/2020 | | | | 230,000 | | | | 271,872 | |
| | | | | 2,810,827 | |
Total Corporate Bonds (Cost $47,107,385) | | | | 48,428,460 | |
| | |
| Mortgage-Backed Securities Pass-Throughs 5.5% | |
| Federal National Mortgage Association, 4.0%, 10/1/2023 (c) | | | | 1,000,000 | | | | 1,029,610 | |
| Government National Mortgage Association, 4.5%, 7/1/2039 (c) | | | | 3,000,000 | | | | 3,115,078 | |
Total Mortgage-Backed Securities Pass-Throughs (Cost $4,088,477) | | | | 4,144,688 | |
| | | Principal Amount ($) (a) | | | Value ($) | |
| | | | | | | | | |
| Commercial Mortgage-Backed Securities 3.1% | |
| Citigroup Commercial Mortgage Trust, "AMP3", Series 2006-C5, 144A, 5.501%, 10/15/2049 | | | | 127,595 | | | | 113,277 | |
| Credit Suisse Mortgage Capital Certificates Trust, "A2", Series 2007-C1, 5.268%, 2/15/2040 | | | | 814,000 | | | | 826,456 | |
| CS First Boston Mortgage Securities Corp., "H", Series 2002-CKP1, 144A, 7.191%***, 12/15/2035 | | | | 290,000 | | | | 286,115 | |
| JPMorgan Chase Commercial Mortgage Securities Corp.: | | |
| "F", Series 2004-LN2, 144A, 5.452%***, 7/15/2041 | | | | 500,000 | | | | 322,735 | |
| "A4", Series 2006-LDP7, 5.872%***, 4/15/2045 | | | | 140,000 | | | | 153,105 | |
| LB-UBS Commercial Mortgage Trust, "A3", Series 2006-C7, 5.347%, 11/15/2038 | | | | 440,000 | | | | 465,194 | |
| Wachovia Bank Commercial Mortgage Trust, "A4", Series 2005-C22, 5.27%***, 12/15/2044 | | | | 140,000 | | | | 150,078 | |
Total Commercial Mortgage-Backed Securities (Cost $2,338,559) | | | | 2,316,960 | |
| | |
| Collateralized Mortgage Obligations 3.5% | |
| Banc of America Mortgage Securities, "2A2", Series 2004-A, 3.493%***, 2/25/2034 | | | | 197,420 | | | | 181,352 | |
| Bear Stearns Adjustable Rate Mortgage Trust, "2A1", Series 2005-11, 3.436%***, 12/25/2035 | | | | 258,663 | | | | 247,466 | |
| Citicorp Mortgage Securities, Inc., "1A7", Series 2006-4, 6.0%, 8/25/2036 | | | | 60,243 | | | | 60,157 | |
| Countrywide Home Loans, "2A5", Series 2004-13, 5.75%, 8/25/2034 | | | | 180,689 | | | | 164,321 | |
| Federal National Mortgage Association, "BI", Series 2010-13, Interest Only, 5.0%, 12/25/2038 | | | | 445,564 | | | | 63,930 | |
| Government National Mortgage Association, "XA", Series 2009-118, 5.0%, 12/20/2039 | | | | 347,329 | | | | 344,906 | |
| JPMorgan Mortgage Trust, "2A1", Series 2006-A2, 5.72%***, 4/25/2036 | | | | 711,435 | | | | 655,719 | |
| Merrill Lynch Mortgage Investors Trust: | | |
| "2A1A", Series 2005-A9, 2.7%***, 12/25/2035 | | | | 119,270 | | | | 119,090 | |
| "2A", Series 2003-A6, 3.19%***, 10/25/2033 | | | | 130,698 | | | | 127,749 | |
| Morgan Stanley Mortgage Loan Trust, "5A5", Series 2005-4, 5.5%, 8/25/2035 | | | | 133,860 | | | | 130,053 | |
| Vericrest Opportunity Loan Transferee, "M", Series 2010-NPL1, 144A, 6.0%, 5/25/2039 | | | | 149,454 | | | | 146,521 | |
| | | Principal Amount ($) (a) | | | Value ($) | |
| | | | | | | | | |
| Washington Mutual Mortgage Pass-Through Certificates Trust, "1A1", Series 2005-AR12, 2.721%***, 10/25/2035 | | | | 119,151 | | | | 114,132 | |
| Wells Fargo Mortgage-Backed Securities Trust: | | |
| "A3", Series 2005-4, 5.0%, 4/25/2035 | | | | 115,095 | | | | 114,565 | |
| "A19", Series 2006-11, 6.0%, 9/25/2036 | | | | 124,533 | | | | 124,412 | |
Total Collateralized Mortgage Obligations (Cost $2,503,586) | | | | 2,594,373 | |
| | |
| Government & Agency Obligations 17.2% | |
| Other Government Related (d) 5.3% | |
| Citibank NA, FDIC Guaranteed, 0.316%***, 5/7/2012 | | | | 650,000 | | | | 650,528 | |
| International Bank for Reconstruction & Development, 5.25%***, 4/9/2025 | | | | 290,000 | | | | 284,461 | |
| JPMorgan Chase & Co., Series 3, FDIC Guaranteed, 0.553%***, 12/26/2012 | | | | 232,000 | | | | 233,177 | |
| Kreditanstalt fuer Wiederaufbau, 1.35%, 1/20/2014 | JPY | | | 185,000,000 | | | | 2,347,476 | |
| Pemex Project Funding Master Trust, 5.75%, 3/1/2018 | | | | 460,000 | | | | 491,826 | |
| | | | | 4,007,468 | |
| Sovereign Bonds 7.0% | |
| Federative Republic of Brazil: | |
| 8.875%, 10/14/2019 | | | | 295,000 | | | | 389,400 | |
| 12.5%, 1/5/2016 | BRL | | | 250,000 | | | | 174,398 | |
| Government of Canada, 4.5%, 6/1/2015 | CAD | | | 350,000 | | | | 384,461 | |
| Republic of Argentina, 5.83%, 12/31/2033 | ARS | | | 375 | | | | 176 | |
| Republic of El Salvador, 144A, 7.65%, 6/15/2035 | | | | 156,000 | | | | 164,970 | |
| Republic of Lithuania: | |
| 144A, 5.125%, 9/14/2017 | | | | 205,000 | | | | 201,965 | |
| 144A, 7.375%, 2/11/2020 | | | | 195,000 | | | | 215,404 | |
| Republic of Panama, 9.375%, 1/16/2023 | | | | 500,000 | | | | 688,750 | |
| Republic of Peru, 7.35%, 7/21/2025 | | | | 285,000 | | | | 346,703 | |
| Republic of Poland, 6.375%, 7/15/2019 | | | | 345,000 | | | | 386,473 | |
| Republic of South Africa, 6.875%, 5/27/2019 | | | | 220,000 | | | | 257,675 | |
| Republic of Uruguay: | |
| 7.625%, 3/21/2036 | | | | 60,000 | | | | 71,250 | |
| 9.25%, 5/17/2017 | | | | 105,000 | | | | 135,450 | |
| Republic of Venezuela, 9.25%, 9/15/2027 | | | | 150,000 | | | | 111,750 | |
| Russian Federation, REG S, 7.5%, 3/31/2030 | | | | 478,731 | | | | 553,652 | |
| United Kingdom Treasury Bond, 3.75%, 9/7/2019 | GBP | | | 750,000 | | | | 1,206,322 | |
| | | | | 5,288,799 | |
| US Government Sponsored Agency 0.1% | |
| Federal Home Loan Mortgage Corp., 1.125%, 12/15/2011 | | | | 100,000 | | | | 100,695 | |
| | | Principal Amount ($) (a) | | | Value ($) | |
| | | | | | | | | |
| US Treasury Obligations 4.8% | |
| US Treasury Bill, 0.185%****, 3/17/2011 (e) | | | | 99,000 | | | | 98,978 | |
| US Treasury Bond, 4.375%, 5/15/2040 | | | | 551,000 | | | | 553,667 | |
| US Treasury Notes: | |
| 0.875%, 2/29/2012 | | | | 2,250,000 | | | | 2,263,095 | |
| 2.625%, 11/15/2020 | | | | 759,000 | | | | 715,950 | |
| | | | | 3,631,690 | |
Total Government & Agency Obligations (Cost $12,104,046) | | | | 13,028,652 | |
| | |
| Loan Participations and Assignments 3.7% | |
| Senior Loans*** 3.2% | |
| Buffets, Inc.: | |
| Letter of Credit, First Lien, 7.539%, 4/22/2015 (PIK) | | | | 11,948 | | | | 9,141 | |
| Term Loan B, 12.0%, 4/21/2015 (PIK) | | | | 69,862 | | | | 65,636 | |
| Burger King Corp., New Term Loan B, 6.25%, 10/19/2016 | | | | 85,000 | | | | 86,410 | |
| Charter Communications Operating LLC: | | |
| Replacement Term Loan, 2.27%, 3/6/2014 | | | | 18,104 | | | | 17,904 | |
| Term Loan, 3.56%, 9/6/2016 | | | | 208,149 | | | | 205,287 | |
| New Term Loan, 7.25%, 3/6/2014 | | | | 94,108 | | | | 97,945 | |
| Clear Channel Communication, Term Loan B, LIBOR plus 3.65%, 1/28/2016 | | | | 110,000 | | | | 95,920 | |
| Dunkin' Brands, Inc., Term Loan B, 5.75%, 11/23/2017 | | | | 70,000 | | | | 70,943 | |
| Ford Motor Co., Term Loan B1, 3.02%, 12/16/2013 | | | | 183,850 | | | | 183,803 | |
| Hawker Beechcraft Acquisition Co., LLC: | | |
| Term Loan, 2.261%, 3/26/2014 | | | | 165,210 | | | | 145,300 | |
| Letter of Credit, 2.289%, 3/26/2014 | | | | 9,903 | | | | 8,709 | |
| IASIS Healthcare LLC, Term Loan, 5.538%, 6/13/2014 (PIK) | | | | 109,416 | | | | 105,559 | |
| Kabel Deutschland GmbH, Term Loan, 8.272%, 11/19/2014 (PIK) | EUR | | | 93,849 | | | | 126,321 | |
| Momentive Specialty Chemicals, Inc.: | | |
| Term Loan C1, 2.563%, 5/6/2013 | | | | 114,379 | | | | 112,556 | |
| Term Loan C2, 2.563%, 5/6/2013 | | | | 58,987 | | | | 58,046 | |
| Nuveen Investments, Inc., First Lien, Term Loan, 3.303%, 11/13/2014 | | | | 115,000 | | | | 110,137 | |
| OSI Restaurant Partners LLC: | |
| Term Loan, 2.563%, 6/14/2013 | | | | 11,007 | | | | 10,537 | |
| Term Loan B, 2.625%, 6/14/2014 | | | | 113,924 | | | | 109,062 | |
| Pinafore LLC, Term Loan B, 6.25%, 9/29/2016 | | | | 522,909 | | | | 530,918 | |
| Roundy's Supermarkets, Inc., Second Lien, Term Loan, LIBOR plus 8.0%, 4/18/2016 | | | | 65,000 | | | | 66,097 | |
| | | Principal Amount ($) (a) | | | Value ($) | |
| | | | | | | | | |
| Syniverse Technologies, Inc., Term Loan B, LIBOR plus 3.75%, 12/21/2017 | | | | 50,000 | | | | 50,641 | |
| Tribune Co., Term Loan B, LIBOR plus 3.0%, 6/4/2014** | | | | 88,875 | | | | 62,124 | |
| US Foodservice, Inc., Term Loan B, 2.76%, 7/3/2014 | | | | 84,346 | | | | 77,556 | |
| VML US Finance LLC: | |
| Delayed Draw Term Loan B, 4.8%, 5/25/2012 | | | | 18,154 | | | | 18,177 | |
| Term Loan B, 4.8%, 5/27/2013 | | | | 31,429 | | | | 31,469 | |
| | | | | 2,456,198 | |
| Sovereign Loans 0.5% | |
| BOM Capital PLC, 144A, 6.699%, 3/11/2015 | | | | 205,000 | | | | 211,150 | |
| VTB Bank, 144A, 6.875%, 5/29/2018 | | | | 145,000 | | | | 153,337 | |
| | | | | 364,487 | |
Total Loan Participations and Assignments (Cost $2,735,317) | | | | 2,820,685 | |
| | |
| Preferred Securities 0.7% | |
| Financials 0.6% | |
| Capital One Capital VI, 8.875%, 5/15/2040 | | | | 330,000 | | | | 343,613 | |
| USB Capital XIII Trust, 6.625%, 12/15/2039 | | | | 145,000 | | | | 148,107 | |
| | | | | 491,720 | |
| Materials 0.1% | |
| Hercules, Inc., 6.5%, 6/30/2029 | | | | 95,000 | | | | 73,625 | |
Total Preferred Securities (Cost $526,972) | | | | 565,345 | |
| | | Units | | | Value ($) | |
| | | | |
| Other Investments 0.0% | |
| Consumer Discretionary | |
| AOT Bedding Super Holdings LLC* (Cost $4,000) | | | 4 | | | | 4,000 | |
| | | Shares | | | Value ($) | |
| | | | |
| Common Stocks 0.0% | |
| Consumer Discretionary 0.0% | |
| Buffets Restaurants Holdings, Inc.* | | | 2,318 | | | | 8,113 | |
| Dex One Corp.* | | | 540 | | | | 4,029 | |
| SuperMedia, Inc.* | | | 99 | | | | 862 | |
| Trump Entertainment Resorts, Inc.* | | | 6 | | | | 109 | |
| Vertis Holdings, Inc.* | | | 940 | | | | 0 | |
| | | | | 13,113 | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| Industrials 0.0% | |
| Congoleum Corp.* | | | 125,000 | | | | 0 | |
| Quad Graphics, Inc.* | | | 69 | | | | 2,847 | |
| | | | | 2,847 | |
| Materials 0.0% | |
| GEO Specialty Chemicals, Inc.* | | | 2,058 | | | | 1,749 | |
Total Common Stocks (Cost $279,466) | | | | 17,709 | |
| | |
| Preferred Stock 0.1% | |
| Financials | |
| Ally Financial, Inc., Series G, 144A, 7.0% (Cost $100,132) | | | 110 | | | | 103,967 | |
| | |
| Warrants 0.0% | |
| Consumer Discretionary 0.0% | |
| Reader's Digest Association, Inc., Expiration Date 2/19/2014* | | | 159 | | | | 5 | |
| Materials 0.0% | |
| Hercules Trust II, Expiration Date 3/31/2029* | | | 85 | | | | 967 | |
Total Warrants (Cost $17,432) | | | | 972 | |
| | | Contracts | | | Value ($) | |
| | | | |
| Call Options Purchased 0.0% | |
| Floating Rate — LIBOR, Effective Date 5/16/2011, Expiration Date 5/16/2012, Cap Rate 3.0% (Cost $54,460) | | | 14,000,000 | | | | 467 | |
| | | Shares | | | Value ($) | |
| | | | |
| Securities Lending Collateral 0.2% | |
| Daily Assets Fund Institutional, 0.27% (f) (g) (Cost $122,734) | | | 122,734 | | | | 122,734 | |
| | |
| Cash Equivalents 5.6% | |
| Central Cash Management Fund, 0.19% (f) (Cost $4,269,126) | | | 4,269,126 | | | | 4,269,126 | |
| | | % of Net Assets | | | Value ($) | |
| | | | |
Total Investment Portfolio (Cost $76,251,692)+ | | | 103.6 | | | | 78,418,138 | |
| Other Assets and Liabilities, Net | | | (3.6 | ) | | | (2,711,284 | ) |
| Net Assets | | | 100.0 | | | | 75,706,854 | |
* Non-income producing security.
** Non-income producing security. Issuer has defaulted on the payment of principal or interest or has filed for bankruptcy. The following table represents bonds and senior loans that are in default:
| Securities | | Coupon | | Maturity Date | | Principal Amount ($) | | Acquisition Cost ($) | | | Value ($) | |
| CanWest MediaWorks LP | | | 9.25 | % | 8/1/2015 | | | 50,000 | | USD | | | 50,000 | | | | 8,500 | |
| Fontainebleau Las Vegas Holdings LLC | | | 11.0 | % | 6/15/2015 | | | 65,000 | | USD | | | 65,225 | | | | 228 | |
| Grupo Iusacell Celular SA de CV | | | 10.0 | % | 3/31/2012 | | | 29,280 | | USD | | | 27,863 | | | | 10,834 | |
| Radnor Holdings Corp. | | | 11.0 | % | 3/15/2010 | | | 25,000 | | USD | | | 15,888 | | | | 3 | |
| Tribune Co. | | LIBOR plus 3.0% | | 6/4/2014 | | | 88,875 | | USD | | | 88,819 | | | | 62,124 | |
| Tropicana Entertainment LLC | | | 9.625 | % | 12/15/2014 | | | 150,000 | | USD | | | 122,979 | | | | 77 | |
| Vertis, Inc. | | | 13.5 | % | 4/1/2014 | | | 24,348 | | USD | | | 9,890 | | | | 730 | |
| Wolverine Tube, Inc. | | | 15.0 | % | 3/31/2012 | | | 91,631 | | USD | | | 91,631 | | | | 49,481 | |
| Young Broadcasting, Inc. | | | 8.75 | % | 1/15/2014 | | | 275,000 | | USD | | | 224,631 | | | | 3 | |
| | | | | | | | | | | | | | 696,926 | | | | 131,980 | |
*** These securities are shown at their current rate as of December 31, 2010. Floating rate securities' yields vary with a designated market index or market rate, such as the coupon-equivalent of the US Treasury bill rate.
**** Annualized yield at time of purchase; not a coupon rate.
+ The cost for federal income tax purposes was $76,320,197. At December 31, 2010, net unrealized appreciation for all securities based on tax cost was $2,097,941. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $3,741,864 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $1,643,923.
(a) Principal amount stated in US dollars unless otherwise noted.
(b) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2010 amounted to $116,902, which is 0.2% of net assets.
(c) Delayed delivery security included.
(d) Government-backed debt issued by financial companies or government sponsored enterprises.
(e) At December 31, 2010, this security has been pledged, in whole or in part, to cover initial margin requirements for open futures contracts.
(f) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(g) Represents collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates.
144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
FDIC: Federal Deposit Insurance Corp.
Interest Only: Interest Only (IO) bonds represent the "interest only" portion of payments on a pool of underlying mortgages or mortgage-backed securities. IO securities are subject to prepayment risk of the pool of underlying mortgages.
PIK: Denotes that all or a portion of the income is paid in-kind.
REG S: Securities sold under Regulation S may not be offered, sold or delivered within the United States or to, or for the account or benefit of, US persons, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933.
REIT: Real Estate Investment Trust
At December 31, 2010, open futures contracts purchased were as follows:
| Futures | Currency | Expiration Date | | Contracts | | | Notional Value ($) | | | Unrealized Appreciation/ (Depreciation) ($) | |
| 10 Year Australian Treasury Bond | AUD | 3/15/2011 | | | 34 | | | | 3,592,345 | | | | 26,808 | |
| 10 Year US Treasury Note | USD | 3/22/2011 | | | 47 | | | | 5,660,563 | | | | (153,853 | ) |
| 2 Year US Treasury Note | USD | 3/31/2011 | | | 74 | | | | 16,199,063 | | | | 11,578 | |
| DAX Index | EUR | 3/18/2011 | | | 1 | | | | 231,414 | | | | (4,326 | ) |
| Federal Republic of Germany Euro-Bund | EUR | 3/8/2011 | | | 7 | | | | 1,172,162 | | | | 10,009 | |
| Federal Republic of Germany Euro-Schatz | EUR | 3/8/2011 | | | 5 | | | | 728,317 | | | | (811 | ) |
| FTSE 100 Index | GBP | 3/18/2011 | | | 6 | | | | 551,266 | | | | 5,332 | |
| Hang Seng Index | HKD | 1/28/2011 | | | 1 | | | | 148,080 | | | | 1,988 | |
| IBEX 35 Index | EUR | 1/21/2011 | | | 1 | | | | 130,837 | | | | (3,337 | ) |
| S&P 500 E-Mini Index | USD | 3/18/2011 | | | 6 | | | | 375,900 | | | | 5,130 | |
| TOPIX Index | JPY | 3/11/2011 | | | 3 | | | | 331,075 | | | | 6,577 | |
| United Kingdom Long Gilt Bond | GBP | 3/29/2011 | | | 16 | | | | 2,980,748 | | | | (5,477 | ) |
| Total net unrealized depreciation | | | | (100,382 | ) |
At December 31, 2010, open futures contracts sold were as follows:
| Futures | Currency | Expiration Date | | Contracts | | | Notional Value ($) | | | Unrealized Appreciation/ (Depreciation) ($) | |
| 10 Year Canadian Government Bond | CAD | 3/22/2011 | | | 19 | | | | 2,341,989 | | | | (9,848 | ) |
| 10 Year Japanese Government Bond | JPY | 3/10/2011 | | | 6 | | | | 10,391,181 | | | | (50,690 | ) |
| AEX Index | EUR | 1/21/2011 | | | 2 | | | | 189,648 | | | | (1,550 | ) |
| ASX SPI 200 Index | AUD | 3/17/2011 | | | 3 | | | | 362,838 | | | | 3,375 | |
| CAC 40 Index | EUR | 1/21/2011 | | | 3 | | | | 152,719 | | | | 3,668 | |
| DJ Euro Stoxx 50 Index | EUR | 3/18/2011 | | | 11 | | | | 410,698 | | | | 10,437 | |
| Federal Republic of Germany Euro-Bund | EUR | 3/8/2011 | | | 42 | | | | 7,032,973 | | | | 45,686 | |
| FTSE MIB Index | EUR | 3/18/2011 | | | 2 | | | | 269,999 | | | | 7,416 | |
| Russell 2000 E-Mini Index | USD | 3/18/2011 | | | 1 | | | | 78,230 | | | | (865 | ) |
| S&P TSX 60 Index | CAD | 3/17/2011 | | | 1 | | | | 154,300 | | | | (2,547 | ) |
| Total net unrealized appreciation | | | | 5,082 | |
At December 31, 2010, open written interest rate option contracts were as follows:
Effective/ Expiration Date | Cash Flows Paid | | Contract Amount | | | Strike Rate (%) | | | Value ($) | | | Premiums Received ($) | | | Unrealized Depreciation ($) | |
Call Option 5/16/2011 5/16/2012 | 30-year USD Swap Rate — 10-year USD Swap Rate | | | 29,000,000 | | | | 0.6 | | | | (35,163 | ) | | | 30,740 | | | | (4,423 | ) |
At December 31, 2010, open credit default swap contracts sold were as follows:
Effective/ Expiration Date | | Notional Amount ($) (i) | | | Fixed Cash Flows Received | | Underlying Debt Obligation/Quality Rating (h) | | Value ($) | | | Upfront Payments Paid/ (Received) ($) | | | Unrealized Appreciation/ (Depreciation) ($) | |
9/21/2009 12/20/2014 | | | 290,000 | 1 | | | 1.0 | % | Berkshire Hathaway Finance Corp., 4.625%, 10/15/2013, AA | | | (1,114 | ) | | | (7,340 | ) | | | 6,226 | |
6/21/2010 9/20/2013 | | | 70,000 | 2 | | | 5.0 | % | Ford Motor Co., 6.5%, 8/1/2018, B | | | 7,023 | | | | 858 | | | | 6,165 | |
6/21/2010 9/20/2015 | | | 90,000 | 3 | | | 5.0 | % | Ford Motor Co., 6.5%, 8/1/2018, B | | | 10,162 | | | | (1,604 | ) | | | 11,766 | |
3/22/2010 6/20/2015 | | | 290,000 | 4 | | | 1.0 | % | Freeport-McMoRan Copper & Gold, Inc., 8.375%, 4/1/2017, BBB- | | | (138 | ) | | | (1,646 | ) | | | 1,508 | |
9/20/2010 12/20/2015 | | | 1,630,000 | 5 | | | 1.0 | % | Markit iTraxx SovX Western Europe | | | (78,525 | ) | | | (50,148 | ) | | | (28,377 | ) |
| Total net unrealized depreciation | | | | (2,712 | ) |
(h) The quality ratings represent the lower of Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") credit ratings and are unaudited.
(i) The maximum potential amount of future undiscounted payments that the Fund could be required to make under a credit default swap contract would be the notional amount of the contract. These potential amounts would be partially offset by any recovery values of the referenced debt obligation or net amounts received from the settlement of buy protection credit default swap contracts entered into by the Fund for the same referenced debt obligation.
At December 31, 2010, open interest rate swaps contracts were as follows:
| Effective/ Expiration Date | | Notional Amount ($) | | Cash Flows Paid by the Fund | Cash Flows Received by the Fund | | Value ($) | | | Upfront Payments Paid ($) | | | Unrealized Depreciation ($) | |
10/27/2010 10/27/2020 | | | 1,500,000 | 4 | Fixed — 4.12% | Floating — LIBOR | | | (109,121 | ) | | | 525 | | | | (109,646 | ) |
11/24/2010 11/24/2020 | | | 1,300,000 | 6 | Fixed — 3.96% | Floating — LIBOR | | | (71,822 | ) | | | 591 | | | | (72,413 | ) |
10/28/2010 10/28/2025 | | | 140,000 | 4 | Fixed — 4.138% | Floating — LIBOR | | | (4,412 | ) | | | — | | | | (4,412 | ) |
11/1/2010 11/1/2025 | | | 240,000 | 6 | Fixed — 4.292% | Floating — LIBOR | | | (21,668 | ) | | | — | | | | (21,668 | ) |
11/12/2010 11/12/2025 | | | 280,000 | 4 | Fixed — 4.285% | Floating — LIBOR | | | (8,155 | ) | | | — | | | | (8,155 | ) |
11/15/2010 11/15/2025 | | | 280,000 | 6 | Fixed — 4.585% | Floating — LIBOR | | | (23,555 | ) | | | — | | | | (23,555 | ) |
11/16/2010 11/16/2025 | | | 140,000 | 4 | Fixed — 4.584% | Floating — LIBOR | | | (2,817 | ) | | | — | | | | (2,817 | ) |
11/19/2010 11/19/2025 | | | 140,000 | 6 | Fixed — 4.784% | Floating — LIBOR | | | (11,110 | ) | | | — | | | | (11,110 | ) |
11/23/2010 11/23/2025 | | | 70,000 | 4 | Fixed — 4.834% | Floating — LIBOR | | | (924 | ) | | | — | | | | (924 | ) |
| Total unrealized depreciation | | | | (254,700 | ) |
At December 31, 2010, open total return swap contracts were as follows:
Effective/ Expiration Date | | Notional Amount ($) | | | Fixed Cash Flows Paid | | Reference Entity | | Value ($) | | | Upfront Payment Paid ($) | | | Unrealized Appreciation ($) | |
5/28/2010 6/1/2012 | | | 2,800,000 | 2 | | | 0.45 | % | Global Interest Rate Strategy Index | | | 4,545 | | | | 1,867 | | | | 2,678 | |
Counterparties:
1 JPMorgan Chase Securities, Inc.
2 Citigroup, Inc.
3 Bank of America
4 Morgan Stanley
5 The Goldman Sachs & Co.
6 Barclays Bank PLC
LIBOR: London InterBank Offered Rate
At December 31, 2010, the Fund had the following open forward foreign currency exchange contracts:
| Contracts to Deliver | | In Exchange For | | Settlement Date | | Unrealized Appreciation ($) | | Counterparty |
| EUR | | | 1,510,000 | | USD | | | 2,091,391 | | 1/14/2011 | | | 69,078 | | UBS AG |
| USD | | | 1,740,512 | | CAD | | | 1,753,000 | | 1/25/2011 | | | 21,681 | | Bank of New York Mellon Corp. |
| USD | | | 1,325,283 | | NOK | | | 7,858,000 | | 1/25/2011 | | | 19,708 | | Bank of New York Mellon Corp. |
| USD | | | 3,376,310 | | AUD | | | 3,420,000 | | 1/25/2011 | | | 109,775 | | UBS AG |
| USD | | | 1,413,474 | | SEK | | | 9,637,000 | | 1/25/2011 | | | 18,182 | | HSBC Bank USA |
| USD | | | 509,540 | | JPY | | | 42,741,000 | | 1/25/2011 | | | 17,047 | | Royal Bank of Scotland PLC |
| GBP | | | 981,000 | | USD | | | 1,532,749 | | 1/25/2011 | | | 3,583 | | Royal Bank of Scotland PLC |
| Total unrealized appreciation | | | | | 259,054 | |
| Contracts to Deliver | | In Exchange For | | Settlement Date | | Unrealized Depreciation ($) | | Counterparty |
| CAD | | | 236,000 | | USD | | | 235,609 | | 1/14/2011 | | | (1,604 | ) | Credit Suisse |
| EUR | | | 200,000 | | USD | | | 262,132 | | 1/14/2011 | | | (5,724 | ) | Morgan Stanley |
| EUR | | | 368,900 | | USD | | | 488,408 | | 1/20/2011 | | | (4,535 | ) | JPMorgan Chase Securities, Inc. |
| EUR | | | 170,000 | | USD | | | 226,727 | | 1/25/2011 | | | (434 | ) | Royal Bank of Scotland PLC |
| NZD | | | 2,974,000 | | USD | | | 2,212,269 | | 1/25/2011 | | | (100,137 | ) | UBS AG |
| CHF | | | 2,415,000 | | USD | | | 2,514,983 | | 1/25/2011 | | | (68,734 | ) | HSBC Bank USA |
| GBP | | | 925,000 | | USD | | | 1,440,234 | | 2/22/2011 | | | (1,967 | ) | Morgan Stanley |
| JPY | | | 195,000,000 | | USD | | | 2,325,665 | | 2/22/2011 | | | (79,250 | ) | Morgan Stanley |
| Total unrealized depreciation | | | | | (262,385 | ) |
| Currency Abbreviations |
ARS Argentine Peso AUD Australian Dollar BRL Brazilian Real CAD Canadian Dollar CHF Swiss Franc EUR Euro GBP British Pound HKD Hong Kong Dollar JPY Japanese Yen NOK Norwegian Krone NZD New Zealand Dollar SEK Swedish Krona USD United States Dollar |
For information on the Fund's policy and additional disclosures regarding option contracts, futures contracts, interest rate swap contracts, credit default swap contracts, total return swap contracts and forward foreign currency exchange contracts, please refer to Note B in the accompanying Notes to Financial Statements.
Fair Value Measurements
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
| Assets | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | |
| Fixed Income Investments (j) | | | | | | | | | | | | |
| Corporate Bonds | | $ | — | | | $ | 47,884,841 | | | $ | 543,619 | | | $ | 48,428,460 | |
| Mortgage-Backed Securities Pass-Throughs | | | — | | | | 4,144,688 | | | | — | | | | 4,144,688 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 2,316,960 | | | | — | | | | 2,316,960 | |
| Collateralized Mortgage Obligations | | | — | | | | 2,594,373 | | | | — | | | | 2,594,373 | |
| Government & Agency Obligations | | | — | | | | 12,645,213 | | | | 284,461 | | | | 12,929,674 | |
| Loan Participations and Assignments | | | — | | | | 2,820,685 | | | | — | | | | 2,820,685 | |
| Preferred Securities | | | — | | | | 565,345 | | | | — | | | | 565,345 | |
| Common Stocks | | | 15,851 | | | | — | | | | 1,858 | | | | 17,709 | |
| Preferred Stock | | | — | | | | 103,967 | | | | — | | | | 103,967 | |
| Warrants | | | — | | | | — | | | | 972 | | | | 972 | |
| Other Investments | | | — | | | | — | | | | 4,000 | | | | 4,000 | |
| Short-Term Investments | | | 4,391,860 | | | | 98,978 | | | | — | | | | 4,490,838 | |
| Derivatives (k) | | | — | | | | 287,397 | | | | 467 | | | | 287,864 | |
| Total | | $ | 4,407,711 | | | $ | 73,462,447 | | | $ | 835,377 | | | $ | 78,705,535 | |
| Liabilities | | | | | | | | | | | | | | | | |
| Derivatives (k) | | $ | (95,300 | ) | | $ | (545,462 | ) | | $ | (35,163 | ) | | $ | (675,925 | ) |
| Total | | $ | (95,300 | ) | | $ | (545,462 | ) | | $ | (35,163 | ) | | $ | (675,925 | ) |
There have been no significant transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2010.
(j) See Investment Portfolio for additional detailed categorizations.
(k) Derivatives include value of open options purchased, unrealized appreciation (depreciation) on open futures contracts, credit default swap contracts, interest rate swap contracts, total return swap contracts, forward foreign currency exchange contracts and written options, at value.
Level 3 Reconciliation
The following is a reconciliation of the Fund's Level 3 investments for which significant unobservable inputs were used in determining value:
| | | Corporate Bonds | | | Asset-Backed | | | Government & Agency Obligations | | | Loan Participations and Assignments | | | Common Stocks | |
| Balance as of December 31, 2009 | | $ | 1,399,392 | | | $ | 600,572 | | | $ | — | | | $ | 72,237 | | | $ | 1,749 | |
| Total realized gain (loss) | | | — | | | | 57,024 | | | | — | | | | 3,736 | | | | — | |
| Change in unrealized appreciation (depreciation) | | | 141,636 | | | | (25,710 | ) | | | (5,539 | ) | | | 7,898 | | | | (12 | ) |
| Amortization premium/ discount | | | 16,809 | | | | — | | | | — | | | | 407 | | | | — | |
| Net purchases (sales) | | | (1,000,000 | ) | | | (631,886 | ) | | | 290,000 | | | | (84,278 | ) | | | 121 | |
| Transfers into Level 3 | | | 8,402 | (l) | | | — | | | | — | | | | — | | | | — | |
| Transfers (out) of Level 3 | | | (22,620 | ) (m) | | | — | | | | — | | | | — | | | | — | |
| Balance as of December 31, 2010 | | $ | 543,619 | | | $ | — | | | $ | 284,461 | | | $ | — | | | $ | 1,858 | |
| Net change in unrealized appreciation (depreciation) from investments still held as of December 31, 2010 | | $ | (59,208 | ) | | $ | — | | | $ | (5,539 | ) | | $ | — | | | $ | (12 | ) |
| | | Warrants | | | Convertible Preferred Stocks | | | Call Options Purchased | | | Other Investments | | | Total | | | Written Options | |
| Balance as of December 31, 2009 | | $ | 625 | | | $ | 0 | | | $ | — | | | $ | — | | | $ | 2,074,575 | | | $ | — | |
| Total realized gain (loss) | | | — | | | | (4,191 | ) | | | — | | | | — | | | | 56,569 | | | | — | |
| Change in unrealized appreciation (depreciation) | | | 347 | | | | 4,191 | | | | (53,993 | ) | | | 0 | | | | 68,818 | | | | (4,423 | ) |
| Amortization premium/ discount | | | — | | | | — | | | | — | | | | — | | | | 17,216 | | | | — | |
| Net purchases (sales) | | | — | | | | 0 | | | | 54,460 | | | | 4,000 | | | | (1,367,583 | ) | | | (30,740 | ) |
| Transfers into Level 3 | | | — | | | | — | | | | — | | | | — | | | | 8,402 | | | | — | |
| Transfers (out) of Level 3 | | | | — | | | — | | | | — | | | | — | | | | (22,620 | ) | | | — | |
| Balance as of December 31, 2010 | | $ | 972 | | | $ | — | | | $ | 467 | | | $ | 4,000 | | | $ | 835,377 | | | $ | (35,163 | ) |
| Net change in unrealized appreciation (depreciation) from investments still held as of December 31, 2010 | | $ | 972 | | | $ | — | | | $ | (53,993 | ) | | $ | 0 | | | $ | (117,780 | ) | | $ | (4,423 | ) |
Transfers between price levels are recognized at the beginning of the reporting period.
(l) The investment was transferred from Level 2 to Level 3 because of the lack of observable market data due to a decrease in market activity.
(m) The investment was transferred from Level 3 to Level 2 as a result of the availability of a pricing source supported by observable inputs.
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities
| as of December 31, 2010 | |
| Assets | |
Investments: Investments in unaffiliated securities, at value (cost $71,859,832) — including $116,902 of securities loaned | | $ | 74,026,278 | |
| Investment in Daily Assets Fund Institutional (cost $122,734)* | | | 122,734 | |
| Investment in Central Cash Management Fund (cost $4,269,126) | | | 4,269,126 | |
| Total investments, at value (cost $76,251,692) | | | 78,418,138 | |
| Cash | | | 185,479 | |
| Foreign currency, at value (cost $122,513) | | | 124,704 | |
| Deposit with brokers for open futures contracts | | | 918,646 | |
| Receivable for investments sold | | | 104,426 | |
| Interest receivable | | | 1,081,310 | |
| Upfront payments paid on swaps | | | 3,841 | |
| Unrealized appreciation on open swap contracts | | | 28,343 | |
| Unrealized appreciation on open forward foreign currency exchange contracts | | | 259,054 | |
| Foreign taxes recoverable | | | 4,684 | |
| Other assets | | | 447 | |
| Total assets | | | 81,129,072 | |
| Liabilities | |
| Payable for investments purchased | | | 280,508 | |
| Payable for investments purchased — delayed delivery securities | | | 4,097,602 | |
| Payable upon return of securities loaned | | | 122,734 | |
| Payable for daily variation margin on open futures contracts | | | 86,632 | |
| Payable for Fund shares redeemed | | | 64,777 | |
| Options written, at value (premiums received $30,740) | | | 35,163 | |
| Upfront payments received on swaps | | | 60,738 | |
| Unrealized depreciation on open swap contracts | | | 283,077 | |
| Unrealized depreciation on open forward foreign currency exchange contracts | | | 262,385 | |
| Accrued management fee | | | 19,509 | |
| Other accrued expenses and payables | | | 109,093 | |
| Total liabilities | | | 5,422,218 | |
| Net assets, at value | | $ | 75,706,854 | |
| Net Assets Consist of | |
| Undistributed net investment income | | | 4,058,018 | |
Net unrealized appreciation (depreciation) on: Investments | | | 2,166,446 | |
| Swap contracts | | | (254,734 | ) |
| Written options | | | (4,423 | ) |
| Futures | | | (95,300 | ) |
| Foreign currency | | | 8,924 | |
| Accumulated net realized gain (loss) | | | (944,838 | ) |
| Paid-in capital | | | 70,772,761 | |
| Net assets, at value | | $ | 75,706,854 | |
Class A Net Asset Value, offering and redemption price per share ($75,706,854 ÷ 6,329,747 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | | $ | 11.96 | |
* Represents collateral on securities loaned.
The accompanying notes are an integral part of the financial statements.
Statement of Operations
| for the year ended December 31, 2010 | |
| Investment Income | |
Income: Interest (net of foreign taxes withheld of $164) | | $ | 4,821,293 | |
| Income distributions — Central Cash Management Fund | | | 10,113 | |
| Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates | | | 2,499 | |
| Total income | | | 4,833,905 | |
Expenses: Management fee | | | 410,735 | |
| Administration fee | | | 74,679 | |
| Services to shareholders | | | 1,730 | |
| Custodian fee | | | 70,329 | |
| Legal fees | | | 17,266 | |
| Audit and tax fees | | | 66,284 | |
| Trustees' fees and expenses | | | 5,347 | |
| Reports to shareholders | | | 17,398 | |
| Other | | | 42,290 | |
| Total expenses before expense reductions | | | 706,058 | |
| Expense reductions | | | (67,414 | ) |
| Total expenses after expense reductions | | | 638,644 | |
| Net investment income (loss) | | | 4,195,261 | |
| Realized and Unrealized Gain (Loss) | |
Net realized gain (loss) from: Investments | | | 1,957,117 | |
| Swap contracts | | | (37,558 | ) |
| Futures | | | 59,063 | |
| Foreign currency | | | 404,118 | |
| | | | 2,382,740 | |
Change in net unrealized appreciation (depreciation) on: Investments | | | 1,121,385 | |
| Swap contracts | | | (309,862 | ) |
| Written options | | | (4,423 | ) |
| Futures | | | (1,691 | ) |
| Foreign currency | | | (282,893 | ) |
| | | | 522,516 | |
| Net gain (loss) | | | 2,905,256 | |
| Net increase (decrease) in net assets resulting from operations | | $ | 7,100,517 | |
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Net Assets
| | | Years Ended December 31, | |
| Increase (Decrease) in Net Assets | | 2010 | | | 2009 | |
Operations: Net investment income | | $ | 4,195,261 | | | $ | 4,244,300 | |
| Net realized gain (loss) | | | 2,382,740 | | | | 564,606 | |
| Change in net unrealized appreciation (depreciation) | | | 522,516 | | | | 9,572,764 | |
| Net increase (decrease) in net assets resulting from operations | | | 7,100,517 | | | | 14,381,670 | |
Distributions to shareholders from: Net investment income: Class A | | | (4,806,010 | ) | | | (3,708,667 | ) |
Fund share transactions: Class A Proceeds from shares sold | | | 11,245,997 | | | | 9,943,530 | |
Shares converted* | | | — | | | | 44,195 | |
| Reinvestment of distributions | | | 4,806,010 | | | | 3,708,667 | |
| Payments for shares redeemed | | | (16,514,815 | ) | | | (23,212,559 | ) |
| Net increase (decrease) in net assets from Class A share transactions | | | (462,808 | ) | | | (9,516,167 | ) |
Class B Shares converted* | | | — | | | | (44,195 | ) |
| Payments for shares redeemed | | | — | | | | (151 | ) |
| Net increase (decrease) in net assets from Class B share transactions | | | — | | | | (44,346 | ) |
| Increase (decrease) in net assets | | | 1,831,699 | | | | 1,112,490 | |
| Net assets at beginning of period | | | 73,875,155 | | | | 72,762,665 | |
| Net assets at end of period (including undistributed net investment income of $4,058,018 and $4,333,267, respectively) | | $ | 75,706,854 | | | $ | 73,875,155 | |
| Other Information | |
Class A Shares outstanding at beginning of period | | | 6,362,456 | | | | 7,250,530 | |
| Shares sold | | | 957,272 | | | | 943,043 | |
| Shares converted* | | | — | | | | 4,547 | |
| Shares issued to shareholders in reinvestment of distributions | | | 420,473 | | | | 392,867 | |
| Shares redeemed | | | (1,410,454 | ) | | | (2,228,531 | ) |
| Net increase (decrease) in Class A shares | | | (32,709 | ) | | | (888,074 | ) |
| Shares outstanding at end of period | | | 6,329,747 | | | | 6,362,456 | |
Class B Shares outstanding at beginning of period | | | — | | | | 4,594 | |
| Shares converted* | | | — | | | | (4,579 | ) |
| Shares redeemed | | | — | | | | (15 | ) |
| Net increase (decrease) in Class B shares | | | — | | | | (4,594 | ) |
| Shares outstanding at end of period | | | — | | | | — | |
* On March 6, 2009, Class B shares converted into Class A shares.
The accompanying notes are an integral part of the financial statements.
Financial Highlights
Class A Years Ended December 31, | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| Selected Per Share Data | |
| Net asset value, beginning of period | | $ | 11.61 | | | $ | 10.03 | | | $ | 11.70 | | | $ | 11.80 | | | $ | 11.50 | |
Income (loss) from investment operations: Net investment incomea | | | .66 | | | | .63 | | | | .55 | | | | .63 | | | | .62 | |
| Net realized and unrealized gain (loss) | | | .47 | | | | 1.50 | | | | (1.38 | ) | | | (.01 | ) | | | .36 | |
| Total from investment operations | | | 1.13 | | | | 2.13 | | | | (.83 | ) | | | .62 | | | | .98 | |
Less distributions from: Net investment income | | | (.78 | ) | | | (.55 | ) | | | (.69 | ) | | | (.72 | ) | | | (.57 | ) |
| Net realized gains | | | — | | | | — | | | | (.15 | ) | | | — | | | | (.11 | ) |
| Total distributions | | | (.78 | ) | | | (.55 | ) | | | (.84 | ) | | | (.72 | ) | | | (.68 | ) |
| Net asset value, end of period | | $ | 11.96 | | | $ | 11.61 | | | $ | 10.03 | | | $ | 11.70 | | | $ | 11.80 | |
| Total Return (%) | | | 10.05 | b | | | 22.73 | b | | | (7.75 | )b | | | 5.43 | b | | | 8.98 | |
| Ratios to Average Net Assets and Supplemental Data | |
| Net assets, end of period ($ millions) | | | 76 | | | | 74 | | | | 73 | | | | 100 | | | | 86 | |
| Ratio of expenses before expense reductions (%) | | | .95 | | | | .86 | | | | .89 | | | | .84 | | | | .85 | |
| Ratio of expenses after expense reductions (%) | | | .86 | | | | .80 | | | | .87 | | | | .83 | | | | .85 | |
| Ratio of net investment income (%) | | | 5.62 | | | | 5.96 | | | | 5.06 | | | | 5.50 | | | | 5.47 | |
| Portfolio turnover rate (%) | | | 167 | | | | 370 | | | | 234 | | | | 147 | | | | 143 | |
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. | |
Performance Summary December 31, 2010
DWS Strategic Value VIP
All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce ret urns. While all share classes have the same underlying portfolio, their performance will differ.
The gross expense ratios of the Fund, as stated in the fee table of the prospectus dated May 1, 2010 are 0.80% and 1.11% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Risk Considerations
Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. Stocks may decline in value. See the prospectus for details.
Fund returns for all periods shown reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.
| Growth of an Assumed $10,000 Investment in DWS Strategic Value VIP |
[] DWS Strategic Value VIP — Class A [] S&P 500® Index | The Standard & Poor's 500® (S&P 500) Index is an unmanaged, capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index. |
| |
| Yearly periods ended December 31 | |
| Comparative Results | |
| DWS Strategic Value VIP | | 1-Year | | | 3-Year | | | 5-Year | | | 10-Year | |
| Class A | Growth of $10,000 | | $ | 11,252 | | | $ | 7,617 | | | $ | 8,875 | | | $ | 12,012 | |
| Average annual total return | | | 12.52 | % | | | -8.68 | % | | | -2.36 | % | | | 1.85 | % |
| S&P 500 Index | Growth of $10,000 | | $ | 11,506 | | | $ | 9,168 | | | $ | 11,199 | | | $ | 11,507 | |
| Average annual total return | | | 15.06 | % | | | -2.86 | % | | | 2.29 | % | | | 1.41 | % |
| DWS Strategic Value VIP | | 1-Year | | | 3-Year | | | 5-Year | | | Life of Class* | |
| Class B | Growth of $10,000 | | $ | 11,213 | | | $ | 7,543 | | | $ | 8,721 | | | $ | 12,809 | |
| Average annual total return | | | 12.13 | % | | | -8.97 | % | | | -2.70 | % | | | 2.95 | % |
| S&P 500 Index | Growth of $10,000 | | $ | 11,506 | | | $ | 9,168 | | | $ | 11,199 | | | $ | 15,038 | |
| Average annual total return | | | 15.06 | % | | | -2.86 | % | | | 2.29 | % | | | 4.92 | % |
The growth of $10,000 is cumulative.
* The Fund commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.
Information About Your Fund's Expenses
DWS Strategic Value VIP
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Fund expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2010 to December 31, 2010).
The tables illustrate your Fund's expenses in two ways:
•Actual Fund Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Fund using the Fund's actual return during the period. To estimate the expenses 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 "Expenses Paid per $1,000" line under the share class you hold.
• Hypothetical 5% Fund Return. This helps you to compare your Fund's ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
Expenses and Value of a $1,000 Investment for the six months ended December 31, 2010 | |
| Actual Fund Return | | Class A | | | Class B | |
| Beginning Account Value 7/1/10 | | $ | 1,000.00 | | | $ | 1,000.00 | |
| Ending Account Value 12/31/10 | | $ | 1,226.20 | | | $ | 1,223.70 | |
| Expenses Paid per $1,000* | | $ | 4.71 | | | $ | 6.56 | |
| Hypothetical 5% Fund Return | | Class A | | | Class B | |
| Beginning Account Value 7/1/10 | | $ | 1,000.00 | | | $ | 1,000.00 | |
| Ending Account Value 12/31/10 | | $ | 1,020.97 | | | $ | 1,019.31 | |
| Expenses Paid per $1,000* | | $ | 4.28 | | | $ | 5.96 | |
* Expenses are equal to the Fund's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.
| Annualized Expense Ratios | Class A | | Class B | |
| DWS Variable Series II — DWS Strategic Value VIP | .84% | | 1.17% | |
For more information, please refer to the Fund's prospectus.
These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
Management Summary December 31, 2010
DWS Strategic Value VIP
The US equity market performed well during the past year, gaining 15.06% as measured by the Fund's benchmark, the Standard & Poor's 500® (S&P 500) Index. The Class A shares of the Fund returned 12.52% (unadjusted for contract charges).
The most important factor in the Fund's underperformance was the pro-cyclical bias we held throughout the year. By "pro-cyclical," we mean that we tilted the Fund toward the areas of the market most likely to benefit from an improving economy. This approach worked well during the first three months of the Fund's fiscal year, and again in the fourth quarter rally. However, our pro-cyclical tilt proved to be a significant negative in the April-August 2010 interval, during which elevated concerns about the possibility of a "double-dip" recession weighed heavily on the more economically sensitive areas of the market. Unfortunately, this more than offset the outperformance we generated during the other parts of the year. Other important factors in our underperformance included our underweight in the consumer discretionary sector and our relatively conservative positioning in technology.1
On the plus side, we added value in the energy sector, thanks to both an overweight position and strong stock selection. Our stock selection in the health care, consumer staples and industrials sectors also was additive to performance.
We are disappointed that the Fund failed to keep pace with the benchmark during the past year, but we remain confident in its positioning as we head into 2011. We are focused on owning stocks with high free cash flow, a metric that has correlated with outperformance for individual stocks over time. Free cash flow strength opens the door for a variety of positive developments, including increased dividends, share buybacks and the potential to be acquired at a premium by a competitor. While high free cash flows did not necessarily lead to outperformance for individual stocks during the past year, we believe that the best time to add exposure to a time-tested investment style is when it is out of favor.
In the wake of a financial shock as large as what we experienced in 2008-2009, the process of recovery is bound to be uneven. The result, inevitably, is periodic instability such as what we witnessed in the April-August 2010 time frame.
Thomas Schuessler, PhD
Volker Dosch
Oliver Pfeil, PhD
Portfolio Managers
The Standard & Poor's 500 (S&P 500) Index is an unmanaged, capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.
1 "Overweight" means the Fund holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the Fund holds a lower weighting.
Portfolio management market commentary is as of December 31, 2010, and may not come to pass. This information is subject to change at any time based on market and other conditions. Past performance does not guarantee future results. Current and future portfolio holdings are subject to risk.
Portfolio Summary
DWS Strategic Value VIP
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | 12/31/10 | 12/31/09 |
| | | |
| Common Stocks | 98% | 98% |
| Cash Equivalents | 2% | 2% |
| | 100% | 100% |
Sector Diversification (As a % of Common Stocks) | 12/31/10 | 12/31/09 |
| | | |
| Energy | 22% | 13% |
| Financials | 16% | 16% |
| Information Technology | 15% | 15% |
| Industrials | 11% | 12% |
| Consumer Discretionary | 10% | 7% |
| Health Care | 9% | 14% |
| Consumer Staples | 7% | 12% |
| Telecommunication Services | 4% | 6% |
| Materials | 3% | 4% |
| Utilities | 3% | 1% |
| | 100% | 100% |
Asset allocation and sector diversification are subject to change.
For more complete details about the Fund's investment portfolio, see page 251.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
Investment Portfolio December 31, 2010
DWS Strategic Value VIP
| | | Shares | | | Value ($) | |
| | | | |
| Common Stocks 98.3% | |
| Consumer Discretionary 10.0% | |
| Automobiles 1.0% | |
| General Motors Co.* | | | 73,980 | | | | 2,726,903 | |
| Hotels Restaurants & Leisure 2.2% | |
| McDonald's Corp. | | | 62,115 | | | | 4,767,947 | |
| MGM Resorts International* (a) | | | 80,000 | | | | 1,188,000 | |
| | | | | | | | 5,955,947 | |
| Household Durables 0.4% | |
| Newell Rubbermaid, Inc. | | | 60,000 | | | | 1,090,800 | |
| Leisure Equipment & Products 0.8% | |
| Mattel, Inc. | | | 87,213 | | | | 2,217,826 | |
| Media 1.6% | |
| Time Warner, Inc. | | | 131,875 | | | | 4,242,419 | |
| Multiline Retail 1.5% | |
| Target Corp. | | | 64,560 | | | | 3,881,993 | |
| Specialty Retail 1.1% | |
| Bed Bath & Beyond, Inc.* | | | 30,000 | | | | 1,474,500 | |
| Lowe's Companies, Inc. | | | 55,829 | | | | 1,400,191 | |
| | | | | | | | 2,874,691 | |
| Textiles, Apparel & Luxury Goods 1.4% | |
| VF Corp. (a) | | | 43,799 | | | | 3,774,598 | |
| Consumer Staples 7.0% | |
| Beverages 1.5% | |
| PepsiCo, Inc. | | | 61,068 | | | | 3,989,572 | |
| Food & Staples Retailing 2.0% | |
| CVS Caremark Corp. | | | 88,016 | | | | 3,060,316 | |
| Safeway, Inc. (a) | | | 108,536 | | | | 2,440,975 | |
| | | | | | | | 5,501,291 | |
| Tobacco 3.5% | |
| Altria Group, Inc. | | | 205,453 | | | | 5,058,253 | |
| Philip Morris International, Inc. | | | 73,109 | | | | 4,279,070 | |
| | | | | | | | 9,337,323 | |
| Energy 21.4% | |
| Energy Equipment & Services 5.6% | |
| Ensco PLC (ADR) | | | 73,117 | | | | 3,902,985 | |
| National Oilwell Varco, Inc. | | | 43,893 | | | | 2,951,804 | |
| Transocean Ltd.* (a) | | | 58,269 | | | | 4,050,278 | |
| Weatherford International Ltd.* (a) | | | 181,327 | | | | 4,134,256 | |
| | | | | | | | 15,039,323 | |
| Oil, Gas & Consumable Fuels 15.8% | |
| Apache Corp. | | | 48,056 | | | | 5,729,717 | |
| Chevron Corp. | | | 65,658 | | | | 5,991,292 | |
| ConocoPhillips | | | 114,579 | | | | 7,802,830 | |
| Exxon Mobil Corp. | | | 43,803 | | | | 3,202,875 | |
| Hess Corp. | | | 80,468 | | | | 6,159,021 | |
| Marathon Oil Corp. | | | 131,664 | | | | 4,875,518 | |
| Nexen, Inc. | | | 97,451 | | | | 2,231,628 | |
| Occidental Petroleum Corp. | | | 29,367 | | | | 2,880,903 | |
| Williams Companies, Inc. | | | 135,158 | | | | 3,341,106 | |
| | | | | | | | 42,214,890 | |
| Financials 15.3% | |
| Capital Markets 1.8% | |
| Janus Capital Group, Inc. | | | 80,000 | | | | 1,037,600 | |
| Legg Mason, Inc. | | | 30,000 | | | | 1,088,100 | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| The Goldman Sachs Group, Inc. | | | 16,213 | | | | 2,726,378 | |
| | | | | | | | 4,852,078 | |
| Commercial Banks 3.0% | |
| Royal Bank of Canada | | | 50,000 | | | | 2,618,000 | |
| Wells Fargo & Co. | | | 172,565 | | | | 5,347,789 | |
| | | | | | | | 7,965,789 | |
| Consumer Finance 1.0% | |
| Capital One Financial Corp. (a) | | | 63,978 | | | | 2,722,904 | |
| Diversified Financial Services 5.6% | |
| Citigroup, Inc.* | | | 1,057,545 | | | | 5,002,188 | |
| JPMorgan Chase & Co. | | | 233,319 | | | | 9,897,392 | |
| | | | | | | | 14,899,580 | |
| Insurance 3.9% | |
| Hartford Financial Services Group, Inc. (a) | | | 154,087 | | | | 4,081,765 | |
| Lincoln National Corp. | | | 130,684 | | | | 3,634,322 | |
| MetLife, Inc. | | | 61,167 | | | | 2,718,261 | |
| | | | | | | | 10,434,348 | |
| Thrifts & Mortgage Finance 0.0% | |
| Washington Mutual, Inc.* | | | 1,394,944 | | | | 78,954 | |
| Health Care 8.9% | |
| Biotechnology 0.9% | |
| Amgen, Inc.* | | | 43,291 | | | | 2,376,676 | |
| Health Care Providers & Services 3.5% | |
| Aetna, Inc. | | | 99,770 | | | | 3,043,983 | |
| UnitedHealth Group, Inc. | | | 83,959 | | | | 3,031,759 | |
| WellPoint, Inc.* | | | 58,337 | | | | 3,317,042 | |
| | | | | | | | 9,392,784 | |
| Life Sciences Tools & Services 1.1% | |
| Thermo Fisher Scientific, Inc.* | | | 51,917 | | | | 2,874,125 | |
| Pharmaceuticals 3.4% | |
| Abbott Laboratories | | | 52,809 | | | | 2,530,079 | |
| Mylan, Inc.* | | | 174,984 | | | | 3,697,412 | |
| Novartis AG (ADR) (a) | | | 48,184 | | | | 2,840,447 | |
| | | | | | | | 9,067,938 | |
| Industrials 10.4% | |
| Aerospace & Defense 5.4% | |
| Honeywell International, Inc. | | | 76,520 | | | | 4,067,803 | |
| ITT Corp. (a) | | | 58,665 | | | | 3,057,033 | |
| United Technologies Corp. | | | 94,868 | | | | 7,468,009 | |
| | | | | | | | 14,592,845 | |
| Construction & Engineering 0.9% | |
| URS Corp.* | | | 58,652 | | | | 2,440,510 | |
| Industrial Conglomerates 1.5% | |
| General Electric Co. | | | 226,206 | | | | 4,137,308 | |
| Machinery 1.6% | |
| Deere & Co. | | | 50,053 | | | | 4,156,902 | |
| Road & Rail 1.0% | |
| CSX Corp. | | | 41,068 | | | | 2,653,403 | |
| Information Technology 14.8% | |
| Communications Equipment 1.0% | |
| Cisco Systems, Inc.* | | | 135,000 | | | | 2,731,050 | |
| Computers & Peripherals 3.4% | |
| Hewlett-Packard Co. | | | 179,144 | | | | 7,541,962 | |
| Lexmark International, Inc. "A"* | | | 45,000 | | | | 1,566,900 | |
| | | | | | | | 9,108,862 | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| Electronic Equipment, Instruments & Components 0.5% | |
| Corning, Inc. | | | 70,000 | | | | 1,352,400 | |
| IT Services 2.5% | |
| Accenture PLC "A" | | | 102,451 | | | | 4,967,849 | |
| Computer Sciences Corp. | | | 33,254 | | | | 1,649,398 | |
| | | | | | | | 6,617,247 | |
| Office Electronics 1.6% | |
| Xerox Corp. | | | 373,129 | | | | 4,298,447 | |
| Semiconductors & Semiconductor Equipment 1.0% | |
| Micron Technology, Inc.* (a) | | | 331,290 | | | | 2,656,946 | |
| Software 4.8% | |
| BMC Software, Inc.* | | | 65,869 | | | | 3,105,065 | |
| Microsoft Corp. | | | 354,564 | | | | 9,899,427 | |
| | | | | | | | 13,004,492 | |
| Materials 3.4% | |
| Metals & Mining | |
| Agnico-Eagle Mines Ltd. (a) | | | 21,894 | | | | 1,679,270 | |
| BHP Billiton Ltd. (ADR) (a) | | | 20,000 | | | | 1,858,400 | |
| Freeport-McMoRan Copper & Gold, Inc. | | | 23,244 | | | | 2,791,372 | |
| Kinross Gold Corp. | | | 146,385 | | | | 2,775,459 | |
| | | | | | | | 9,104,501 | |
| Telecommunication Services 4.5% | |
| Diversified Telecommunication Services 2.8% | |
| AT&T, Inc. | | | 146,263 | | | | 4,297,207 | |
| CenturyLink, Inc. (a) | | | 65,928 | | | | 3,043,896 | |
| | | | | | | | 7,341,103 | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| Wireless Telecommunication Services 1.7% | |
| Vodafone Group PLC (ADR) (a) | | | 175,281 | | | | 4,632,677 | |
| Utilities 2.6% | |
| Electric Utilities 0.6% | |
| FirstEnergy Corp. (a) | | | 43,893 | | | | 1,624,919 | |
| Multi-Utilities 2.0% | |
| PG&E Corp. | | | 58,501 | | | | 2,798,688 | |
| Sempra Energy | | | 48,382 | | | | 2,539,087 | |
| | | | | | | | 5,337,775 | |
Total Common Stocks (Cost $225,572,465) | | | | 263,304,139 | |
| | |
| Securities Lending Collateral 14.9% | |
| Daily Assets Fund Institutional, 0.27% (b) (c) (Cost $39,865,520) | | | 39,865,520 | | | | 39,865,520 | |
| | |
| Cash Equivalents 2.1% | |
| Central Cash Management Fund, 0.19% (b) (Cost $5,724,962) | | | 5,724,962 | | | | 5,724,962 | |
| | | % of Net Assets | | | Value ($) | |
| | | | |
Total Investment Portfolio (Cost $271,162,947)+ | | | 115.3 | | | | 308,894,621 | |
| Other Assets and Liabilities, Net | | | (15.3 | ) | | | (40,966,695 | ) |
| Net Assets | | | 100.0 | | | | 267,927,926 | |
* Non-income producing security.
+ The cost for federal income tax purposes was $272,059,584. At December 31, 2010, net unrealized appreciation for all securities based on tax cost was $36,835,037. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $50,605,721 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $13,770,684.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2010 amounted to $38,874,375, which is 14.5% of net assets.
(b) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(c) Represents collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates.
ADR: American Depositary Receipt
Fair Value Measurements
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
| Assets | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | |
| Common Stocks (d) | | $ | 263,304,139 | | | $ | — | | | $ | — | | | $ | 263,304,139 | |
| Short-Term Investments (d) | | | 45,590,482 | | | | — | | | | — | | | | 45,590,482 | |
| Total | | $ | 308,894,621 | | | $ | — | | | $ | — | | | $ | 308,894,621 | |
There have been no significant transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2010.
(d) See Investment Portfolio for additional detailed categorizations.
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities
| as of December 31, 2010 | |
| Assets | |
Investments: Investments in unaffiliated securities, at value (cost $225,572,465) — including $38,874,375 of securities loaned | | $ | 263,304,139 | |
| Investment in Daily Assets Fund Institutional (cost $39,865,520)* | | | 39,865,520 | |
| Investment in Central Cash Management Fund (cost $5,724,962) | | | 5,724,962 | |
| Total investments at value (cost $271,162,947) | | | 308,894,621 | |
| Receivable for Fund shares sold | | | 803 | |
| Dividends receivable | | | 426,895 | |
| Interest receivable | | | 2,761 | |
| Foreign taxes recoverable | | | 2,107 | |
| Other assets | | | 1,438 | |
| Total assets | | | 309,328,625 | |
| Liabilities | |
| Payable upon return of securities loaned | | | 39,865,520 | |
| Payable for Fund shares redeemed | | | 154,974 | |
| Payable for investments purchased | | | 1,085,769 | |
| Accrued management fee | | | 149,132 | |
| Other accrued expenses and payables | | | 145,304 | |
| Total liabilities | | | 41,400,699 | |
| Net assets, at value | | $ | 267,927,926 | |
| Net Assets Consist of | |
| Undistributed net investment income | | | 3,522,893 | |
Net unrealized appreciation (depreciation) on: Investments | | | 37,731,674 | |
| Foreign currency | | | 64 | |
| Accumulated net realized gain (loss) | | | (141,564,092 | ) |
| Paid-in capital | | | 368,237,387 | |
| Net assets, at value | | $ | 267,927,926 | |
Class A Net Asset Value, offering and redemption price per share ($266,068,810 ÷ 32,742,109 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | | $ | 8.13 | |
Class B Net Asset Value, offering and redemption price per share ($1,859,116 ÷ 228,157 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | | $ | 8.15 | |
The accompanying notes are an integral part of the financial statements.
Statement of Operations
| for the year ended December 31, 2010 | |
| Investment Income | |
Income: Dividends (net of foreign taxes withheld of $43,360) | | $ | 5,932,680 | |
| Income distributions — Central Cash Management Fund | | | 19,988 | |
| Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates | | | 32,898 | |
| Total income | | | 5,985,566 | |
Expenses: Management fee | | | 1,756,021 | |
| Administration fee | | | 264,774 | |
| Services to shareholders | | | 20,135 | |
| Distribution service fee (Class B) | | | 4,271 | |
| Record keeping fees (Class B) | | | 940 | |
| Custodian fee | | | 17,404 | |
| Professional fees | | | 65,688 | |
| Trustees' fees and expenses | | | 9,696 | |
| Reports to shareholders | | | 69,429 | |
| Other | | | 13,801 | |
| Total expenses before expense reductions | | | 2,222,159 | |
| Expense reductions | | | (36,423 | ) |
| Total expenses after expense reductions | | | 2,185,736 | |
| Net investment income (loss) | | | 3,799,830 | |
| Realized and Unrealized Gain (Loss) | |
Net realized gain (loss) from: Investments | | | 17,969,063 | |
| Foreign currency | | | 351 | |
| Payments by Affiliates (see Note I) | | | 289,394 | |
| | | | 18,258,808 | |
Change in net unrealized appreciation (depreciation) on: Investments | | | 8,466,003 | |
| Foreign currency | | | 64 | |
| | | | 8,466,067 | |
| Net gain (loss) | | | 26,724,875 | |
| Net increase (decrease) in net assets resulting from operations | | $ | 30,524,705 | |
* Represents collateral on securities loaned.
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Net Assets
| | | Years Ended December 31, | |
| Increase (Decrease) in Net Assets | | 2010 | | | 2009 | |
Operations: Net investment income (loss) | | $ | 3,799,830 | | | $ | 5,183,044 | |
| Net realized gain (loss) | | | 18,258,808 | | | | (11,128,319 | ) |
| Change in net unrealized appreciation (depreciation) | | | 8,466,067 | | | | 65,208,508 | |
| Net increase (decrease) in net assets resulting from operations | | | 30,524,705 | | | | 59,263,233 | |
Distributions to shareholders from: Net investment income: Class A | | | (5,244,990 | ) | | | (12,778,810 | ) |
| Class B | | | (28,738 | ) | | | (81,600 | ) |
| Total distributions | | | (5,273,728 | ) | | | (12,860,410 | ) |
Fund share transactions: Class A Proceeds from shares sold | | | 4,504,378 | | | | 5,209,923 | |
| Reinvestment of distributions | | | 5,244,990 | | | | 12,778,810 | |
| Payments for shares redeemed | | | (50,438,746 | ) | | | (90,662,545 | ) |
| Net increase (decrease) in net assets from Class A share transactions | | | (40,689,378 | ) | | | (72,673,812 | ) |
Class B Proceeds from shares sold | | | 431,727 | | | | 544,525 | |
| Reinvestment of distributions | | | 28,738 | | | | 81,600 | |
| Payments for shares redeemed | | | (713,355 | ) | | | (1,038,519 | ) |
| Net increase (decrease) in net assets from Class B share transactions | | | (252,890 | ) | | | (412,394 | ) |
| Increase (decrease) in net assets | | | (15,691,291 | ) | | | (26,683,383 | ) |
| Net assets at beginning of period | | | 283,619,217 | | | | 310,302,600 | |
| Net assets at end of period (including undistributed net investment income of $3,522,893 and $4,996,440, respectively) | | $ | 267,927,926 | | | $ | 283,619,217 | |
| Other Information | |
Class A Shares outstanding at beginning of period | | | 38,269,626 | | | | 49,642,073 | |
| Shares sold | | | 610,579 | | | | 874,127 | |
| Shares issued to shareholders in reinvestment of distributions | | | 674,163 | | | | 2,576,373 | |
| Shares redeemed | | | (6,812,259 | ) | | | (14,822,947 | ) |
| Net increase (decrease) in Class A shares | | | (5,527,517 | ) | | | (11,372,447 | ) |
| Shares outstanding at end of period | | | 32,742,109 | | | | 38,269,626 | |
Class B Shares outstanding at beginning of period | | | 265,888 | | | | 327,546 | |
| Shares sold | | | 56,800 | | | | 86,408 | |
| Shares issued to shareholders in reinvestment of distributions | | | 3,675 | | | | 16,352 | |
| Shares redeemed | | | (98,206 | ) | | | (164,418 | ) |
| Net increase (decrease) in Class B shares | | | (37,731 | ) | | | (61,658 | ) |
| Shares outstanding at end of period | | | 228,157 | | | | 265,888 | |
The accompanying notes are an integral part of the financial statements.
Financial Highlights
Class A Years Ended December 31, | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| Selected Per Share Data | |
| Net asset value, beginning of period | | $ | 7.36 | | | $ | 6.21 | | | $ | 14.40 | | | $ | 15.02 | | | $ | 13.41 | |
Income (loss) from investment operations: Net investment income (loss)a | | | .11 | | | | .12 | | | | .22 | | | | .29 | | | | .27 | |
| Net realized and unrealized gain (loss) | | | .81 | | | | 1.31 | | | | (5.80 | ) | | | (.56 | ) | | | 2.21 | |
| Total from investment operations | | | .92 | | | | 1.43 | | | | (5.58 | ) | | | (.27 | ) | | | 2.48 | |
Less distributions from: Net investment income | | | (.15 | ) | | | (.28 | ) | | | (.36 | ) | | | (.22 | ) | | | (.28 | ) |
| Net realized gains | | | — | | | | — | | | | (2.25 | ) | | | (.13 | ) | | | (.59 | ) |
| Total distributions | | | (.15 | ) | | | (.28 | ) | | | (2.61 | ) | | | (.35 | ) | | | (.87 | ) |
| Net asset value, end of period | | $ | 8.13 | | | $ | 7.36 | | | $ | 6.21 | | | $ | 14.40 | | | $ | 15.02 | |
| Total Return (%) | | | 12.52 | b | | | 25.30 | b | | | (45.98 | )b | | | (1.86 | ) | | | 18.74 | |
| Ratios to Average Net Assets and Supplemental Data | |
| Net assets, end of period ($ millions) | | | 266 | | | | 282 | | | | 308 | | | | 792 | | | | 992 | |
| Ratio of expenses before expense reductions (%) | | | .84 | | | | .80 | | | | .81 | | | | .78 | | | | .77 | |
| Ratio of expenses after expense reductions(%) | | | .82 | | | | .76 | | | | .80 | | | | .78 | | | | .77 | |
| Ratio of net investment income (%) | | | 1.44 | | | | 1.89 | | | | 2.21 | | | | 1.94 | | | | 1.87 | |
| Portfolio turnover rate (%) | | | 87 | | | | 91 | | | | 28 | | | | 27 | | | | 20 | |
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. | |
Class B Years Ended December 31, | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| Selected Per Share Data | |
| Net asset value, beginning of period | | $ | 7.38 | | | $ | 6.22 | | | $ | 14.41 | | | $ | 15.02 | | | $ | 13.39 | |
Income (loss) from investment operations: Net investment income (loss)a | | | .08 | | | | .10 | | | | .16 | | | | .24 | | | | .22 | |
| Net realized and unrealized gain (loss) | | | .81 | | | | 1.32 | | | | (5.79 | ) | | | (.56 | ) | | | 2.19 | |
| Total from investment operations | | | .89 | | | | 1.42 | | | | (5.63 | ) | | | (.32 | ) | | | 2.41 | |
Less distributions from: Net investment income | | | (.12 | ) | | | (.26 | ) | | | (.31 | ) | | | (.16 | ) | | | (.19 | ) |
| Net realized gains | | | — | | | | — | | | | (2.25 | ) | | | (.13 | ) | | | (.59 | ) |
| Total distributions | | | (.12 | ) | | | (.26 | ) | | | (2.56 | ) | | | (.29 | ) | | | (.78 | ) |
| Net asset value, end of period | | $ | 8.15 | | | $ | 7.38 | | | $ | 6.22 | | | $ | 14.41 | | | $ | 15.02 | |
Total Return (%)b | | | 12.13 | | | | 24.94 | | | | (46.16 | ) | | | (2.19 | ) | | | 18.21 | |
| Ratios to Average Net Assets and Supplemental Data | |
| Net assets, end of period ($ millions) | | | 2 | | | | 2 | | | | 2 | | | | 37 | | | | 191 | |
| Ratio of expenses before expense reduction (%) | | | 1.15 | | | | 1.11 | | | | 1.21 | | | | 1.15 | | | | 1.16 | |
| Ratio of expenses after expense reduction (%) | | | 1.14 | | | | 1.08 | | | | 1.17 | | | | 1.13 | | | | 1.16 | |
| Ratio of net investment income (%) | | | 1.12 | | | | 1.57 | | | | 1.84 | | | | 1.59 | | | | 1.48 | |
| Portfolio turnover rate (%) | | | 87 | | | | 91 | | | | 28 | | | | 27 | | | | 20 | |
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. | |
Performance Summary December 31, 2010
DWS Technology VIP
All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce ret urns. While all share classes have the same underlying portfolio, their performance will differ.
The gross expense ratios of the Fund, as stated in the fee table of the prospectus dated May 1, 2010 are 0.84% and 1.18% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Risk Considerations
Any Fund that concentrates in a particular segment of the market will generally be more volatile than a fund that invests more broadly. This Fund is non-diversified and can take larger positions in fewer issues, increasing its potential risk. Stocks may decline in value. See the prospectus for details.
Fund returns shown during the 3-year, 5-year and 10-year periods reflect a fee waiver and/or expense reimbursement for Class A shares. Without this waiver/reimbursement, returns would have been lower.
| Growth of an Assumed $10,000 Investment in DWS Technology VIP |
[] DWS Technology VIP — Class A [] Russell 1000® Growth Index [] S&P® North American Technology Sector Index | The Russell 1000® Growth Index is an unmanaged index that consists of those stocks in the Russell 1000 Index with higher price-to-book ratios and higher forecasted growth values. The S&P North American Technology Sector Index is the technology subindex of the S&P North American Sector Indices. The S&P North American Technology Sector Index family is designed as equity benchmarks for US-traded technology-related securities. Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index. |
| |
| Yearly periods ended December 31 | |
| Comparative Results | |
| DWS Technology VIP | | 1-Year | | | 3-Year | | | 5-Year | | | 10-Year | |
| Class A | Growth of $10,000 | | $ | 11,866 | | | $ | 10,237 | | | $ | 11,789 | | | $ | 7,967 | |
| Average annual total return | | | 18.66 | % | | | 0.79 | % | | | 3.35 | % | | | -2.25 | % |
| Russell 1000 Growth Index | Growth of $10,000 | | $ | 11,671 | | | $ | 9,858 | | | $ | 12,023 | | | $ | 10,017 | |
| Average annual total return | | | 16.71 | % | | | -0.47 | % | | | 3.75 | % | | | 0.02 | % |
| S&P North American Technology Sector Index | Growth of $10,000 | | $ | 11,265 | | | $ | 10,417 | | | $ | 13,276 | | | $ | 9,168 | |
| Average annual total return | | | 12.65 | % | | | 1.37 | % | | | 5.83 | % | | | -0.86 | % |
| DWS Technology VIP | | 1-Year | | | 3-Year | | | 5-Year | | | Life of Class* | |
| Class B | Growth of $10,000 | | $ | 11,769 | | | $ | 10,104 | | | $ | 11,553 | | | $ | 16,857 | |
| Average annual total return | | | 17.96 | % | | | 0.35 | % | | | 2.93 | % | | | 6.34 | % |
| Russell 1000 Growth Index | Growth of $10,000 | | $ | 11,671 | | | $ | 9,858 | | | $ | 12,023 | | | $ | 15,890 | |
| Average annual total return | | | 16.71 | % | | | -0.47 | % | | | 3.75 | % | | | 5.60 | % |
| S&P North American Technology Sector Index | Growth of $10,000 | | $ | 11,265 | | | $ | 10,417 | | | $ | 13,276 | | | $ | 19,158 | |
| Average annual total return | | | 12.65 | % | | | 1.37 | % | | | 5.83 | % | | | 7.94 | % |
The growth of $10,000 is cumulative.
* The Fund commenced offering Class B shares on July 1, 2002. Index returns began on June 30, 2002.
Information About Your Fund's Expenses
DWS Technology VIP
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Fund expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2010 to December 31, 2010).
The tables illustrate your Fund's expenses in two ways:
•Actual Fund Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Fund using the Fund's actual return during the period. To estimate the expenses 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 "Expenses Paid per $1,000" line under the share class you hold.
• Hypothetical 5% Fund Return. This helps you to compare your Fund's ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
Expenses and Value of a $1,000 Investment for the six months ended December 31, 2010 | |
| Actual Fund Return | | Class A | | | Class B | |
| Beginning Account Value 7/1/10 | | $ | 1,000.00 | | | $ | 1,000.00 | |
| Ending Account Value 12/31/10 | | $ | 1,300.10 | | | $ | 1,297.60 | |
| Expenses Paid per $1,000* | | $ | 5.45 | | | $ | 7.76 | |
| Hypothetical 5% Fund Return | | Class A | | | Class B | |
| Beginning Account Value 7/1/10 | | $ | 1,000.00 | | | $ | 1,000.00 | |
| Ending Account Value 12/31/10 | | $ | 1,020.47 | | | $ | 1,018.45 | |
| Expenses Paid per $1,000* | | $ | 4.79 | | | $ | 6.82 | |
* Expenses are equal to the Fund's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.
| Annualized Expense Ratios | Class A | | Class B | |
| DWS Variable Series II — DWS Technology VIP | .94% | | 1.34% | |
For more information, please refer to the Fund's prospectus.
These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
Management Summary December 31, 2010
DWS Technology VIP
Technology stocks produced double-digit returns during 2010 — as measured by the 12.65% gain of the Fund's benchmark, the S&P® North American Technology Sector Index — but underperformed the 15.06% return of the Standard & Poor's 500® (S&P 500) Index. The Class A shares of the Fund returned 18.66% (unadjusted for contract charges), outperforming the benchmark by a wide margin.
The Fund's strong performance was largely attributable to the effectiveness of our individual stock selection. Of the many stocks that stood out as winners, the largest contributor was Isilon Systems, Inc.,* a vendor of data storage systems suitable for very large files. The stock performed well due to the effectiveness of the company's new sales strategy, rising demand for its storage products and takeover speculation. Also among the Fund's top contributors were LogMeIn, Inc.,* Apple Inc., Ariba, Inc. and F5 Networks, Inc.
On the negative side, our performance was hurt by an overweight position in Hewlett-Packard Co.1 The stock lagged the broader sector by a wide margin due to the forced departure of esteemed CEO Mark Hurd and the Board's unexpected choice of former SAP CEO Leo Apotheker as his replacement. Other detractors of note included Comverse Technology, Inc. and Google, Inc.
We believe the tech sector continues to present a mix of defensive and offensive characteristics, making it attractive at a time of an uncertain economic outlook. The tech sector also provides investors with the opportunity to take part in a number of compelling longer-term themes. For instance, we favor companies participating in technological trends with significant potential impact on the overall economy, such as cloud computing, mobile data, business analytics and online advertising. Many companies related to these themes are likely to become potential targets for further merger and acquisition (M&A) activity, creating opportunities for bottom-up investors.
Frederic L. Fayolle, CFA
Lead Portfolio Manager
Clark Chang
Walter Holick
Portfolio Managers
The S&P North American Technology Sector Index is an unmanaged, capitalization-weighted index based on a universe of technology-related stocks.
The Standard & Poor's 500 (S&P 500) Index is an unmanaged, capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.
1 "Overweight" means the Fund holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the Fund holds a lower weighting.
* Not held in the portfolio as of December 31, 2010.
Portfolio management market commentary is as of December 31, 2010, and may not come to pass. This information is subject to change at any time based on market and other conditions. Past performance does not guarantee future results. Current and future portfolio holdings are subject to risk.
Portfolio Summary
DWS Technology VIP
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | 12/31/10 | 12/31/09 |
| | | |
| Common Stocks | 99% | 98% |
| Cash Equivalents | 1% | 2% |
| | 100% | 100% |
Sector Diversification (As a % of Common Stocks) | 12/31/10 | 12/31/09 |
| | | |
| Information Technology: | | |
| Computers & Peripherals | 22% | 25% |
| Software | 18% | 18% |
| Communications Equipment | 17% | 17% |
| Semiconductors & Semiconductor Equipment | 16% | 16% |
| Internet Software & Services | 14% | 14% |
| IT Services | 9% | 7% |
| Electronic Equipment, Instruments & Components | 1% | 2% |
| Consumer Discretionary: | | |
| Hotel Restaurants & Leisure | 0% | — |
| Internet & Catalog Retail | 3% | 1% |
| | 100% | 100% |
Asset allocation and sector diversification are subject to change.
For more complete details about the Fund's investment portfolio, see page 264.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
Investment Portfolio December 31, 2010
DWS Technology VIP
| | | Shares | | | Value ($) | |
| | | | |
| Common Stocks 99.3% | |
| Consumer Discretionary 3.1% | |
| Hotels Restaurants & Leisure 0.3% | |
| Ctrip.com International Ltd. (ADR)* | | | 6,070 | | | | 245,532 | |
| Internet & Catalog Retail 2.8% | |
| Amazon.com, Inc.* | | | 7,210 | | | | 1,297,800 | |
| Priceline.com, Inc.* | | | 1,950 | | | | 779,122 | |
| | | | | | | | 2,076,922 | |
| Information Technology 96.2% | |
| Communications Equipment 17.2% | |
| Acme Packet, Inc.* | | | 7,523 | | | | 399,923 | |
| Aviat Networks, Inc.* | | | 2,463 | | | | 12,487 | |
| Cisco Systems, Inc.* | | | 183,760 | | | | 3,717,465 | |
| Comverse Technology, Inc.* | | | 126,644 | | | | 919,435 | |
| F5 Networks, Inc.* | | | 8,850 | | | | 1,151,916 | |
| Juniper Networks, Inc.* (a) | | | 29,800 | | | | 1,100,216 | |
| Motorola, Inc.* | | | 59,350 | | | | 538,304 | |
| Polycom, Inc.* (a) | | | 23,810 | | | | 928,114 | |
| QUALCOMM, Inc. | | | 77,996 | | | | 3,860,022 | |
| Research In Motion Ltd.* | | | 6,460 | | | | 375,520 | |
| | | | | | | | 13,003,402 | |
| Computers & Peripherals 22.2% | |
| Apple, Inc.* | | | 29,370 | | | | 9,473,587 | |
| EMC Corp.* (a) | | | 93,957 | | | | 2,151,615 | |
| Gemalto NV | | | 7,700 | | | | 327,670 | |
| Hewlett-Packard Co. | | | 90,770 | | | | 3,821,417 | |
| QLogic Corp.* | | | 3,660 | | | | 62,293 | |
| SanDisk Corp.* | | | 17,290 | | | | 862,079 | |
| Xyratex Ltd.* | | | 7,848 | | | | 128,001 | |
| | | | | | | | 16,826,662 | |
| Electronic Equipment, Instruments & Components 1.0% | | | | | | | | |
| Corning, Inc. | | | 39,250 | | | | 758,310 | |
| Internet Software & Services 13.6% | |
| Akamai Technologies, Inc.* | | | 6,720 | | | | 316,176 | |
| Digital River, Inc.* | | | 16,620 | | | | 572,060 | |
| eBay, Inc.* | | | 10,450 | | | | 290,824 | |
| Equinix, Inc.* | | | 2,710 | | | | 220,215 | |
| Google, Inc. "A"* | | | 9,450 | | | | 5,613,017 | |
| LogMeIn, Inc.* (a) | | | 24,313 | | | | 1,078,038 | |
| Open Text Corp.* (a) | | | 3,400 | | | | 156,604 | |
| QuinStreet, Inc.* (a) | | | 27,888 | | | | 535,728 | |
| Telecity Group PLC* | | | 40,505 | | | | 297,064 | |
| Tencent Holdings Ltd. | | | 18,080 | | | | 397,756 | |
| VistaPrint NV* (a) | | | 3,030 | | | | 139,380 | |
| Yahoo!, Inc.* (a) | | | 41,070 | | | | 682,994 | |
| | | | | | | | 10,299,856 | |
| IT Services 8.9% | |
| Accenture PLC "A" | | | 9,820 | | | | 476,172 | |
| Amdocs Ltd.* | | | 8,580 | | | | 235,693 | |
| Cognizant Technology Solutions Corp. "A"* | | | 25,390 | | | | 1,860,833 | |
| Fiserv, Inc.* | | | 10,400 | | | | 609,024 | |
| FleetCor Technologies, Inc.* | | | 4,920 | | | | 152,126 | |
| International Business Machines Corp. | | | 12,740 | | | | 1,869,722 | |
| iSoftStone Holdings Ltd. (ADR)* | | | 4,530 | | | | 82,310 | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| MasterCard, Inc. "A" | | | 960 | | | | 215,146 | |
| Teradata Corp.* | | | 22,861 | | | | 940,959 | |
| Visa, Inc. "A" (a) | | | 4,610 | | | | 324,452 | |
| | | | | | | | 6,766,437 | |
| Semiconductors & Semiconductor Equipment 15.7% | | | | | | | | |
| Aixtron SE (a) | | | 10,660 | | | | 393,643 | |
| Altera Corp. (a) | | | 11,660 | | | | 414,863 | |
| Applied Materials, Inc. | | | 24,000 | | | | 337,200 | |
| ASML Holding NV (NY Registered Shares) (a) | | | 14,190 | | | | 544,044 | |
| Avago Technologies Ltd. | | | 17,129 | | | | 487,663 | |
| Broadcom Corp. "A" | | | 20,310 | | | | 884,500 | |
| Cavium Networks, Inc.* (a) | | | 7,010 | | | | 264,137 | |
| Cirrus Logic, Inc.* | | | 21,400 | | | | 341,972 | |
| Inphi Corp.* | | | 1,940 | | | | 38,975 | |
| Integrated Device Technology, Inc.* | | | 74,600 | | | | 496,836 | |
| Intel Corp. | | | 152,879 | | | | 3,215,045 | |
| KLA-Tencor Corp. | | | 12,740 | | | | 492,273 | |
| Marvell Technology Group Ltd.* | | | 17,900 | | | | 332,045 | |
| MaxLinear, Inc. "A"* (a) | | | 22,300 | | | | 239,948 | |
| Microchip Technology, Inc. (a) | | | 8,270 | | | | 282,917 | |
| Microsemi Corp.* | | | 14,290 | | | | 327,241 | |
| Netlogic Microsystems, Inc.* | | | 13,880 | | | | 435,971 | |
| Novellus Systems, Inc.* (a) | | | 16,910 | | | | 546,531 | |
| NXP Semiconductors NV* | | | 10,220 | | | | 213,905 | |
| Texas Instruments, Inc. (a) | | | 49,900 | | | | 1,621,750 | |
| | | | | | | | 11,911,459 | |
| Software 17.6% | |
| Activision Blizzard, Inc. | | | 36,210 | | | | 450,452 | |
| Adobe Systems, Inc.* | | | 20,990 | | | | 646,072 | |
| ANSYS, Inc.* | | | 5,160 | | | | 268,681 | |
| Ariba, Inc.* | | | 55,660 | | | | 1,307,453 | |
| BMC Software, Inc.* | | | 19,040 | | | | 897,546 | |
| Check Point Software Technologies Ltd.* | | | 11,080 | | | | 512,561 | |
| Citrix Systems, Inc.* | | | 4,770 | | | | 326,316 | |
| Informatica Corp.* (a) | | | 20,790 | | | | 915,384 | |
| Longtop Financial Technologies Ltd. (ADR)* | | | 4,900 | | | | 177,282 | |
| Microsoft Corp. | | | 127,410 | | | | 3,557,287 | |
| Oracle Corp. | | | 87,010 | | | | 2,723,413 | |
| QLIK Technologies, Inc.* | | | 7,958 | | | | 205,396 | |
| RealD, Inc.* | | | 976 | | | | 25,298 | |
| Rovi Corp.* (a) | | | 3,150 | | | | 195,332 | |
| Salesforce.com, Inc.* (a) | | | 1,560 | | | | 205,920 | |
| Symantec Corp.* | | | 18,560 | | | | 310,694 | |
| Taleo Corp. "A"* | | | 10,890 | | | | 301,109 | |
| VanceInfo Technologies, Inc. (ADR)* | | | 8,160 | | | | 281,846 | |
| | | | | | | | 13,308,042 | |
Total Common Stocks (Cost $42,878,738) | | | | 75,196,622 | |
| | |
| Securities Lending Collateral 12.3% | |
| Daily Assets Fund Institutional, 0.27% (b) (c) (Cost $9,321,665) | | | 9,321,665 | | | | 9,321,665 | |
| | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| Cash Equivalents 0.9% | |
| Central Cash Management Fund, 0.19% (b) (Cost $675,065) | | | 675,065 | | | | 675,065 | |
| | | % of Net Assets | | | Value ($) | |
| | | | |
Total Investment Portfolio (Cost $52,875,468)+ | | | 112.5 | | | | 85,193,352 | |
| Other Assets and Liabilities, Net | | | (12.5 | ) | | | (9,493,284 | ) |
| Net Assets | | | 100.0 | | | | 75,700,068 | |
* Non-income producing security.
+ The cost for federal income tax purposes was $56,197,483. At December 31, 2010, net unrealized appreciation for all securities based on tax cost was $28,995,869. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $32,698,880 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $3,703,011.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2010 amounted to $9,072,813, which is 12.0% of net assets.
(b) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(c) Represents collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates.
ADR: American Depositary Receipt
Fair Value Measurements
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
| Assets | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | |
| Common Stocks (d) | |
| Consumer Discretionary | | $ | 2,322,454 | | | $ | — | | | $ | — | | | $ | 2,322,454 | |
| Information Technology | | | 71,458,035 | | | | 1,416,133 | | | | — | | | | 72,874,168 | |
| Short-Term Investments (d) | | | 9,996,730 | | | | — | | | | — | | | | 9,996,730 | |
| Total | | $ | 83,777,219 | | | $ | 1,416,133 | | | $ | — | | | $ | 85,193,352 | |
There have been no significant transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2010.
(d) See Investment Portfolio for additional detailed categorizations.
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities
| as of December 31, 2010 | |
| Assets | |
Investments: Investments in unaffiliated securities, at value (cost $42,878,738) — including $9,072,813 of securities loaned | | $ | 75,196,622 | |
Investment in Daily Assets Fund Institutional (cost $9,321,665)* | | | 9,321,665 | |
| Investment in Central Cash Management Fund (cost $675,065) | | | 675,065 | |
| Total investments, at value (cost $52,875,468) | | | 85,193,352 | |
| Cash | | | 3,103 | |
| Foreign currency, at value (cost $9,181) | | | 9,138 | |
| Receivable for Fund shares sold | | | 128 | |
| Interest receivable | | | 4,770 | |
| Other assets | | | 406 | |
| Total assets | | | 85,210,897 | |
| Liabilities | |
| Payable upon return of securities loaned | | | 9,321,665 | |
| Payable for Fund shares redeemed | | | 72,412 | |
| Accrued management fee | | | 42,305 | |
| Other accrued expenses and payables | | | 74,447 | |
| Total liabilities | | | 9,510,829 | |
| Net assets, at value | | $ | 75,700,068 | |
| Net Assets Consist of | |
| Distributions in excess of net investment income | | | (79 | ) |
Net unrealized appreciation (depreciation) on: Investments | | | 32,317,884 | |
| Foreign currency | | | (43 | ) |
| Accumulated net realized gain (loss) | | | (108,783,810 | ) |
| Paid-in capital | | | 152,166,116 | |
| Net assets, at value | | $ | 75,700,068 | |
Class A Net Asset Value, offering and redemption price per share ($75,572,811 ÷ 6,893,997 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | | $ | 10.96 | |
Class B Net Asset Value, offering and redemption price per share ($127,257 ÷ 11,963 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | | $ | 10.64 | |
* Represents collateral on securities loaned.
The accompanying notes are an integral part of the financial statements.
Statement of Operations
| for the year ended December 31, 2010 | |
| Investment Income | |
Income: Dividends (net of foreign taxes withheld of $607) | | $ | 442,108 | |
| Income distributions — Central Cash Management Fund | | | 974 | |
| Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates | | | 29,747 | |
| Total income | | | 472,829 | |
Expenses: Management fee | | | 484,850 | |
| Administration fee | | | 72,910 | |
| Services to shareholders | | | 2,813 | |
| Distribution service fee (Class B) | | | 2,449 | |
| Record keeping fees (Class B) | | | 962 | |
| Custodian fee | | | 10,843 | |
| Legal fees | | | 9,743 | |
| Audit and tax fees | | | 52,788 | |
| Trustees' fees and expenses | | | 5,376 | |
| Reports to shareholders | | | 24,990 | |
| Other | | | 17,141 | |
| Total expenses | | | 684,865 | |
| Net investment income (loss) | | | (212,036 | ) |
| Realized and Unrealized Gain (Loss) | |
Net realized gain (loss) from: Investments | | | 7,855,733 | |
| Foreign currency | | | 3,739 | |
| Payments by affiliate (see Note I) | | | 1,507 | |
| | | | 7,860,979 | |
Change in net unrealized appreciation (depreciation) on: Investments | | | 4,413,329 | |
| Foreign currency | | | (5,229 | ) |
| | | | 4,408,100 | |
| Net gain (loss) | | | 12,269,079 | |
| Net increase (decrease) in net assets resulting from operations | | $ | 12,057,043 | |
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Net Assets
| | | Years Ended December 31, | |
| Increase (Decrease) in Net Assets | | 2010 | | | 2009 | |
Operations: Net investment income (loss) | | $ | (212,036 | ) | | $ | 43,997 | |
| Net realized gain (loss) | | | 7,860,979 | | | | (13,132,543 | ) |
| Net unrealized appreciation (depreciation) | | | 4,408,100 | | | | 45,141,538 | |
| Net increase (decrease) in net assets resulting from operations | | | 12,057,043 | | | | 32,052,992 | |
Distributions to shareholders from: Net investment income: Class A | | | (30,198 | ) | | | — | |
Fund share transactions: Class A Proceeds from shares sold | | | 4,885,683 | | | | 8,267,890 | |
| Reinvestment of distributions | | | 30,198 | | | | — | |
| Payments for shares redeemed | | | (19,283,343 | ) | | | (20,829,816 | ) |
| Net increase (decrease) in net assets from Class A share transactions | | | (14,367,462 | ) | | | (12,561,926 | ) |
Class B Proceeds from shares sold | | | 154,027 | | | | 696,779 | |
| Payments for shares redeemed | | | (2,934,016 | ) | | | (561,458 | ) |
| Net increase (decrease) in net assets from Class B share transactions | | | (2,779,989 | ) | | | 135,321 | |
| Increase (decrease) in net assets | | | (5,120,606 | ) | | | 19,626,387 | |
| Net assets at beginning of period | | | 80,820,674 | | | | 61,194,287 | |
| Net assets at end of period (including distributions in excess of net investment income and undistributed net investment income of $79 and $24,841, respectively) | | $ | 75,700,068 | | | $ | 80,820,674 | |
| Other Information | |
Class A Shares outstanding at beginning of period | | | 8,447,123 | | | | 10,336,451 | |
| Shares sold | | | 509,793 | | | | 1,071,894 | |
| Shares issued to shareholders in reinvestment of distributions | | | 3,065 | | | | — | |
| Shares redeemed | | | (2,065,984 | ) | | | (2,961,222 | ) |
| Net increase (decrease) in Class A shares | | | (1,553,126 | ) | | | (1,889,328 | ) |
| Shares outstanding at end of period | | | 6,893,997 | | | | 8,447,123 | |
Class B Shares outstanding at beginning of period | | | 309,078 | | | | 290,168 | |
| Shares sold | | | 17,099 | | | | 100,046 | |
| Shares redeemed | | | (314,214 | ) | | | (81,136 | ) |
| Net increase (decrease) in Class B shares | | | (297,115 | ) | | | 18,910 | |
| Shares outstanding at end of period | | | 11,963 | | | | 309,078 | |
The accompanying notes are an integral part of the financial statements.
Financial Highlights
Class A Years Ended December 31, | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| Selected Per Share Data | |
| Net asset value, beginning of period | | $ | 9.24 | | | $ | 5.76 | | | $ | 10.71 | | | $ | 9.37 | | | $ | 9.30 | |
Income (loss) from investment operations: Net investment income (loss)a | | | (.03 | ) | | | .01 | | | | (.00 | )* | | | (.02 | ) | | | (.01 | )c |
| Net realized and unrealized gain (loss) | | | 1.75 | | | | 3.47 | | | | (4.95 | ) | | | 1.36 | | | | .08 | |
| Total from investment operations | | | 1.72 | | | | 3.48 | | | | (4.95 | ) | | | 1.34 | | | | .07 | |
Less distributions from: Net investment income | | | (.00 | )* | | | — | | | | — | | | | — | | | | — | |
| Net asset value, end of period | | $ | 10.96 | | | $ | 9.24 | | | $ | 5.76 | | | $ | 10.71 | | | $ | 9.37 | |
| Total Return (%) | | | 18.66 | | | | 60.42 | | | | (46.22 | )b | | | 14.30 | | | | .75 | c |
| Ratios to Average Net Assets and Supplemental Data | |
| Net assets, end of period ($ millions) | | | 76 | | | | 78 | | | | 60 | | | | 153 | | | | 165 | |
| Ratio of expenses before expense reductions (%) | | | .93 | | | | .84 | | | | 1.01 | | | | .91 | | | | .89 | |
| Ratio of expenses after expense reductions (%) | | | .93 | | | | .84 | | | | 1.00 | | | | .91 | | | | .89 | |
| Ratio of net investment income (loss) (%) | | | (.29 | ) | | | .08 | | | | (.01 | ) | | | (.15 | ) | | | (.12 | )c |
| Portfolio turnover rate (%) | | | 23 | | | | 45 | | | | 71 | | | | 91 | | | | 49 | |
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. c Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Funds. The non-recurring income resulted in an increase in net investment income of $0.017 per share and an increase in the ratio of net investment income of 0.18%. Excluding this non-recurring income, total return would have been 0.19% lower. * Amount is less than $0.005. | |
Class B Years Ended December 31, | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| Selected Per Share Data | |
| Net asset value, beginning of period | | $ | 9.02 | | | $ | 5.64 | | | $ | 10.53 | | | $ | 9.25 | | | $ | 9.21 | |
Income (loss) from investment operations: Net investment income (loss)a | | | (.06 | ) | | | (.02 | ) | | | (.03 | ) | | | (.05 | ) | | | (.04 | )c |
| Net realized and unrealized gain (loss) | | | 1.68 | | | | 3.40 | | | | (4.86 | ) | | | 1.33 | | | | .08 | |
| Total from investment operations | | | 1.62 | | | | 3.38 | | | | (4.89 | ) | | | 1.28 | | | | .04 | |
| Net asset value, end of period | | $ | 10.64 | | | $ | 9.02 | | | $ | 5.64 | | | $ | 10.53 | | | $ | 9.25 | |
| Total Return (%) | | | 17.96 | | | | 59.93 | | | | (46.44 | )b | | | 13.84 | | | | .43 | c |
| Ratios to Average Net Assets and Supplemental Data | |
| Net assets, end of period ($ millions) | | | .1 | | | | 3 | | | | 2 | | | | 3 | | | | 14 | |
| Ratio of expenses before expense reductions (%) | | | 1.29 | | | | 1.18 | | | | 1.35 | | | | 1.29 | | | | 1.28 | |
| Ratio of expenses after expense reductions (%) | | | 1.29 | | | | 1.18 | | | | 1.35 | | | | 1.29 | | | | 1.28 | |
| Ratio of net investment income (loss) (%) | | | (.64 | ) | | | (.27 | ) | | | (.35 | ) | | | (.53 | ) | | | (.51 | )c |
| Portfolio turnover rate (%) | | | 23 | | | | 45 | | | | 71 | | | | 91 | | | | 49 | |
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. c Includes non-recurring income from the Advisor recorded as a result of an administrative proceeding regarding disclosure of brokerage allocation practices in connection with sales of DWS Funds. The non-recurring income resulted in an increase in net investment income of $0.017 per share and an increase in the ratio of net investment income of 0.18%. Excluding this non-recurring income, total return would have been 0.19% lower. | |
Performance Summary December 31, 2010
DWS Turner Mid Cap Growth VIP
All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund's most recent month-end performance. Performance doesn't reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce returns.
The gross expense ratio of the Fund, as stated in the fee table of the prospectus dated May 1, 2010 is 0.89% for Class A shares and may differ from the expense ratio disclosed in the Financial Highlights table in this report.
Risk Considerations
Stocks of medium-sized companies involve greater risk than securities of larger, more-established companies. Stocks may decline in value. See the prospectus for details.
Fund returns for all periods shown reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.
| Growth of an Assumed $10,000 Investment in DWS Turner Mid Cap Growth VIP from 5/1/2001 to 12/31/2010 |
[] DWS Turner Mid Cap Growth VIP — Class A [] Russell Midcap® Growth Index | The Russell Midcap® Growth Index is an unmanaged index that measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth Index. Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly in an index. |
| |
| Yearly periods ended December 31 | |
| Comparative Results | |
| DWS Turner Mid Cap Growth VIP | | 1-Year | | | 3-Year | | | 5-Year | | | Life of Fund* | |
| Class A | Growth of $10,000 | | $ | 12,900 | | | $ | 9,774 | | | $ | 13,092 | | | $ | 14,428 | |
| Average annual total return | | | 29.00 | % | | | -0.76 | % | | | 5.54 | % | | | 3.86 | % |
| Russell Midcap Growth Index | Growth of $10,000 | | $ | 12,638 | | | $ | 10,294 | | | $ | 12,692 | | | $ | 15,551 | |
| Average annual total return | | | 26.38 | % | | | 0.97 | % | | | 4.88 | % | | | 4.67 | % |
The growth of $10,000 is cumulative.
* The Fund commenced operations on May 1, 2001. Index returns began on April 30, 2001.
Information About Your Fund's Expenses
DWS Turner Mid Cap Growth VIP
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees and other Fund expenses. Examples of transaction costs include contract charges, redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Fund limited these expenses; had it not done so, expenses would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2010 to December 31, 2010).
The tables illustrate your Fund's expenses in two ways:
•Actual Fund Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Fund using the Fund's actual return during the period. To estimate the expenses 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 "Expenses Paid per $1,000" line under the share class you hold.
• Hypothetical 5% Fund Return. This helps you to compare your Fund's ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical Fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
Expenses and Value of a $1,000 Investment for the six months ended December 31, 2010 | |
| Actual Fund Return | | Class A | |
| Beginning Account Value 7/1/10 | | $ | 1,000.00 | |
| Ending Account Value 12/31/10 | | $ | 1,348.50 | |
Expenses Paid per $1,000* | | $ | 5.68 | |
| Hypothetical 5% Fund Return | | Class A | |
| Beginning Account Value 7/1/10 | | $ | 1,000.00 | |
| Ending Account Value 12/31/10 | | $ | 1,020.37 | |
| Expenses Paid per $1,000* | | $ | 4.89 | |
* Expenses are equal to the Fund's annualized expense ratio, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.
| Annualized Expense Ratio | Class A | |
| DWS Variable Series II — DWS Turner Mid Cap Growth VIP | .96% | |
For more information, please refer to the Fund's prospectus.
These tables do not reflect charges and fees ("contract charges") associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
Management Summary December 31, 2010
DWS Turner Mid Cap Growth VIP
Both DWS Turner Mid Cap Growth VIP and the stock market capped 2010 with a strong finish, propelled by a strengthening global economy, robust earnings and a growing bullish sentiment among investors. The Standard & Poor's 500® (S&P 500) Index finished the year with a healthy gain of 15.06%. This is the index's second yearly gain in a row and its fourth over the past five years. The year, although strong, was not without its challenges as investors had to deal with the May 6th "flash crash", financial reform and continued concerns over the health of many European economies. On the other hand, the US Federal Reserve Board (the Fed) continued to be active in the market, with round two of the quantitative easing effort initiated la ter in the year, and corporate earnings continued to post strong gains.
For 2010, small-cap stocks outpaced both mid- and large-cap stocks. The Russell 2000® Index posted a gain of 26.85% versus 16.10% for the Russell 1000® Index. Growth stocks outperformed value stocks across the market-cap spectrum for the year as investors became more optimistic over the economic rebound and sought out companies with stronger earnings prospects.
With improving economic conditions and a favorable backdrop for companies looking to grow their earnings, the performance of the Fund was strong, with Class A shares returning 29.00%, outpacing the 26.38% return for the Fund's benchmark, the Russell Midcap® Growth Index, as of December 31, 2010 (unadjusted for contract charges). Seven of the nine portfolio sectors outperformed the benchmark, with outperformance largely attributed to strength in the technology sector due to good stock selection.
The technology and financial services sectors contributed the most to relative gains, while the health care sector and producer durables, a Turner Custom Sector, were the lead detractors. A sustained pickup in corporate spending aided the technology sector as our holdings in F5 Networks, Inc., Salesforce.com, Inc. and Cypress Semiconductor Corp. generated strong double-digit returns. Within financial services, the life/health insurance and real estate development industries led the way. Health care was among the worst-performing sectors as unanswered health care reform questions continued to linger over the industry. Electronic production equipment, electrical products and industrial machinery companies detracted.
As before, the Fund emphasizes three types of growth stocks. One, it holds classic growth stocks in industries such as biotechnology and wireless communications that we think have high-return potential for fundamental reasons. Two, it holds stocks of companies gaining market share in their businesses. And three, it holds cyclical stocks in industries such as metals, heavy equipment, bioagriculture, retailing and chemicals that historically have tended to do well as the economy improves.
Christopher K. McHugh
Lead Manager, Turner Investment Partners, Inc.
Subadvisor to the Fund
Tara Hedlund, CFA
Jason Schrotberger, CFA
Portfolio Managers
The Standard & Poor's 500 (S&P 500) Index is an unmanaged, capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Russell 1000 Index is an unmanaged index that measures the performance of the 1,000 largest companies in the Russell 3000® Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index.
The Russell Midcap Growth Index is an unmanaged index that measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values.
Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly in an index.
Portfolio management market commentary is as of December 31, 2010, and may not come to pass. This information is subject to change at any time based on market and other conditions. Past performance does not guarantee future results. Current and future portfolio holdings are subject to risk.
Portfolio Summary
DWS Turner Mid Cap Growth VIP
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | 12/31/10 | 12/31/09 |
| | | |
| Common Stocks | 99% | 99% |
| Cash Equivalents | 1% | 1% |
| | 100% | 100% |
Sector Diversification (As a % of Common Stocks) | 12/31/10 | 12/31/09 |
| | | |
| Information Technology | 28% | 27% |
| Consumer Discretionary | 18% | 16% |
| Health Care | 12% | 15% |
| Industrials | 11% | 10% |
| Financials | 10% | 10% |
| Materials | 8% | 6% |
| Energy | 6% | 7% |
| Consumer Staples | 4% | 7% |
| Telecommunication Services | 2% | 1% |
| Utilities | 1% | 1% |
| | 100% | 100% |
Asset allocation and sector diversification are subject to change.
For more complete details about the Fund's investment portfolio, see page 276.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
Investment Portfolio December 31, 2010
DWS Turner Mid Cap Growth VIP
| | | Shares | | | Value ($) | |
| | | | |
| Common Stocks 98.8% | |
| Consumer Discretionary 17.6% | |
| Auto Components 1.2% | |
| BorgWarner, Inc.* (a) | | | 10,260 | | | | 742,414 | |
| Hotels Restaurants & Leisure 6.5% | |
| Darden Restaurants, Inc. | | | 7,510 | | | | 348,764 | |
| Royal Caribbean Cruises Ltd.* | | | 12,510 | | | | 587,970 | |
| Starwood Hotels & Resorts Worldwide, Inc. (a) | | | 23,700 | | | | 1,440,486 | |
| WMS Industries, Inc.* | | | 16,775 | | | | 758,901 | |
| Wynn Resorts Ltd. | | | 6,660 | | | | 691,575 | |
| | | | | | | | 3,827,696 | |
| Internet & Catalog Retail 1.2% | |
| Priceline.com, Inc.* | | | 1,770 | | | | 707,203 | |
| Media 1.3% | |
| Interpublic Group of Companies, Inc.* | | | 75,190 | | | | 798,518 | |
| Multiline Retail 1.5% | |
| Nordstrom, Inc. (a) | | | 20,850 | | | | 883,623 | |
| Specialty Retail 3.7% | |
| Abercrombie & Fitch Co. "A" (a) | | | 13,290 | | | | 765,903 | |
| Dick's Sporting Goods, Inc.* | | | 14,010 | | | | 525,375 | |
| Guess?, Inc. | | | 18,850 | | | | 891,982 | |
| | | | | | | | 2,183,260 | |
| Textiles, Apparel & Luxury Goods 2.2% | |
| Coach, Inc. | | | 23,230 | | | | 1,284,851 | |
| Consumer Staples 3.8% | |
| Beverages 0.5% | |
| Hansen Natural Corp.* | | | 6,020 | | | | 314,726 | |
| Food & Staples Retailing 1.2% | |
| Whole Foods Market, Inc.* | | | 13,890 | | | | 702,695 | |
| Food Products 2.1% | |
| Green Mountain Coffee Roasters, Inc.* | | | 15,560 | | | | 511,302 | |
| Mead Johnson Nutrition Co. | | | 11,210 | | | | 697,822 | |
| | | | | | | | 1,209,124 | |
| Energy 6.3% | |
| Energy Equipment & Services 1.0% | |
| Cameron International Corp.* | | | 11,800 | | | | 598,614 | |
| Oil, Gas & Consumable Fuels 5.3% | |
| Alpha Natural Resources, Inc.* | | | 10,860 | | | | 651,926 | |
| Cimarex Energy Co. | | | 7,810 | | | | 691,419 | |
| Concho Resources, Inc.* | | | 9,200 | | | | 806,564 | |
| QEP Resources, Inc. | | | 12,800 | | | | 464,768 | |
| Whiting Petroleum Corp.* | | | 4,190 | | | | 491,026 | |
| | | | | | | | 3,105,703 | |
| Financials 9.5% | |
| Capital Markets 3.4% | |
| Invesco Ltd. | | | 27,690 | | | | 666,221 | |
| T. Rowe Price Group, Inc. (a) | | | 20,340 | | | | 1,312,744 | |
| | | | | | | | 1,978,965 | |
| Commercial Banks 0.9% | |
| M&T Bank Corp. | | | 6,290 | | | | 547,545 | |
| Consumer Finance 0.7% | |
| Discover Financial Services | | | 23,040 | | | | 426,931 | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| Diversified Financial Services 2.1% | |
| IntercontinentalExchange, Inc.* | | | 6,140 | | | | 731,581 | |
| MSCI, Inc. "A"* | | | 12,530 | | | | 488,169 | |
| | | | | | | | 1,219,750 | |
| Insurance 1.3% | |
| Aon Corp. | | | 8,820 | | | | 405,808 | |
| Unum Group | | | 16,060 | | | | 388,973 | |
| | | | | | | | 794,781 | |
| Real Estate Management & Development 1.1% | | | | | | | | |
| CB Richard Ellis Group, Inc. "A"* | | | 32,550 | | | | 666,624 | |
| Health Care 11.7% | |
| Biotechnology 2.7% | |
| Alexion Pharmaceuticals, Inc.* (a) | | | 9,880 | | | | 795,834 | |
| Onyx Pharmaceuticals, Inc.* | | | 7,680 | | | | 283,161 | |
| United Therapeutics Corp.* | | | 8,340 | | | | 527,255 | |
| | | | | | | | 1,606,250 | |
| Health Care Equipment & Supplies 1.8% | |
| Intuitive Surgical, Inc.* | | | 1,790 | | | | 461,372 | |
| Varian Medical Systems, Inc.* | | | 8,400 | | | | 581,952 | |
| | | | | | | | 1,043,324 | |
| Health Care Providers & Services 4.2% | |
| AMERIGROUP Corp.* | | | 8,610 | | | | 378,151 | |
| AmerisourceBergen Corp. | | | 19,480 | | | | 664,658 | |
| Emergency Medical Services Corp. "A"* | | | 5,550 | | | | 358,586 | |
| Laboratory Corp. of America Holdings* | | | 3,960 | | | | 348,163 | |
| Universal Health Services, Inc. "B" | | | 17,110 | | | | 742,916 | |
| | | | | | | | 2,492,474 | |
| Life Sciences Tools & Services 0.9% | |
| Charles River Laboratories International, Inc.* | | | 6,550 | | | | 232,787 | |
| Illumina, Inc.* | | | 4,670 | | | | 295,798 | |
| | | | | | | | 528,585 | |
| Pharmaceuticals 2.1% | |
| Hospira, Inc.* | | | 9,020 | | | | 502,324 | |
| Valeant Pharmaceuticals International, Inc. | | | 12,560 | | | | 355,322 | |
| Watson Pharmaceuticals, Inc.* | | | 7,620 | | | | 393,573 | |
| | | | | | | | 1,251,219 | |
| Industrials 10.6% | |
| Aerospace & Defense 1.2% | |
| Goodrich Corp. | | | 8,480 | | | | 746,834 | |
| Airlines 1.4% | |
| United Continental Holdings, Inc.* | | | 33,936 | | | | 808,355 | |
| Machinery 4.5% | |
| Cummins, Inc. | | | 10,330 | | | | 1,136,403 | |
| Joy Global, Inc. | | | 11,890 | | | | 1,031,458 | |
| Parker Hannifin Corp. | | | 5,810 | | | | 501,403 | |
| | | | | | | | 2,669,264 | |
| Professional Services 0.8% | |
| Manpower, Inc. | | | 7,200 | | | | 451,872 | |
| Road & Rail 0.8% | |
| Canadian Pacific Railway Ltd. | | | 7,240 | | | | 469,224 | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| Trading Companies & Distributors 1.9% | |
| Fastenal Co. (a) | | | 13,390 | | | | 802,195 | |
| WESCO International, Inc.* | | | 5,760 | | | | 304,128 | |
| | | | | | | | 1,106,323 | |
| Information Technology 28.1% | |
| Communications Equipment 6.3% | |
| Acme Packet, Inc.* | | | 8,270 | | | | 439,633 | |
| Aruba Networks, Inc.* | | | 28,110 | | | | 586,937 | |
| F5 Networks, Inc.* | | | 12,600 | | | | 1,640,016 | |
| Finisar Corp.* | | | 13,120 | | | | 389,533 | |
| Juniper Networks, Inc.* | | | 11,990 | | | | 442,671 | |
| Riverbed Technology, Inc.* | | | 5,950 | | | | 209,261 | |
| | | | | | | | 3,708,051 | |
| Computers & Peripherals 3.4% | |
| NetApp, Inc.* (a) | | | 18,210 | | | | 1,000,821 | |
| SanDisk Corp.* | | | 20,230 | | | | 1,008,668 | |
| | | | | | | | 2,009,489 | |
| Electronic Equipment, Instruments & Components 0.6% | | | | | | | | |
| Aeroflex Holding Corp.* | | | 20,500 | | | | 337,225 | |
| Internet Software & Services 2.7% | |
| Akamai Technologies, Inc.* | | | 7,620 | | | | 358,521 | |
| LogMeIn, Inc.* | | | 9,350 | | | | 414,579 | |
| MercadoLibre, Inc.* (a) | | | 4,270 | | | | 284,596 | |
| OpenTable, Inc.* | | | 1,650 | | | | 116,292 | |
| VeriSign, Inc. | | | 12,300 | | | | 401,841 | |
| | | | | | | | 1,575,829 | |
| IT Services 0.9% | |
| VeriFone Systems, Inc.* | | | 13,290 | | | | 512,462 | |
| Semiconductors & Semiconductor Equipment 10.5% | | | | | | | | |
| ASML Holding NV (NY Registered Shares) (a) | | | 20,810 | | | | 797,855 | |
| Atheros Communications* | | | 22,530 | | | | 809,278 | |
| Broadcom Corp. "A" | | | 17,150 | | | | 746,883 | |
| Cree, Inc.* | | | 4,730 | | | | 311,660 | |
| Cypress Semiconductor Corp.* | | | 50,140 | | | | 931,601 | |
| First Solar, Inc.* (a) | | | 1,550 | | | | 201,717 | |
| Lam Research Corp.* | | | 15,670 | | | | 811,393 | |
| Netlogic Microsystems, Inc.* | | | 22,230 | | | | 698,244 | |
| Varian Semiconductor Equipment Associates, Inc.* | | | 24,730 | | | | 914,268 | |
| | | | | | | | 6,222,899 | |
| | | Shares | | | Value ($) | |
| | | | | | | | | |
| Software 3.7% | |
| Fortinet, Inc.* | | | 11,110 | | | | 359,408 | |
| Salesforce.com, Inc.* | | | 9,790 | | | | 1,292,280 | |
| SuccessFactors, Inc.* | | | 19,030 | | | | 551,109 | |
| | | | | | | | 2,202,797 | |
| Materials 8.3% | |
| Chemicals 2.7% | |
| CF Industries Holdings, Inc. | | | 7,300 | | | | 986,595 | |
| LyondellBasell Industries NV* | | | 17,390 | | | | 598,216 | |
| | | | | | | | 1,584,811 | |
| Metals & Mining 5.6% | |
| Cliffs Natural Resources, Inc. (a) | | | 10,920 | | | | 851,869 | |
| Silver Wheaton Corp.* | | | 10,820 | | | | 422,413 | |
| United States Steel Corp. (a) | | | 13,690 | | | | 799,770 | |
| Walter Energy, Inc. | | | 9,770 | | | | 1,248,997 | |
| | | | | | | | 3,323,049 | |
| Telecommunication Services 2.3% | |
| Wireless Telecommunication Services | |
| Crown Castle International Corp.* | | | 19,260 | | | | 844,166 | |
| NII Holdings, Inc.* | | | 11,200 | | | | 500,192 | |
| | | | | | | | 1,344,358 | |
| Utilities 0.6% | |
| Gas Utilities | |
| Questar Corp. | | | 21,780 | | | | 379,190 | |
Total Common Stocks (Cost $36,798,115) | | | | 58,366,907 | |
| | |
| Securities Lending Collateral 16.1% | |
| Daily Assets Fund Institutional, 0.27% (b) (c) (Cost $9,501,633) | | | 9,501,633 | | | | 9,501,633 | |
| | |
| Cash Equivalents 1.2% | |
| Central Cash Management Fund, 0.19% (b) (Cost $682,786) | | | 682,786 | | | | 682,786 | |
| | | % of Net Assets | | | Value ($) | |
| | | | |
Total Investment Portfolio (Cost $46,982,534)+ | | | 116.1 | | | | 68,551,326 | |
| Other Assets and Liabilities, Net | | | (16.1 | ) | | | (9,506,407 | ) |
| Net Assets | | | 100.0 | | | | 59,044,919 | |
* Non-income producing security.
+ The cost for federal income tax purposes was $47,461,113. At December 31, 2010, net unrealized appreciation for all securities based on tax cost was $21,090,213. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $21,587,307 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $497,094.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2010 amounted to $9,276,096, which is 15.7% of net assets.
(b) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(c) Represents collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates.
Fair Value Measurements
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.
| Assets | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | |
| Common Stocks (d) | | $ | 58,366,907 | | | $ | — | | | $ | — | | | $ | 58,366,907 | |
| Short-Term Investments (d) | | | 10,184,419 | | | | — | | | | — | | | | 10,184,419 | |
| Total | | $ | 68,551,326 | | | $ | — | | | $ | — | | | $ | 68,551,326 | |
There have been no significant transfers between Level 1 and Level 2 fair value measurements during the year ended December 31, 2010.
(d) See Investment Portfolio for additional detailed categorizations.
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities
| as of December 31, 2010 | |
| Assets | |
Investments: Investments in unaffiliated securities, at value (cost $36,798,115) — including $9,276,096 of securities loaned | | $ | 58,366,907 | |
Investment in Daily Assets Fund Institutional (cost $9,501,633)* | | | 9,501,633 | |
| Investment in Central Cash Management Fund (cost $682,786) | | | 682,786 | |
| Total investments, at value (cost $46,982,534) | | | 68,551,326 | |
| Cash | | | 10,000 | |
| Receivable for investments sold | | | 312,238 | |
| Dividends receivable | | | 12,654 | |
| Interest receivable | | | 740 | |
| Other assets | | | 286 | |
| Total assets | | | 68,887,244 | |
| Liabilities | |
| Payable upon return of securities loaned | | | 9,501,633 | |
| Payable for investments purchased | | | 155,357 | |
| Payable for Fund shares redeemed | | | 83,068 | |
| Accrued management fee | | | 40,161 | |
| Other accrued expenses and payables | | | 62,106 | |
| Total liabilities | | | 9,842,325 | |
| Net assets, at value | | $ | 59,044,919 | |
| Net Assets Consist of | |
Net unrealized appreciation (depreciation) on: Investments | | | 21,568,792 | |
| Foreign currency | | | 10 | |
| Accumulated net realized gain (loss) | | | (16,197,182 | ) |
| Paid-in capital | | | 53,673,299 | |
| Net assets, at value | | $ | 59,044,919 | |
Class A Net Asset Value, offering and redemption price per share ($59,044,919 ÷ 6,033,131 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | | $ | 9.79 | |
* Represents collateral on securities loaned.
The accompanying notes are an integral part of the financial statements.
Statement of Operations
| for the year ended December 31, 2010 | |
| Investment Income | |
Income: Dividends (net of foreign taxes withheld of $3,538) | | $ | 408,183 | |
| Income distributions — Central Cash Management Fund | | | 2,018 | |
| Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates | | | 1,716 | |
| Total income | | | 411,917 | |
Expenses: Management fee | | | 368,747 | |
| Administration fee | | | 51,573 | |
| Services to shareholders | | | 1,911 | |
| Custodian fee | | | 12,628 | |
| Legal fees | | | 7,226 | |
| Audit and tax fees | | | 46,905 | |
| Trustees' fees and expenses | | | 3,784 | |
| Reports to shareholders | | | 13,380 | |
| Other | | | 3,465 | |
| Total expenses before expense reductions | | | 509,619 | |
| Expense reductions | | | (679 | ) |
| Total expenses after expense reductions | | | 508,940 | |
| Net investment income (loss) | | | (97,023 | ) |
| Realized and Unrealized Gain (Loss) | |
Net realized gain (loss) from investments: Investments | | | 6,420,921 | |
| Foreign currency | | | 35 | |
| | | | 6,420,956 | |
Change in net unrealized appreciation (depreciation) on: Investments | | | 7,106,878 | |
| Foreign currency | | | 10 | |
| | | | 7,106,888 | |
| Net gain (loss) | | | 13,527,844 | |
| Net increase (decrease) in net assets resulting from operations | | $ | 13,430,821 | |
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Net Assets
| | | Years Ended December 31, | |
| Increase (Decrease) in Net Assets | | 2010 | | | 2009 | |
Operations: Net investment income (loss) | | $ | (97,023 | ) | | $ | 10,140 | |
| Net realized gain (loss) | | | 6,420,956 | | | | (5,079,785 | ) |
| Change in net unrealized appreciation (depreciation) | | | 7,106,888 | | | | 23,095,058 | |
| Net increase (decrease) in net assets resulting from operations | | | 13,430,821 | | | | 18,025,413 | |
Distributions to shareholders from: Net investment income: Class A | | | (7,813 | ) | | | — | |
| Total distributions | | | (7,813 | ) | | | — | |
Fund share transactions: Class A Proceeds from shares sold | | | 4,327,117 | | | | 3,565,715 | |
| Shares issued to shareholders in reinvestment of distributions | | | 7,813 | | | | — | |
| Payments for shares redeemed | | | (9,376,315 | ) | | | (19,620,216 | ) |
| Shares converted* | | | — | | | | 5,097 | |
| Net increase (decrease) in net assets from Class A share transactions | | | (5,041,385 | ) | | | (16,049,404 | ) |
Class B Payments for shares redeemed | | | — | | | | (21 | ) |
| Shares converted* | | | — | | | | (5,097 | ) |
| Net increase (decrease) in net assets from Class B share transactions | | | — | | | | (5,118 | ) |
| Increase (decrease) in net assets | | | 8,381,623 | | | | 1,970,891 | |
| Net assets at beginning of period | | | 50,663,296 | | | | 48,692,405 | |
| Net assets at end of period (including undistributed net investment income of $0 and $4,590, respectively) | | $ | 59,044,919 | | | $ | 50,663,296 | |
| Other Information | |
Class A Shares outstanding at beginning of period | | | 6,675,631 | | | | 9,629,198 | |
| Shares sold | | | 522,352 | | | | 533,210 | |
| Shares issued to shareholders in reinvestment of distributions | | | 906 | | | | — | |
| Shares redeemed | | | (1,165,758 | ) | | | (3,488,014 | ) |
| Shares converted* | | | — | | | | 1,237 | |
| Net increase (decrease) in Class A shares | | | (642,500 | ) | | | (2,953,567 | ) |
| Shares outstanding at end of period | | | 6,033,131 | | | | 6,675,631 | |
Class B Shares outstanding at beginning of period | | | — | | | | 1,306 | |
| Shares redeemed | | | — | | | | (5 | ) |
| Shares converted* | | | — | | | | (1,301 | ) |
| Net increase (decrease) in Class B shares | | | — | | | | (1,306 | ) |
| Shares outstanding at end of period | | | — | | | | — | |
* On March 6, 2009, Class B shares converted into Class A shares.
The accompanying notes are an integral part of the financial statements.
Financial Highlights
Class A Years Ended December 31, | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| Selected Per Share Data | |
| Net asset value, beginning of period | | $ | 7.59 | | | $ | 5.06 | | | $ | 12.55 | | | $ | 10.92 | | | $ | 11.02 | |
Income (loss) from investment operations: Net investment income (loss)a | | | (.02 | ) | | | .00 | * | | | (.01 | ) | | | (.04 | ) | | | (.01 | ) |
| Net realized and unrealized gain (loss) | | | 2.22 | | | | 2.53 | | | | (5.28 | ) | | | 2.64 | | | | .77 | |
| Total from investment operations | | | 2.20 | | | | 2.53 | | | | (5.29 | ) | | | 2.60 | | | | .76 | |
Less distributions from: Net investment income | | | (.00 | )* | | | — | | | | — | | | | — | | | | — | |
| Net realized gains | | | — | | | | — | | | | (2.20 | ) | | | (.97 | ) | | | (.86 | ) |
| Tax return of capital | | | — | | | | — | | | | (.00 | )* | | | — | | | | — | |
| Total distributions | | | (.00 | )* | | | — | | | | (2.20 | ) | | | (.97 | ) | | | (.86 | ) |
| Net asset value, end of period | | $ | 9.79 | | | $ | 7.59 | | | $ | 5.06 | | | $ | 12.55 | | | $ | 10.92 | |
| Total Return (%) | | | 29.00 | b | | | 50.00 | | | | (49.49 | )b | | | 25.75 | | | | 6.52 | |
| Ratios to Average Net Assets and Supplemental Data | |
| Net assets, end of period ($ millions) | | | 59 | | | | 51 | | | | 49 | | | | 129 | | | | 117 | |
| Ratio of expenses before expense reductions (%) | | | .99 | | | | .89 | | | | 1.03 | | | | .95 | | | | .97 | |
| Ratio of expenses after expense reductions (%) | | | .99 | | | | .89 | | | | 1.00 | | | | .95 | | | | .97 | |
| Ratio of net investment income (loss) (%) | | | (.19 | ) | | | .02 | | | | (.14 | ) | | | (.36 | ) | | | (.06 | ) |
| Portfolio turnover rate (%) | | | 96 | | | | 86 | | | | 156 | | | | 133 | | | | 148 | |
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. * Amount is less than $.005. | |
Notes to Financial Statements
A. Organization and Significant Accounting Policies
DWS Variable Series II (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company organized as a Massachusetts business trust. The Trust offers seventeen funds (hereinafter referred to individually as "Fund" or collectively as "Funds"), including DWS Alternative Asset Allocation Plus VIP that invests primarily in existing affiliated DWS Funds ("Underlying Funds") and exchange-traded funds ("ETFs"). Each Underlying Fund's accounting policies and investment holdings are outlined in the Underlying Fund's financial statements and are available upon request. Each Fund (except DWS Technology VIP) is classified as a diversified open-end management investment company. DWS Technology VIP is classified as a non-diversified, open-end management investment company.
Multiple Classes of Shares of Beneficial Interest. Certain Funds of the Trust offer two classes of shares (Class A shares and Class B shares). Effective February 5, 2010, Class B shares of DWS Core Fixed Income VIP were converted into the Class A shares of the same Fund. Sales of Class B shares are subject to record keeping fees up to 0.15% and Rule 12b-1 fees under the 1940 Act equal to an annual rate of 0.25%, of the average daily net assets of the Class B shares of the applicable Fund. Class A shares are not subject to such fees.
Investment income, realized and unrealized gains and losses, and certain fund-level expenses and expense reductions, if any, are borne pro rata on the basis of relative net assets by the holders of all classes of shares except that each class bears certain expenses unique to that class (including the applicable Rule 12b-1 fee and record keeping fees). Differences in class-level expenses may result in payment of different per share dividends by class. All shares have equal rights with respect to voting subject to class-specific arrangements.
The Trust's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require the use of management estimates. Actual results could differ from those estimates. The policies described below are followed consistently by the Trust in the preparation of its financial statements.
Security Valuation. Investments are stated at value determined as of the close of regular trading on the New York Stock Exchange on each day the exchange is open for trading.
Various inputs are used in determining the value of the Funds' investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Funds' own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
DWS Money Market VIP values all securities utilizing the amortized cost method permitted in accordance with Rule 2a-7 under the 1940 Act and certain conditions therein. Under this method, which does not take into account unrealized capital gains or losses on securities, an instrument is initially valued at its cost and thereafter assumes a constant accretion/amortization rate to maturity of any discount or premium. Securities held by a money market fund are reflected as Level 2 because the securities are valued at amortized cost (which approximates fair value) and, accordingly, the inputs used to determine value are not quoted prices in an active market.
Equity securities and ETFs are valued at the most recent sale price or official closing price reported on the exchange (US or foreign) or over-the-counter market on which they trade and are categorized as Level 1 securities. Securities or ETFs for which no sales are reported are valued at the calculated mean between the most recent bid and asked quotations on the relevant market or, if a mean cannot be determined, at the most recent bid quotation. For certain international equity securities, in order to adjust for events which may occur between the close of the foreign exchanges and the close of the New York Stock Exchange, a fair valuation model may be used. This fair valuation model takes into account comparisons to the valuation of American Depository Receipts (ADRs), exchange-traded funds, futures contracts and ce rtain indices and these securities are categorized as Level 2.
Debt securities are valued by independent pricing services approved by the Funds' Board. If the pricing services are unable to provide valuations, securities are valued at the most recent bid quotation or evaluated price, as applicable, obtained from one or more broker-dealers. Such services may use various pricing techniques which take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics and other data, as well as broker quotes. These securities are generally categorized as Level 2.
Futures contracts are generally valued at the settlement prices established each day on the exchange on which they are traded and are categorized as Level 1.
Forward currency contracts are valued at the prevailing forward exchange rate of the underlying currencies and are categorized as Level 2.
Swap contracts are valued daily based upon prices supplied by a Board approved pricing vendor, if available, and otherwise are valued at the price provided by the broker-dealer. Swap contracts are generally categorized as Level 2.
Exchange-traded options are valued at the last sale price or, in the absence of a sale, the mean between the closing bid and asked prices or at the most recent asked price (bid for purchased options) if no bid or asked price are available. Exchange-traded options are categorized as Level 1. Over-the-counter written or purchased options are valued based upon a price provided by the broker-dealer with which the option, was traded and are generally categorized as Level 3.
Money market instruments purchased with an original or remaining maturity of sixty days or less, maturing at par, are valued at amortized cost, which approximates value, and are categorized as Level 2. Investments in open-end investment companies are valued at their net asset value each business day and are categorized as Level 1.
Investments in the Underlying Funds are valued at the net asset value per share of each class of the Underlying Funds and are categorized as Level 1.
Securities and other assets for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value are valued in a manner that is intended to reflect their fair value as determined in accordance with procedures approved by the Board and are generally categorized as Level 3. In accordance with each Fund's valuation procedures, factors used in determining value may include, but are not limited to, the type of the security; the size of the holding; the initial cost of the security; the existence of any contractual restrictions on the security's disposition; the price and extent of public trading in similar securities of the issuer or of comparable companies; quotations or evaluated prices from broker-dealers and/or pricing services; information obtained from the issuer, analysts, and/or the appropriate stock exchange (for exchange-traded securities); an analysis of the company's or issuer's financial statements; an evaluation of the forces that influence the issuer and the market(s) in which the security is purchased and sold and with respect to debt securities; the maturity, coupon, creditworthiness, currency denomination and the movement of the market in which the security is normally traded. The value determined under these procedures may differ from published values for the same securities.
Disclosure about the classification of fair value measurements is included in a table following the Funds' Investment Portfolio.
Foreign Currency Translations. The books and records of the Trust are maintained in US dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into US dollars at the prevailing exchange rates at period end. Purchases and sales of investment securities, income and expenses are translated into US dollars at the prevailing exchange rates on the respective dates of the transactions.
Net realized and unrealized gains and losses on foreign currency transactions represent net gains and losses between trade and settlement dates on securities transactions, the disposition of forward foreign currency exchange contracts and foreign currencies, and the difference between the amount of net investment income accrued and the US dollar amount actually received. 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 but is included with net realized and unrealized gain/appreciation and loss/depreciation on investments.
Repurchase Agreements. Each Fund may enter into repurchase agreements with certain banks and broker/dealers whereby each Fund, through its custodian or sub-custodian bank, receives delivery of the underlying securities, the amount of which at the time of purchase and each subsequent business day is required to be maintained at such a level that the value is equal to at least the principal amount of the repurchase price plus accrued interest. The custodian bank holds the collateral in a separate account until the agreement matures. If the value of the securities falls below the principal amount of the repurchase agreement plus accrued interest, the financial institution deposits additional collateral by the following business day. If the financial institution either fails to deposit the required additional collateral or fails to repurchase the securities as agreed, the Fund has the right to sell the securities and recover any resulting loss from the financial institution. If the financial institution enters into bankruptcy, the Fund's claim on the collateral may be subject to legal proceedings.
Securities Lending. Each Fund, except DWS Money Market VIP and DWS Alternative Asset Allocation Plus VIP, lends securities to certain financial institutions. The Fund retains beneficial ownership of the securities it has loaned and continues to receive interest and dividends paid by the issuer of securities and to participate in any changes in their market value. The Fund requires the borrowers of the securities to maintain collateral with the Fund consisting of either cash or liquid, unencumbered assets having a value at least equal to the value of the securities loaned. When the collateral falls below specified amounts, the lending agent will use its best effort to obtain additional collateral on the next business day to meet required amounts u nder the security lending agreement. The Fund may invest the cash collateral into a joint trading account in an affiliated money market fund pursuant to Exemptive Orders issued by the SEC. The Fund receives compensation for lending its securities either in the form of fees or by earning interest on invested cash collateral net of borrower rebates and fees paid to a lending agent. Either the Fund or the borrower may terminate the loan. There may be risks of delay and costs in recovery of securities or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund is also subject to all investment risks associated with the reinvestment of any cash collateral received, including, but not limited to, interest rate, credit and liquidity risk associated with such investments. DWS Government & Agency Securities VIP had no securities on loan as of December 31, 2010.
Loan Participations and Assignments. DWS Balanced VIP, DWS High Income VIP and DWS Strategic Income VIP invest in Loan Participations and Assignments. Loan Participations and Assignments are portions of loans originated by banks and sold in pieces to investors. These US dollar-denominated fixed and floating rate loans ("Loans") in which the Fund invests, are arranged between the borrower and one or more financial institutions ("Lenders"). These Loans may take the form of Senior Loans, which are corporate obligations often issued in connection with recapitalizations, acquisitions, leveraged buy-outs and refinancings, and Sovereign Loans, which are debt instruments between a foreign sovereign entity and one or more financial institutions. The Fund invests in such Loans in the form of participations in Loans ("Participations") or assignments of all or a portion of Loans from third parties ("Assignments"). Participations typically result in the Fund having a contractual relationship only with the Lender, not with the borrower. The Fund has the right to receive payments of principal, interest and any fees to which it is entitled from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Participations, the Fund generally has no right to enforce compliance by the borrower with the terms of the loan agreement relating to the Loan, or any rights of set-off against the borrower, and the Fund will not benefit directly from any collateral supporting the Loan in which it has purchased the Participation. As a result, the Fund assumes the credit risk of both the borrower and the Lender that is selling the Participation. Assignments typically result in the Fund having a direct cont ractual relationship with the borrower, and the Fund may enforce compliance by the borrower with the terms of the loan agreement. All Loan Participations and Assignments involve interest rate risk, liquidity risk and credit risk, including the potential default or insolvency of the borrower.
Participatory Notes. DWS Global Thematic VIP invests in Participatory Notes (P-Notes). P-Notes are promissory notes designed to offer a return linked to the performance of a particular underlying equity security or market. P-Notes are issued by banks or broker-dealers and allow the Fund to gain exposure to local shares in foreign markets. Investments in P-Notes involve the same risks associated with a direct investment in the underlying foreign companies or foreign markets that they seek to replicate. Although each participation note is structured with a defined maturity date, early redemption may be possible. Risks associated with participation notes include the possible failure of a counterparty to perform in accordance with the terms of the ag reement and potential delays or an inability to redeem before maturity under certain market conditions.
Mortgage Dollar Rolls. DWS Balanced VIP, DWS Core Fixed Income VIP and DWS Government & Agency Securities VIP may enter into mortgage dollar rolls in which the Fund sells to a bank or broker/dealer (the "counterparty") mortgage-backed securities for delivery in the current month and simultaneously contracts to repurchase similar, but not identical, securities on a fixed date. The counterparty receives all principal and interest payments, including prepayments, made on the security while it is the holder. The Fund receives compensation as consideration for entering into the commitment to repurchase. The compensation is paid in the form of a lower price for the security upon its repurchase, or alternatively, a fee. Mortgage dollar rolls may be renewed with a new sale and repurchase price and a cash settlement made at each renewal without physical delivery of the securities subject to the contract.
Certain risks may arise upon entering into mortgage dollar rolls from the potential inability of counterparties to meet the terms of their commitments. Additionally, the value of such securities may change adversely before the Fund is able to repurchase them. There can be no assurance that the Fund's use of the cash that it receives from a mortgage dollar roll will provide a return that exceeds its costs.
When-Issued/Delayed Delivery Securities. DWS Balanced VIP, DWS Core Fixed Income VIP, DWS Government & Agency Securities VIP, DWS High Income VIP and DWS Strategic Income VIP may purchase securities with delivery or payment to occur at a later date beyond the normal settlement period. At the time the Fund enters into a commitment to purchase a security, the transaction is recorded and the value of the security is reflected in the net asset value. The price of such security and the date when 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 the Fund enters into this t ype of transaction it is required to segregate cash or other liquid assets at least equal to the amount of the commitment.
Certain risks may arise upon entering into when-issued or delayed delivery securities from the potential inability of counterparties to meet the terms of their contracts or if the issuer does not issue the securities due to political, economic, or other factors. Additionally, losses may arise due to changes in the value of the underlying securities.
Taxes. Each Fund's policy is to comply with the requirements of the Internal Revenue Code, as amended, which are applicable to regulated investment companies and to distribute all of its taxable income to its shareholders.
Additionally, based on the Funds' understanding of the tax rules and rates related to income, gains and transactions for the foreign jurisdictions in which they invest, the Funds will provide for foreign taxes, and where appropriate, deferred foreign taxes.
At December 31, 2010, the following Funds had an approximate net tax basis capital loss carryforward which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until the following expiration dates, whichever occurs first:
| Fund | | Capital Loss Carryforward ($) | | | Expiration Date | | | Capital Loss Carryforward Utilized ($) | | | Capital Loss Carryforward Expired ($) | |
| DWS Balanced VIP | | | 6,483,000 | | | 12/31/2016 | | | | 16,309,000 | | | | — | |
| | | | 45,045,000 | | | 12/31/2017 | | | | | | | | | |
| DWS Blue Chip VIP | | | 15,813,000 | | | 12/31/2016 | | | | 10,865,000 | | | | — | |
| | | | 32,910,000 | | | 12/31/2017 | | | | | | | | | |
| DWS Core Fixed Income VIP | | | 5,512,000 | | | 12/31/2016 | | | | 4,494,000 | | | | — | |
| | | | 48,195,000 | | | 12/31/2017 | | | | | | | | | |
| DWS Diversified International Equity VIP | | | 30,075,000 | | | 12/31/2016 | | | | 2,858,000 | | | | — | |
| | | | 39,164,000 | | | 12/31/2017 | | | | | | | | | |
| DWS Dreman Small Mid Cap Value VIP | | | 10,090,000 | | | 12/31/2016 | | | | 30,517,000 | | | | — | |
| | | | 93,411,000 | | | 12/31/2017 | | | | | | | | | |
| DWS Global Thematic VIP | | | 35,242,000 | | | 12/31/2016 | | | | 6,786,000 | | | | — | |
| | | | 17,811,000 | | | 12/31/2017 | | | | | | | | | |
| DWS Government & Agency Securities VIP | | | — | | | | — | | | | 1,158,000 | | | | — | |
| DWS High Income VIP | | | 13,877,000 | | | 12/31/2011 | | | | 1,517,000 | | | | 53,591,000 | |
| | | | 3,844,000 | | | 12/31/2014 | | | | | | | | | |
| | | | 858,000 | | | 12/31/2015 | | | | | | | | | |
| | | | 17,300,000 | | | 12/31/2016 | | | | | | | | | |
| | | | 17,232,000 | | | 12/31/2017 | | | | | | | | | |
| DWS Large Cap Value VIP | | | 29,003,000 | | | 12/31/2016 | | | | 7,651,000 | | | | — | |
| | | | 12,084,000 | | | 12/31/2017 | | | | | | | | | |
| DWS Mid Cap Growth VIP | | | 18,281,000 | | | 12/31/2011 | | | | 1,874,000 | | | | — | |
| | | | 935,000 | | | 12/31/2016 | | | | | | | | | |
| | | | 6,533,000 | | | 12/31/2017 | | | | | | | | | |
| DWS Small Cap Growth VIP | | | 8,113,000 | | | 12/31/2016 | | | | 10,901,000 | | | | 55,922,000 | |
| | | | 34,287,000 | | | 12/31/2017 | | | | | | | | | |
| DWS Strategic Income VIP | | | 543,000 | | | 12/31/2017 | | | | 2,458,000 | | | | — | |
| DWS Strategic Value VIP | | | 52,455,000 | | | 12/31/2016 | | | | 15,988,000 | | | | — | |
| | | | 88,212,000 | | | 12/31/2017 | | | | | | | | | |
| DWS Technology VIP | | | 71,516,000 | | | 12/31/2011 | | | | 6,205,000 | | | | 87,294,000 | |
| | | | 13,148,000 | | | 12/31/2016 | | | | | | | | | |
| | | | 20,753,000 | | | 12/31/2017 | | | | | | | | | |
| DWS Turner Mid Cap Growth VIP | | | 800,000 | | | 12/31/2016 | | | | 5,953,000 | | | | — | |
| | | | 14,919,000 | | | 12/31/2017 | | | | | | | | | |
In addition, included in DWS Large Cap Value VIP's net tax basis capital loss carryforward of approximately $41,087,000 is $19,469,000 inherited from its merger with DWS Davis Venture Value VIP in fiscal year 2009, which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until the above expiration dates, whichever occurs first, subject to certain limitations under Sections 381-384 of the Internal Revenue Code.
In addition, from November 1, 2010 through December 31, 2010, the following Funds incurred net realized capital losses. As permitted by tax regulations, the Funds intend to elect to defer these losses and treat them as arising in the fiscal year ended December 31, 2011.
| Fund | | | |
| DWS Global Thematic VIP | | $ | 43,000 | |
| DWS High Income VIP | | | 185,000 | |
| DWS Strategic Income VIP | | | 472,000 | |
The Funds have reviewed the tax positions for the open tax years as of December 31, 2010 and have determined that no provision for income tax is required in the Funds' financial statements. The Funds' federal tax returns for the prior three fiscal years and for the two fiscal years of DWS Alternative Asset Allocation Plus VIP remain open subject to examination by the Internal Revenue Service.
Distribution of Income and Gains. Distributions of net investment income, if any, for each Fund, except DWS Money Market VIP, are made annually. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to each Fund if not distributed and, therefore, will be distributed to shareholders at least annually. Net investment income of DWS Money Market VIP is declared as a daily dividend and is distributed to shareholders monthly. DWS Money Market VIP may take into account capital gains and losses in its daily dividend declarations. Each Fund may also make additional distributions for tax purposes if necessary.
The timing and characterization of certain income and capital gains distributions are determined annually in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences primarily relate to net operating losses, investments in foreign denominated investments, investments in forward currency contracts, investments in futures contracts, investments in swap contracts, income received from Passive Foreign Investment Companies and Real Estate Investment Trusts and certain securities sold at a loss. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, each Fund may periodically make reclass ifications among certain of its capital accounts without impacting the net asset value of the Fund.
At December 31, 2010, the Funds' components of distributable earnings on a tax basis were as follows:
| Fund | | Undistributed Ordinary Income ($)* | | | Undistributed Net Long-Term Capital gains | | | Capital Loss Carryforwards ($) | | | Unrealized Appreciation (Depreciation) on Investments ($) | |
| DWS Alternative Asset Allocation Plus VIP | | | 426,034 | | | | 99,137 | | | | — | | | | 1,578,944 | |
| DWS Balanced VIP | | | 4,560,940 | | | | — | | | | (51,528,000 | ) | | | 39,560,610 | |
| DWS Blue Chip VIP | | | 1,146,935 | | | | — | | | | (48,723,000 | ) | | | 14,678,739 | |
| DWS Core Fixed Income VIP | | | 2,279,173 | | | | — | | | | (53,707,000 | ) | | | 2,267,700 | |
| DWS Diversified International Equity VIP | | | 1,473,946 | | | | — | | | | (69,239,000 | ) | | | 21,763,626 | |
| DWS Dreman Small Mid Cap Value VIP | | | 2,636,612 | | | | — | | | | (103,501,000 | ) | | | 59,732,698 | |
| DWS Global Thematic VIP | | | 363,173 | | | | — | | | | (53,053,000 | ) | | | 6,218,590 | |
| DWS Government & Agency Securities VIP | | | 7,707,477 | | | | 1,262,738 | | | | — | | | | 8,134,116 | |
| DWS High Income VIP | | | 16,310,534 | | | | — | | | | (53,111,000 | ) | | | (2,383,006 | ) |
| DWS Large Cap Value VIP | | | 4,084,211 | | | | — | | | | (41,087,000 | ) | | | 36,866,114 | |
| DWS Mid Cap Growth VIP | | | — | | | | — | | | | (25,749,000 | ) | | | 8,278,722 | |
| DWS Small Cap Growth VIP | | | 516,412 | | | | — | | | | (42,400,000 | ) | | | 27,549,602 | |
| DWS Strategic Income VIP | | | 4,050,541 | | | | — | | | | (543,000 | ) | | | 2,097,941 | |
| DWS Strategic Value VIP | | | 3,522,893 | | | | — | | | | (140,667,000 | ) | | | 36,835,037 | |
| DWS Technology VIP | | | — | | | | — | | | | (105,417,000 | ) | | | 28,995,869 | |
| DWS Turner Mid Cap Growth VIP | | | — | | | | — | | | | (15,719,000 | ) | | | 21,090,213 | |
In addition, the tax character of distributions paid by the Funds is summarized as follows:
| | | Distributions from Ordinary Income ($)* | |
| | | Years Ended December 31, | |
| Fund | | 2010 | | | 2009 | |
| DWS Alternative Asset Allocation Plus VIP | | | 210,676 | | | | — | |
| DWS Balanced VIP | | | 9,827,154 | | | | 11,680,702 | |
| DWS Blue Chip VIP | | | 1,577,833 | | | | 2,046,739 | |
| DWS Core Fixed Income VIP | | | 5,749,285 | | | | 11,379,976 | |
| DWS Diversified International Equity VIP | | | 1,843,687 | | | | 5,187,036 | |
| DWS Dreman Small Mid Cap Value VIP | | | 3,285,561 | | | | 4,442,178 | |
| DWS Global Thematic VIP | | | 650,285 | | | | 966,170 | |
| DWS Government & Agency Securities VIP | | | 8,062,626 | | | | 9,913,871 | |
| DWS High Income VIP | | | 15,337,062 | | | | 18,661,430 | |
| DWS Large Cap Value VIP | | | 4,122,165 | | | | 2,857,014 | |
| DWS Money Market VIP | | | 24,815 | | | | 1,233,830 | |
| DWS Strategic Income VIP | | | 4,806,010 | | | | 3,708,667 | |
| DWS Strategic Value VIP | | | 5,273,728 | | | | 12,860,410 | |
| DWS Technology VIP | | | 30,198 | | | | — | |
| DWS Turner Mid Cap Growth VIP | | | 7,813 | | | | — | |
* For tax purposes, short-term capital gain distributions are considered ordinary income distributions.
Expenses. Expenses of the Trust arising in connection with a specific fund are allocated to that fund. Other Trust expenses which cannot be directly attributed to a fund are apportioned among the funds in the Trust.
Contingencies. In the normal course of business, each Fund may enter into contracts with service providers that contain general indemnification clauses. The Funds' maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds that have not yet been made. However, based on experience, the Funds expect the risk of loss to be remote.
Real Estate Investment Trusts. DWS Balanced VIP and DWS Dreman Small Mid Cap Value VIP periodically recharacterize distributions received from a Real Estate Investment Trust ("REIT") investment based on information provided by the REIT into the following categories: ordinary income, long-term and short-term capital gains, and return of capital. If information is not available timely from a REIT, the recharacterization will be estimated for financial reporting purposes and a recharacterization will be made to the accounting records in the following year when such information becomes available. Distributions received from REITs in excess of income are recorded as either a reduction of cost of investments or realized gains. The Fund distinguishes be tween dividends on a tax basis and a financial reporting basis and only distributions in excess of tax basis earnings and profits are reported in the financial statements as a return of capital.
Other. Investment transactions are accounted for on a trade date plus one basis for daily net asset value calculations. However, for financial reporting purposes, investment transactions are reported on trade date. Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date net of foreign withholding taxes. Certain dividends from foreign securities may be recorded subsequent to the ex-dividend date as soon as the Fund is informed of such dividends. Realized gains and losses from investment transactions are recorded on an identified cost basis. All discounts and premiums are accreted/amortized for both tax and financial reporting purposes for each Fund, with the exception of securities in default of princi pal. Distributions of income and capital gains from the Underlying Funds are recorded on the ex-dividend date.
B. Derivative Instruments
Interest Rate Swap Contracts. For the year ended December 31, 2010, DWS Government & Agency Securities VIP and DWS Strategic Income VIP entered into interest rate swap transactions to gain exposure to different parts of the yield curve while managing overall duration. The use of interest rate swaps is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio security transactions. In an interest rate swap, the Fund agrees to pay to the other party to the interest rate swap (which is known as the "counterparty") a fixed rate payment in exchange for the counterparty agreeing to pay to the Fund a variable rate payment, or the Fund agrees to receive from the counterparty a fixed rate payment in exchange for the counterparty agreeing to receive from the Fund a variable rate payment. The payment obligations are based on the notional amount of the swap. Certain risks may arise when entering into swap transactions including counterparty default, liquidity or unfavorable changes in interest rates. In connection with these agreements, securities and or cash may be identified as collateral in accordance with the terms of the swap agreements to provide assets of value and recourse in the event of default. The maximum counterparty credit risk is the net present value of the cash flows to be received from or paid to the counterparty over the term of the interest rate swap contract, to the extent that this amount is beneficial to the Fund, in addition to any related collateral posted to the counterparty by the Fund. This risk may be partially reduced by a master netting arrangement between the Fund and the counterparty. The value of the swap is adjusted daily and the change in value, if any, is recorded as unrealized appreciation or depreciation in the Statement of Assets and Liabilities. An upfront payment made by the Fund is recorded as an asset in the Statement of Assets and Liabilities. An upfront payment received by the Fund is recorded as a liability in the Statement of Assets and Liabilities. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations.
A summary of the open interest rate swap contracts as of December 31, 2010 is included in a table following the Investment Portfolio for DWS Government & Agency Securities VIP and DWS Strategic Income VIP. For the year ended December 31, 2010, DWS Government & Agency Securities VIP's investment in interest rate swap contracts had a total notional amount generally indicative of a range from approximately $2,930,000 to $12,800,000 and DWS Strategic Income VIP's investment in interest rate swap contracts had a total notional amount generally indicative of a range from approximately $3,600,000 to $4,850,000.
Credit Default Swap Contracts. A credit default swap is a contract between a buyer and a seller of protection against pre-defined credit events for the reference entity. For the year ended December 31, 2010, DWS High Income VIP and DWS Strategic Income VIP bought or sold credit default swap contracts to gain exposure to an underlying issuer's credit quality characteristics without directly investing in that issuer, or to hedge the risk of default on Fund securities. As a seller in the credit default swap contract, the Fund is required to pay the par (or other agreed-upon) value of the referenced entity to the counterparty with the occurrence of a credit event by a third party, such as a US or foreign corporate issuer, on the reference entity, whi ch would likely result in a loss to the Fund. In return, the Fund receives from the counterparty a periodic stream of payments over the term of the contract provided that no credit event has occurred. If no credit event occurs, the Fund keeps the stream of payments with no payment obligations. The Fund may also buy credit default swap contracts in order to hedge against the risk of a credit event on debt securities, in which case the Fund functions as the counterparty referenced above. This involves the risk that the contract may expire worthless. It also involves counterparty risk that the seller may fail to satisfy its payment obligations to the Fund with the occurrence of a credit event. When the Fund sells a credit default swap contract it will cover its commitment. This may be achieved by, among other methods, maintaining cash or liquid assets equal to the aggregate notional value of the reference entities for all outstanding credit default swap contracts sold by the Fund.
The value of the credit default swap is adjusted daily and the change in value, if any, is recorded daily as unrealized appreciation or depreciation in the Statement of Assets and Liabilities. An upfront payment made by the Fund is recorded as an asset in the Statement of Assets and Liabilities. An upfront payment received by the Fund is recorded as a liability in the Statement of Assets and Liabilities. Under the terms of the credit default swap contracts, the Fund receives or makes quarterly payments based on a specified interest rate on a fixed notional amount. These payments are recorded as a realized gain or loss in the Statement of Operations. Payments received or made as a result of a credit event or termination of the contract are recognized, net of a proportional amount of the upfront payment, as realized gai ns or losses in the Statement of Operations.
A summary of the open credit default swap contracts as of December 31, 2010 is included in a table following the Investment Portfolio for DWS High Income VIP and DWS Strategic Income VIP. For the year ended December 31, 2010, DWS Strategic Income VIP's investment in credit default swap contracts purchased had a total notional value generally indicative of a range from $0 to approximately $4,000,000. DWS High Income VIP's investment in credit default swap contracts sold had a total notional value generally indicative of a range from $0 to approximately $17,275,000 and DWS Strategic Income VIP's investment in credit default swap contracts sold had a total notional value generally indicative of a range from approximately $580,000 to $2,370,000.
Total Return Swap Contracts. Total return swaps involve commitments to pay interest in exchange for a market-linked return based on a notional amount. For the year ended December 31, 2010, DWS Strategic Income VIP and DWS Government & Agency Securities VIP entered into total return swap transactions to enhance potential gain. To the extent the total return of the reference security or index underlying the total return swap exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment or make a payment to the counterparty, respectively. Certain risks may arise when entering into swap transactions including counterparty default, liquidity or unfavorable changes in the value of underlying reference security o r index. The value of the swap is adjusted daily and the change in value, if any, is recorded as unrealized appreciation or depreciation in the Statement of Assets and Liabilities. An upfront payment made by the Fund is recorded as an asset in the Statement of Assets and Liabilities. An upfront payment received by the Fund is recorded as a liability in the Statement of Assets and Liabilities. Payments received or made at the end of each measurement period are recorded as realized gain or loss in the Statement of Operations.
A summary of the open total return swap contracts as of December 31, 2010 is included in a table following the Investment Portfolio for DWS Government & Agency Securities VIP and DWS Strategic Income VIP. For the year ended December 31, 2010, DWS Government & Agency Securities VIP's investment in total return swap contracts had a total notional amount generally indicative of a range from approximately $6,900,000 to $9,000,000 and DWS Strategic Income VIP's investment in total return swap contracts had a total notional amount generally indicative of a range from approximately $2,800,000 to $3,000,000.
Options. An option contract is a contract in which the writer (seller) of the option grants the buyer of the option, upon payment of a premium, the right to purchase from (call option), or sell to (put option), the writer a designated instrument at a specified price within a specified period of time. Certain options, including options on indices and interest rate options, will require cash settlement by the Fund if the option is exercised. Interest rate options are comprised of multiple European style options that have periodic exercise dates within the terms of the contract. For the year ended December 31, 2010, DWS Global Thematic VIP and DWS Government & Agency Securities VIP entered into option contracts in order to enhance potential gain . For the year ended December 31, 2010, DWS Strategic Income VIP entered into option contracts in order to hedge against potential adverse interest rate movements of portfolio assets.
The liability representing the Fund's obligation under an exchange-traded written option or investment in a purchased option is valued at the last sale price or, in the absence of a sale, the mean between the closing bid and asked prices or at the most recent asked price (bid for purchased options) if no bid and asked price are available. Over-the-counter written or purchased options are valued using dealer-supplied quotations. Gain or loss is recognized when the option contract expires, exercised or is closed.
If the Fund writes a covered call option, the Fund foregoes, in exchange for the premium, the opportunity to profit during the option period from an increase in the market value of the underlying security above the exercise price. If the Fund writes a put option it accepts the risk of a decline in the value of the underlying security below the exercise price. Over-the-counter options have the risk of the potential inability of counterparties to meet the terms of their contracts. The Fund's maximum exposure to purchased options is limited to the premium initially paid. In addition, certain risks may arise upon entering into option contracts including the risk that an illiquid secondary market will limit the Fund's ability to close out an option contract prior to the expiration date and that a change in the value of the option contract may not correlate exactly with changes in the value of the securities or currencies hedged.
A summary of the open option contracts as of December 31, 2010 is included in the Investment Portfolio for DWS Strategic Income VIP. For the year ended December 31, 2010, DWS Strategic Income VIP's investment in written option contracts had a total value generally indicative of a range from $0 to approximately $53,000 and in purchased option contracts had a total value generally indicative of a range from $0 to approximately $59,000.
There are no open option contracts as of December 31, 2010 for DWS Global Thematic VIP and DWS Government & Agency Securities VIP. During the year ended December 31, 2010, DWS Global Thematic VIP's investment in purchased option contracts had a total value generally indicative of a range from $0 to approximately $1,000 and DWS Government & Agency Securities VIP's investment in written option contracts had a total value generally indicative of a range from $0 to approximately $197,000 and in purchased option contracts had a total value generally indicative of a range from $0 to approximately $49,000.
Futures Contracts. A futures contract is an agreement between a buyer or seller and an established futures exchange or its clearinghouse in which the buyer or seller agrees to take or make a delivery of a specific amount of a financial instrument at a specified price on a specific date (settlement date). For the year ended December 31, 2010, DWS Balanced VIP, DWS Core Fixed Income VIP, DWS Government & Agency Securities VIP and DWS Strategic Income VIP entered into interest rate futures to gain exposure to different parts of the yield curve while managing overall duration. In addition, DWS Balanced VIP and DWS Strategic Income VIP seek to enhance returns by employing a global tactical asset allocation overlay strategy. DWS Balanced VIP and DW S Strategic Income VIP enter into futures contracts on fixed-income securities and equities, including on financial indices, and security indices and on currency as part of its global tactical asset allocation overlay strategy. For the year ended December 31, 2010, as part of this strategy, DWS Balanced VIP and DWS Strategic Income VIP used futures contracts to attempt to take advantage of short-term and medium-term inefficiencies within the global equity and bond markets. For the year ended December 31, 2010, DWS Blue Chip VIP and DWS Diversified International Equity VIP entered into futures contracts to keep cash on hand to meet shareholder redemptions or other needs while maintaining exposure to the market. DWS Diversified International Equity VIP also entered into futures contracts as a means of gaining exposure to a particular asset class.
Futures contracts are valued at the most recent settlement price. Upon entering into a futures contract, the Fund is required to deposit with a financial intermediary cash or securities ("initial margin") in an amount equal to a certain percentage of the face value indicated in the futures contract. Subsequent payments ("variation margin") are made or received by the Fund dependent upon the daily fluctuations in the value and are recorded for financial reporting purposes as unrealized gains or losses by the Fund. Gains or losses are realized when the contract expires or is closed. Since all futures contracts are exchange-traded, counterparty risk is minimized as the exchange's clearinghouse acts as the counterparty, and guarantees the futures against default.
Certain risks may arise upon entering into futures contracts, including the risk that an illiquid market will limit the Fund's ability to close out a futures contract prior to the settlement date and that a change in the value of a futures contract may not correlate exactly with the changes in the value of the underlying hedged security, index or currency. Risk of loss may exceed amounts recognized in the Statement of Assets and Liabilities.
A summary of the open futures contracts as of December 31, 2010 is included in a table following the Investment Portfolio for DWS Balanced VIP, DWS Blue Chip VIP, DWS Core Fixed Income VIP, DWS Diversified International Equity VIP, DWS Government & Agency Securities VIP and DWS Strategic Income VIP. For the year ended December 31, 2010, DWS Balanced VIP's investment in futures contracts purchased had a total notional value generally indicative of a range from approximately $67,752,000 to $118,748,000, DWS Blue Chip VIP's investment in futures contracts purchased had a total notional value generally indicative of a range from approximately $359,000 to $1,806,000, DWS Diversified International Equity VIP's investment in futures contracts purchased had a total notional value generally indicative of a range from appro ximately $676,000 to $2,958,000, DWS Government & Agency Securities VIP's investment in futures contracts purchased had a total notional value generally indicative of a range from $0 to approximately $33,947,000 and DWS Strategic Income VIP's investment in futures contracts purchased had a total notional value generally indicative of a range from approximately $19,962,000 to $32,102,000. DWS Balanced VIP's investment in futures contracts sold had a total notional value generally indicative of a range from approximately $60,075,000 to $95,480,000, DWS Core Fixed Income VIP's investment in futures contracts sold had a total notional value generally indicative of a range from $0 to approximately $25,611,000, DWS Government & Agency Securities VIP's investment in futures contracts sold had a total notional value generally indicative of a range from approximately $14,332,000 to $49,098,000 and DWS Strategic Income VIP's investment in futures contracts sold had a total notional value generally indicative o f a range from approximately $13,614,000 to $21,729,000.
Forward Foreign Currency Exchange Contracts. A forward foreign currency exchange contract ("forward currency contract") is a commitment to purchase or sell a foreign currency at the settlement date at a negotiated rate. For the year ended December 31, 2010, DWS Balanced VIP, DWS High Income VIP and DWS Strategic Income VIP entered into forward currency contracts in order to hedge its exposure to changes in foreign currency exchange rates on its foreign currency denominated portfolio holdings and to facilitate transactions in foreign currency denominated securities. In addition, DWS Balanced VIP and DWS Strategic Income VIP seek to enhance returns by employing a global tactical asset allocation overlay strategy. For the year ended December 31, 201 0, as part of this strategy, DWS Balanced VIP and DWS Strategic Income VIP used forward currency contracts to gain exposure to changes in the value of foreign currencies, and to attempt to take advantage of short-term and medium-term inefficiencies within the currency markets.
Forward currency contracts are valued at the prevailing forward exchange rate of the underlying currencies and unrealized gain (loss) is recorded daily. On the settlement date of the forward currency contract, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it was closed. Certain risks may arise upon entering into forward currency contracts from the potential inability of counterparties to meet the terms of their contracts. The maximum counterparty credit risk to the Fund is measured by the unrealized gain on appreciated contracts. Additionally, when utilizing forward currency contracts to hedge, the Fund gives up the opportunity to profit from favorable exchange rate movements during the term of the contract.
A summary of the open forward currency contracts as of December 31, 2010 is included in a table following the Investment Portfolio for DWS Balanced VIP, DWS High Income VIP and DWS Strategic Income VIP. For the year ended December 31, 2010, DWS Balanced VIP's investment in forward currency contracts US dollars purchased had a total contract value generally indicative of a range from approximately $15,249,000 to $33,339,000, DWS High Income VIP's investment in forward currency contracts US dollars purchased had a total contract value generally indicative of a range from approximately $6,564,000 to $13,966,000 and DWS Strategic Income VIP's investment in forward currency contracts US dollars purchased had a total contract value generally indicative of a range from approximately $12,029,000 to $20,192,000. DWS Balanced V IP's investment in forward currency contracts US dollars sold had a total contract value generally indicative of a range from approximately $13,605,000 to $33,480,000, DWS High Income VIP's investment in forward currency contracts US dollars sold had a total contract value generally indicative of a range from $0 to approximately $210,000 and DWS Strategic Income VIP's investment in forward currency contracts US dollars sold had a total contract value generally indicative of a range from approximately $3,370,000 to $8,365,000.
DWS Balanced VIP
The following tables summarize the value of the Fund's derivative instruments held as of December 31, 2010 and the related location in the accompanying Statement of Assets and Liabilities, presented by primary underlying risk exposure:
| Asset Derivative | | Forward Contracts | |
| Foreign Exchange Contracts (a) | | $ | 760,385 | |
The above derivative is located in the following Statement of Assets and Liabilities account:
(a) Unrealized appreciation on open forward foreign currency exchange contracts
| Liability Derivatives | | Forward Contracts | | | Futures Contracts | | | Total | |
| Equity Contracts (a) | | $ | — | | | $ | 112,848 | | | $ | 112,848 | |
| Interest Rate Contracts (a) | | | — | | | | (268,526 | ) | | | (268,526 | ) |
| Foreign Exchange Contracts (b) | | | (677,737 | ) | | | — | | | | (677,737 | ) |
| | | $ | (677,737 | ) | | $ | (155,678 | ) | | $ | (833,415 | ) |
Each of the above derivatives is located in the following Statement of Assets and Liabilities accounts:
(a) Net unrealized appreciation (depreciation) on futures. Liability of payable for daily variation margin on open futures contracts reflects unsettled variation margin
(b) Unrealized depreciation on open forward foreign currency exchange contracts
Additionally, the amount of unrealized and realized gains and losses on derivative instruments recognized in Fund earnings during the year ended December 31, 2010 and the related location in the accompanying Statement of Operations is summarized in the following tables by primary underlying risk exposure:
| Realized Gain (Loss) | | Forward Contracts | | | Futures Contracts | | | Total | |
| Equity Contracts (a) | | $ | — | | | $ | (1,379,315 | ) | | $ | (1,379,315 | ) |
| Interest Rate Contracts (a) | | | — | | | | 1,053,743 | | | | 1,053,743 | |
| Foreign Exchange Contracts (b) | | | 171,662 | | | | — | | | | 171,662 | |
| | | $ | 171,662 | | | $ | (325,572 | ) | | $ | (153,910 | ) |
Each of the above derivatives is located in the following Statement of Operations accounts:
(a) Net realized gain (loss) from futures
(b) Net realized gain (loss) from foreign currency (Statement of Operations includes both forward currency contracts and foreign currency transactions)
| Change in Net Unrealized Appreciation (Depreciation) | | Forward Contracts | | | Futures Contracts | | | Total | |
| Equity Contracts (a) | | $ | — | | | $ | 26,819 | | | $ | 26,819 | |
| Interest Rate Contracts (a) | | | — | | | | 67,655 | | | | 67,655 | |
| Foreign Exchange Contracts (b) | | | (60,489 | ) | | | — | | | | (60,489 | ) |
| | | $ | (60,489 | ) | | $ | 94,474 | | | $ | 33,985 | |
Each of the above derivatives is located in the following Statement of Operations accounts:
(a) Change in net unrealized appreciation (depreciation) on futures
(b) Change in net unrealized appreciation (depreciation) on foreign currency (Statement of Operations includes both forward currency contracts and foreign currency transactions)
DWS Blue Chip VIP
The following table summarizes the value of the Fund's derivative instruments held as of December 31, 2010 and the related location in the accompanying Statement of Assets and Liabilities, presented by primary underlying risk exposure:
| Asset Derivative | | Futures Contracts | |
| Equity Contracts (a) | | $ | 15,218 | |
The above derivative is located in the following Statement of Assets and Liabilities account:
(a) Net unrealized appreciation (depreciation) on futures. Asset of receivable for daily variation margin on open futures contracts reflects unsettled variation margin.
Additionally, the amount of unrealized and realized gains and losses on derivative instruments recognized in Fund earnings during the year ended December 31, 2010 and the related location in the accompanying Statement of Operations is summarized in the following tables by primary underlying risk exposure:
| Realized Gain (Loss) | | Futures Contracts | |
| Equity Contracts (a) | | $ | 130,929 | |
The above derivative is located in the following Statement of Operations account:
(a) Net realized gain (loss) from futures
| Change in Net Unrealized Appreciation (Depreciation) | | Futures Contracts | |
| Equity Contracts (a) | | $ | 7,705 | |
The above derivative is located in the following Statement of Operations account:
(a) Change in net unrealized appreciation (depreciation) on futures
DWS Core Fixed Income VIP
The following table summarizes the value of the Fund's derivative instruments held as of December 31, 2010 and the related location in the accompanying Statement of Assets and Liabilities, presented by primary underlying risk exposure:
| Asset Derivative | | Futures Contracts | |
| Interest Rate Contracts (a) | | $ | 617,391 | |
The above derivative is located in the following Statement of Assets and Liabilities account:
(a) Net unrealized appreciation (depreciation) on futures. Liability of payable for daily variation margin on open futures contracts reflects unsettled variation margin.
Additionally, the amount of unrealized and realized gains and losses on derivative instruments recognized in Fund earnings during the year ended December 31, 2010 and the related location in the accompanying Statement of Operations is summarized in the following tables by primary underlying risk exposure:
| Realized Gain (Loss) | | Futures Contracts | |
| Interest Rate Contracts (a) | | $ | (504,977 | ) |
The above derivative is located in the following Statement of Operations account:
(a) Net realized gain (loss) from futures
| Change in Net Unrealized Appreciation (Depreciation) | | Futures Contracts | |
| Interest Rate Contracts (a) | | $ | 534,420 | |
The above derivative is located in the following Statement of Operations account:
(a) Change in net unrealized appreciation (depreciation) on futures
DWS Diversified International Equity VIP
The following table summarizes the value of the Fund's derivative instruments held as of December 31, 2010 and the related location in the accompanying Statement of Assets and Liabilities, presented by primary underlying risk exposure:
| Liability Derivative | | Futures Contracts | |
| Equity Contracts (a) | | $ | (39,027 | ) |
The above derivative is located in the following Statement of Assets and Liabilities account:
(a) Net unrealized appreciation (depreciation) on futures. Liability of payable for daily variation margin on open futures contracts reflects unsettled variation margin.
Additionally, the amount of unrealized and realized gains and losses on derivative instruments recognized in Fund earnings during the year ended December 31, 2010 and the related location in the accompanying Statement of Operations is summarized in the following tables by primary underlying risk exposure:
| Realized Gain (Loss) | | Futures Contracts | |
| Equity Contracts (a) | | $ | 139,952 | |
The above derivative is located in the following Statement of Operations account:
(a) Net realized gain (loss) from futures
| Change in Net Unrealized Appreciation (Depreciation) | | Futures Contracts | |
| Equity Contracts (a) | | $ | (169,560 | ) |
The above derivative is located in the following Statement of Operations account:
(a) Change in net unrealized appreciation (depreciation) on futures
DWS Global Thematic VIP
The following tables summarize the amount of unrealized and realized gains and losses on derivative instruments recognized in Fund earnings during the year ended December 31, 2010 and the related location in the accompanying Statement of Operations, presented by primary underlying risk exposure:
| Realized Gain (Loss) | | Purchased Options | |
| Equity Contracts (a) | | $ | (212,772 | ) |
The above derivative is located in the following Statement of Operations account:
(a) Net realized gain (loss) from investments (includes purchased options)
| Change in Net Unrealized Appreciation (Depreciation) | | Purchased Options | |
| Equity Contracts (a) | | $ | 212,262 | |
The above derivative is located in the following Statement of Operations account:
(a) Change in net unrealized appreciation (depreciation) on investments (includes purchased options)
DWS Government & Agency Securities VIP
The following tables summarize the value of the Fund's derivative instruments held as of December 31, 2010 and the related location in the accompanying Statement of Assets and Liabilities, presented by primary underlying risk exposure:
| Asset Derivative | | Swap Contracts | |
| Interest Rate Contracts (a) | | $ | 6,598 | |
The above derivative is located in the following Statement of Assets and Liabilities account:
(a) Unrealized appreciation on open swap contracts
| Liability Derivative | | Futures Contracts | | | Swap Contracts | | | Total | |
| Interest Rate Contracts (a) | | $ | (145,683 | ) | | $ | (165,133 | ) | | $ | (310,816 | ) |
Each of the above derivatives is located in the following Statement of Assets and Liabilities accounts:
(a) Net unrealized appreciation (depreciation) on futures and unrealized depreciation on open swap contracts. Liability of payable for daily variation margin on open futures contracts reflects unsettled variation margin.
Additionally, the amount of unrealized and realized gains and losses on derivative instruments recognized in Fund earnings during the year ended December 31, 2010 and the related location in the accompanying Statement of Operations is summarized in the following tables by primary underlying risk exposure:
| Realized Gain (Loss) | | Purchased Options | | | Written Options | | | Swap Contracts | | | Futures Contracts | | | Total | |
| Interest Rate Contracts (a) | | $ | (323,210 | ) | | $ | 87,625 | | | $ | (659,466 | ) | | $ | 950,817 | | | $ | 55,766 | |
Each of the above derivatives is located in the following Statement of Operations accounts:
(a) Net realized gain (loss) from investments (includes purchased options), written options, swap contracts and futures, respectively
| Change in Net Unrealized Appreciation (Depreciation) | | Swap Contracts | | | Futures Contracts | | | Total | |
| Interest Rate Contracts (a) | | $ | (95,677 | ) | | $ | 475,938 | | | $ | 380,261 | |
Each of the above derivatives is located in the following Statement of Operations accounts:
(a) Change in net unrealized appreciation (depreciation) on swap contracts and futures, respectively
DWS High Income VIP
The following table summarizes the value of the Fund's derivative instruments held as of December 31, 2010 and the related location in the accompanying Statement of Assets and Liabilities, presented by primary underlying risk exposure:
| Asset Derivatives | | Forward Contracts | | | Swap Contracts | | | Total | |
| Credit Contracts (a) | | $ | — | | | $ | 386,256 | | | $ | 386,256 | |
| Foreign Exchange Contracts (b) | | | 2,528 | | | | — | | | | 2,528 | |
| | | $ | 2,528 | | | $ | 386,256 | | | $ | 388,784 | |
Each of the above derivatives is located in the following Statement of Assets and Liabilities accounts:
(a) Unrealized appreciation on open swap contracts
(b) Unrealized appreciation on open forward foreign currency exchange contracts
| Liability Derivative | | Forward Contracts | |
| Foreign Exchange Contracts (a) | | $ | (60,959 | ) |
The above derivative is located in the following Statement of Assets and Liabilities account:
(a) Unrealized depreciation on open forward foreign currency exchange contracts
Additionally, the amount of unrealized and realized gains and losses on derivative instruments recognized in Fund earnings during the year ended December 31, 2010 and the related location in the accompanying Statement of Operations is summarized in the following tables by primary underlying risk exposure:
| Realized Gain (Loss) | | Forward Contracts | | | Swap Contracts | | | Total | |
| Credit Contracts (a) | | $ | — | | | $ | 1,020,868 | | | $ | 1,020,868 | |
| Foreign Exchange Contracts (b) | | | 1,453,531 | | | | — | | | | 1,453,531 | |
| | | $ | 1,453,531 | | | $ | 1,020,868 | | | $ | 2,474,399 | |
Each of the above derivatives is located in the following Statement of Operations accounts:
(a) Net realized gain (loss) from swap contracts
(b) Net realized gain (loss) from foreign currency (Statement of Operations includes both forward currency contracts and foreign currency transactions)
| Change in Net Unrealized Appreciation (Depreciation) | | Forward Contracts | | | Swap Contracts | | | Total | |
| Credit Contracts (a) | | $ | — | | | $ | 386,256 | | | $ | 386,256 | |
| Foreign Exchange Contracts (b) | | | (34,981 | ) | | | — | | | | (34,981 | ) |
| | | $ | (34,981 | ) | | $ | 386,256 | | | $ | 351,275 | |
Each of the above derivatives is located in the following Statement of Operations accounts:
(a) Change in net unrealized appreciation (depreciation) on swap contracts
(b) Change in net unrealized appreciation (depreciation) on foreign currency (Statement of Operations includes both forward currency contracts and foreign currency transactions)
DWS Strategic Income VIP
The following tables summarize the value of the Fund's derivative instruments held as of December 31, 2010 and the related location in the accompanying Statement of Assets and Liabilities, presented by primary underlying risk exposure:
| Asset Derivatives | | Purchased Options | | | Forward Contracts | | | Swap Contracts | | | Total | |
| Interest Rate Contracts (a) | | $ | 467 | | | $ | — | | | $ | 2,678 | | | $ | 3,145 | |
| Credit Contracts (a) | | | — | | | | — | | | | 25,665 | | | | 25,665 | |
| Foreign Exchange Contracts (b) | | | — | | | | 259,054 | | | | — | | | | 259,054 | |
| | | $ | 467 | | | $ | 259,054 | | | $ | 28,343 | | | $ | 287,864 | |
Each of the above derivatives is located in the following Statement of Assets and Liabilities accounts:
(a) Investments in securities, at value (includes purchased options) and unrealized appreciation on open swap contracts
(b) Unrealized appreciation on open forward foreign currency exchange contracts
| Liability Derivatives | | Written Options | | | Forward Contracts | | | Swap Contracts | | | Futures Contracts | | | Total | |
| Equity Contracts (a) | | $ | — | | | $ | — | | | $ | — | | | $ | 31,298 | | | $ | 31,298 | |
| Interest Rate Contracts (a) | | | (35,163 | ) | | | — | | | | (254,700 | ) | | | (126,598 | ) | | | (416,461 | ) |
| Credit Contracts (a) | | | — | | | | — | | | | (28,377 | ) | | | — | | | | (28,377 | ) |
| Foreign Exchange Contracts (b) | | | — | | | | (262,385 | ) | | | — | | | | — | | | | (262,385 | ) |
| | | $ | (35,163 | ) | | $ | (262,385 | ) | | $ | (283,077 | ) | | $ | (95,300 | ) | | $ | (675,925 | ) |
Each of the above derivatives is located in the following Statement of Assets and Liabilities accounts:
(a) Options written, at value, net unrealized appreciation (depreciation) on futures and unrealized depreciation on open swap contracts. Liability of payable for daily variation margin on open futures contracts reflects unsettled variation margin.
(b) Unrealized depreciation on open forward foreign currency exchange contracts
Additionally, the amount of unrealized and realized gains and losses on derivative instruments recognized in Fund earnings during the year ended December 31, 2010 and the related location in the accompanying Statement of Operations is summarized in the following tables by primary underlying risk exposure:
| Realized Gain (Loss) | | Purchased Options | | | Forward Contracts | | | Swap Contracts | | | Futures Contracts | | | Total | |
| Equity Contracts (a) | | $ | — | | | $ | — | | | $ | — | | | $ | (421,417 | ) | | $ | (421,417 | ) |
| Interest Rate Contracts (a) | | | 38,962 | | | | — | | | | 94,915 | | | | 480,480 | | | | 614,357 | |
| Credit Contracts (a) | | | — | | | | — | | | | (132,473 | ) | | | — | | | | (132,473 | ) |
| Foreign Exchange Contracts (b) | | | — | | | | 434,022 | | | | — | | | | — | | | | 434,022 | |
| | | $ | 38,962 | | | $ | 434,022 | | | $ | (37,558 | ) | | $ | 59,063 | | | $ | 494,489 | |
Each of the above derivatives is located in the following Statement of Operations accounts:
(a) Net realized gain (loss) from investments (includes purchased options), swap contracts and futures, respectively
(b) Net realized gain (loss) from foreign currency (Statement of Operations includes both forward currency contracts and foreign currency transactions)
| Change in Net Unrealized Appreciation (Depreciation) | | Purchased Options | | | Written Options | | | Forward Contracts | | | Swap Contracts | | | Futures Contracts | | | Total | |
| Equity Contracts (a) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 19,172 | | | $ | 19,172 | |
| Interest Rate Contracts (a) | | | (57,941 | ) | | | (4,423 | ) | | | — | | | | (308,385 | ) | | | (20,863 | ) | | | (391,612 | ) |
| Credit contracts (a) | | | — | | | | — | | | | — | | | | (1,477 | ) | | | — | | | | (1,477 | ) |
| Foreign Exchange Contracts (b) | | | — | | | | — | | | | (279,489 | ) | | | — | | | | — | | | | (279,489 | ) |
| | | $ | (57,941 | ) | | $ | (4,423 | ) | | $ | (279,489 | ) | | $ | (309,862 | ) | | $ | (1,691 | ) | | $ | (653,406 | ) |
Each of the above derivatives is located in the following Statement of Operations accounts:
(a) Change in net unrealized appreciation (depreciation) on investments (includes purchased options), written options, swap contracts and futures, respectively
(b) Change in net unrealized appreciation (depreciation) on foreign currency (Statement of Operations includes both forward currency contracts and foreign currency transactions)
C. Purchases and Sales of Securities
During the year ended December 31, 2010, purchases and sales of investment transactions (excluding short-term investments) were as follows:
| Fund | | Purchases ($) | | | Sales ($) | |
DWS Alternative Asset Allocation Plus VIP Underlying Affiliated Funds | | | 20,924,087 | | | | 733,000 | |
| Underlying Non-affiliated Funds | | | 988,703 | | | | 54,941 | |
DWS Balanced VIP excluding US Treasury Obligations | | | 501,453,180 | | | | 520,652,361 | |
| US Treasury Obligations | | | 71,576,766 | | | | 77,346,084 | |
| DWS Blue Chip VIP | | | 151,115,169 | | | | 165,670,571 | |
DWS Core Fixed Income VIP excluding US Treasury Obligations | | | 255,494,334 | | | | 250,517,214 | |
| US Treasury Obligations | | | 97,533,517 | | | | 86,987,776 | |
| DWS Diversified International Equity VIP | | | 10,585,084 | | | | 20,213,690 | |
| DWS Dreman Small Mid Cap Value VIP | | | 93,395,395 | | | | 129,147,757 | |
| DWS Global Thematic VIP | | | 110,185,987 | | | | 116,147,618 | |
| DWS Government & Agency Securities VIP | | | 814,547,329 | | | | 814,973,550 | |
| DWS High Income VIP | | | 165,760,238 | | | | 191,044,642 | |
| DWS Large Cap Value VIP | | | 61,553,310 | | | | 87,416,345 | |
| DWS Mid Cap Growth VIP | | | 12,373,056 | | | | 14,480,595 | |
| DWS Small Cap Growth VIP | | | 49,541,542 | | | | 62,144,300 | |
DWS Strategic Income VIP excluding US Treasury Obligations | | | 83,860,216 | | | | 81,802,651 | |
| US Treasury Obligations | | | 38,991,537 | | | | 36,504,796 | |
| DWS Strategic Value VIP | | | 218,849,807 | | | | 258,849,951 | |
| DWS Technology VIP | | | 16,212,693 | | | | 32,717,685 | |
| DWS Turner Mid Cap Growth VIP | | | 48,107,657 | | | | 53,568,971 | |
For the year ended December 31, 2010, transactions for written options on futures were as follows for DWS Government & Agency Securities VIP:
| | | Number of Contracts | | | Premiums | |
| Outstanding, beginning of period | | | — | | | $ | — | |
| Options written | | | 636 | | | | 202,702 | |
| Options closed | | | (120 | ) | | | (65,361 | ) |
| Options exercised | | | (256 | ) | | | (105,437 | ) |
| Options expired | | | (260 | ) | | | (31,904 | ) |
| Outstanding, end of period | | | — | | | $ | — | |
For the year ended December 31, 2010, transactions for written options on interest rate swaps were as follows for DWS Strategic Income VIP:
| | | Contract Amount | | | Premiums | |
| Outstanding, beginning of period | | | — | | | $ | — | |
| Options written | | | 29,000,000 | | | | 30,740 | |
| Outstanding, end of period | | | 29,000,000 | | | $ | 30,740 | |
D. Related Parties
Management Agreement. Under the Investment Management Agreement with Deutsche Investment Management Americas Inc. ("DIMA" or the "Advisor"), an indirect, wholly owned subsidiary of Deutsche Bank AG, the Advisor directs the investments of each Fund in accordance with its investment objectives, policies and restrictions. The Advisor determines the securities, instruments and other contracts relating to investments to be purchased, sold or entered into by each Fund or delegates such responsibility to each Fund's subadvisor.
Under the Investment Management Agreement with the Advisor, the fees are equivalent to the annual rates shown below of each Fund's average daily net assets, computed and accrued daily and payable monthly:
| Fund | | Annual Management Fee Rate | |
DWS Alternative Asset Allocation Plus VIP on assets invested in other DWS Funds on assets invested in all other assets not considered DWS Funds | | | .200%1.200 | % |
DWS Balanced VIP $0-$250 million | | | .370 | % |
| next $750 million | | | .345 | % |
| over $1 billion | | | .310 | % |
DWS Blue Chip VIP $0-$250 million | | | .550 | % |
| next $750 million | | | .520 | % |
| next $1.5 billion | | | .500 | % |
| next $2.5 billion | | | .480 | % |
| next $2.5 billion | | | .450 | % |
| next $2.5 billion | | | .430 | % |
| next $2.5 billion | | | .410 | % |
| over $12.5 billion | | | .390 | % |
DWS Core Fixed Income VIP $0-$250 million | | | .500 | % |
| next $750 million | | | .470 | % |
| next $1.5 billion | | | .450 | % |
| next $2.5 billion | | | .430 | % |
| next $2.5 billion | | | .400 | % |
| next $2.5 billion | | | .380 | % |
| next $2.5 billion | | | .360 | % |
| over $12.5 billion | | | .340 | % |
DWS Diversified International Equity VIP $0-$1.5 billion | | | .650 | % |
| next $1.75 billion | | | .635 | % |
| next $1.75 billion | | | .620 | % |
| over $5 billion | | | .605 | % |
DWS Dreman Small Mid Cap Value VIP $0-$250 million | | | .650 | % |
| next $750 million | | | .620 | % |
| next $1.5 billion | | | .600 | % |
| next $2.5 billion | | | .580 | % |
| next $2.5 billion | | | .550 | % |
| next $2.5 billion | | | .540 | % |
| next $2.5 billion | | | .530 | % |
| over $12.5 billion | | | .520 | % |
DWS Global Thematic VIP $0-$250 million | | | .915 | % |
| next $500 million | | | .865 | % |
| next $750 million | | | .815 | % |
| next $1.5 billion | | | .765 | % |
| over $3 billion | | | .715 | % |
DWS Government & Agency Securities VIP $0-$250 million | | | .450 | % |
| next $750 million | | | .430 | % |
| next $1.5 billion | | | .410 | % |
| next $2.5 billion | | | .400 | % |
| next $2.5 billion | | | .380 | % |
| next $2.5 billion | | | .360 | % |
| next $2.5 billion | | | .340 | % |
| over $12.5 billion | | | .320 | % |
DWS High Income VIP $0-$250 million | | | .500 | % |
| next $750 million | | | .470 | % |
| next $1.5 billion | | | .450 | % |
| next $2.5 billion | | | .430 | % |
| next $2.5 billion | | | .400 | % |
| next $2.5 billion | | | .380 | % |
| next $2.5 billion | | | .360 | % |
| over $12.5 billion | | | .340 | % |
DWS Large Cap Value VIP $0-$250 million | | | .650 | % |
| next $750 million | | | .625 | % |
| next $1.5 billion | | | .600 | % |
| next $2.5 billion | | | .575 | % |
| next $2.5 billion | | | .550 | % |
| next $2.5 billion | | | .525 | % |
| next $2.5 billion | | | .500 | % |
| over $12.5 billion | | | .475 | % |
DWS Mid Cap Growth VIP $0-$250 million | | | .665 | % |
| next $750 million | | | .635 | % |
| next $1.5 billion | | | .615 | % |
| next $2.5 billion | | | .595 | % |
| next $2.5 billion | | | .565 | % |
| next $2.5 billion | | | .555 | % |
| next $2.5 billion | | | .545 | % |
| over $12.5 billion | | | .535 | % |
DWS Money Market VIP $0-$500 million | | | .285 | % |
| next $500 million | | | .270 | % |
| next $1.0 billion | | | .255 | % |
| over $2.0 billion | | | .240 | % |
DWS Small Cap Growth VIP $0-$250 million | | | .550 | % |
| next $750 million | | | .525 | % |
| over $1 billion | | | .500 | % |
DWS Strategic Income VIP $0-$250 million | | | .550 | % |
| next $750 million | | | .520 | % |
| next $1.5 billion | | | .500 | % |
| next $2.5 billion | | | .480 | % |
| next $2.5 billion | | | .450 | % |
| next $2.5 billion | | | .430 | % |
| next $2.5 billion | | | .410 | % |
| over $12.5 billion | | | .390 | % |
DWS Strategic Value VIP $0-$250 million | | | .665 | % |
| next $750 million | | | .635 | % |
| next $1.5 billion | | | .615 | % |
| next $2.5 billion | | | .595 | % |
| next $2.5 billion | | | .565 | % |
| next $2.5 billion | | | .555 | % |
| next $2.5 billion | | | .545 | % |
| over $12.5 billion | | | .535 | % |
DWS Technology VIP $0-$250 million | | | .665 | % |
| next $750 million | | | .635 | % |
| next $1.5 billion | | | .615 | % |
| next $2.5 billion | | | .595 | % |
| next $2.5 billion | | | .565 | % |
| next $2.5 billion | | | .555 | % |
| next $2.5 billion | | | .545 | % |
| over $12.5 billion | | | .535 | % |
DWS Turner Mid Cap Growth VIP $0-$250 million | | | .715 | % |
| next $250 million | | | .700 | % |
| next $500 million | | | .685 | % |
| over $1 billion | | | .670 | % |
QS Investors, LLC ("QS Investors") acts as an investment sub-advisor to DWS Alternative Asset Allocation Plus VIP, DWS Balanced VIP, DWS Blue Chip VIP, DWS Diversified International Equity VIP and DWS Strategic Income VIP. On August 1, 2010, members of the Advisor's Quantitative Strategies Group, including some members of the Funds' portfolio management teams, separated from the Advisor and formed QS Investors as a separate investment advisory firm unaffiliated with the Advisor (the "Separation"). As an investment sub-advisor to DWS Blue Chip VIP and DWS Diversified International Equity VIP, QS Investors makes investment decisions and buys and sells securities for the Funds. As an investment sub-advisor to DWS Alternative Asset Allocation Plus VIP, QS Investors renders strategic asset allocation services to the Fund. As an investment sub-advisor to DWS Balanced VIP, QS Investors renders strategic asset allocation services to the Fund and manages the assets attributable to the Fund's Global Tactical Asset Allocation ("GTAA") overlay strategy. As an investment sub-advisor to DWS Strategic Income VIP, QS Investors manages the assets attributable only to the Fund's GTAA overlay strategy. QS Investors is paid by the Advisor, not the Funds, for the services QS Investors provides to the Funds.
Global Thematic Partners, LLC ("GTP") acts as investment sub-advisor to DWS Global Thematic VIP. On July 1, 2010, members of the Advisor's Global Equity Team, including members of the DWS Global Thematic VIP portfolio management team, separated from the Advisor and formed GTP as a separate investment advisory firm unaffiliated with the Advisor (the "Separation"). As an investment sub-advisor to DWS Global Thematic VIP, GTP makes investment decisions and buys and sells securities for the Fund. GTP is paid by the Advisor, not the Fund, for the services GTP provides to the Fund.
Deutsche Asset Management International GmbH ("DeAMi") serves as subadvisor to DWS Large Cap Value VIP and a portion of DWS Balanced VIP's large cap value allocation of the portfolio. DeAMi is paid by the Advisor for its services.
Dreman Value Management, L.L.C. ("DVM") serves as subadvisor to DWS Dreman Small Mid Cap Value VIP and is paid by the Advisor for its services.
Turner Investment Partners, Inc. serves as subadvisor to DWS Turner Mid Cap Growth VIP and is paid by the Advisor for its services.
For the year ended December 31, 2010, the Advisor has agreed to waive 0.15% of the monthly management fee based on average daily net assets for DWS Alternative Asset Allocation Plus VIP.
For the period from January 1, 2010 through September 30, 2010, the Advisor had contractually agreed to waive its fee and/or reimburse certain operating expenses to the extent necessary to maintain the operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of each class as follows:
| Fund | Annual Rate |
DWS Global Thematic VIP Class A | 1.06% |
| Class B | 1.46% |
DWS High Income VIP Class B | 1.25% |
DWS Large Cap Value VIP Class A | .88% |
| Class B | 1.28% |
DWS Mid Cap Growth VIP Class A | 1.09% |
DWS Strategic Income VIP Class A | .87% |
DWS Turner Mid Cap Growth VIP Class A | 1.01% |
For the period from January 1, 2010 through April 30, 2011, the Advisor had contractually agreed to waive its fee and/or reimburse certain operating expenses to the extent necessary to maintain the operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage, interest expense and Underlying Funds) of each class as follows:
| Fund | Annual Rate |
DWS Alternative Asset Allocation Plus VIP Class A | .21% |
| Class B | .61% |
For the period from January 1, 2010 through April 30, 2010, the Advisor had contractually agreed to waive its fee and/or reimburse certain operating expenses to the extent necessary to maintain the operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of each class as follows:
| Fund | Annual Rate |
DWS Money Market VIP Class A | .44% |
DWS Strategic Value VIP Class A | .78% |
| Class B | 1.11% |
For the period from May 1, 2010 through January 31, 2011, the Advisor has contractually agreed to waive its fee and/or reimburse certain operating expenses to the extent necessary to maintain the operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of the class as follows:
| Fund | Annual Rate |
DWS Money Market VIP Class A | .51% |
For the period from May 1, 2011 through September 30, 2011, the Advisor has contractually agreed to waive its fee and/or reimburse certain operating expenses to the extent necessary to maintain the operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage, interest expense and Underlying Funds) of each class as follows:
| Fund | Annual Rate |
DWS Alternative Asset Allocation Plus VIP Class A | .35% |
| Class B | .75% |
For the period from October 1, 2010 through September 30, 2011, the Advisor has contractually agreed to waive its fee and/or reimburse certain operating expenses to the extent necessary to maintain the operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of each class as follows:
| Fund | Annual Rate |
DWS Core Fixed Income VIP Class A | .71% |
DWS Global Thematic VIP Class A | 1.03% |
| Class B | 1.43% |
DWS Mid Cap Growth VIP Class A | .97% |
DWS Strategic Income VIP Class A | .78% |
DWS Turner Mid Cap Growth VIP Class A | .97% |
For the period from January 1, 2010 through February 5, 2010, the Advisor had voluntarily agreed to waive its fee and/or reimburse certain operating expenses to the extent necessary to maintain the operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of the class as follows:
| Fund | Annual Rate |
DWS Core Fixed Income VIP Class B | 1.07% |
In addition, the Advisor has agreed to voluntarily waive additional expenses for DWS Money Market VIP. The waiver may be changed or terminated at any time without notice. Under this arrangement, the Advisor waived certain expenses of the Fund.
Accordingly, for the year ended December 31, 2010, the total management fees, management fees waived and effective management fee rates were as follows:
| Fund | | Total Aggregated ($) | | | Waived ($) | | | Annual Effective Rate | |
| DWS Alternative Asset Allocation Plus VIP | | | 31,017 | | | | 31,017 | | | | .00 | % |
| DWS Balanced VIP | | | 1,124,396 | | | | — | | | | .37 | % |
| DWS Blue Chip VIP | | | 580,643 | | | | — | | | | .55 | % |
| DWS Core Fixed Income VIP | | | 482,684 | | | | — | | | | .50 | % |
| DWS Diversified International Equity VIP | | | 519,737 | | | | — | | | | .65 | % |
| DWS Dreman Small Mid Cap Value VIP | | | 1,653,319 | | | | — | | | | .65 | % |
| DWS Global Thematic VIP | | | 626,939 | | | | 245,154 | | | | .56 | % |
| DWS Government & Agency Securities VIP | | | 789,612 | | | | — | | | | .45 | % |
| DWS High Income VIP | | | 946,284 | | | | — | | | | .50 | % |
| DWS Large Cap Value VIP | | | 1,313,548 | | | | — | | | | .65 | % |
| DWS Mid Cap Growth VIP | | | 149,048 | | | | 24,596 | | | | .56 | % |
| DWS Money Market VIP | | | 704,427 | | | | 292,096 | | | | .17 | % |
| DWS Small Cap Growth VIP | | | 434,077 | | | | — | | | | .55 | % |
| DWS Strategic Income VIP | | | 410,735 | | | | 67,252 | | | | .46 | % |
| DWS Strategic Value VIP | | | 1,756,021 | | | | 35,990 | | | | .65 | % |
| DWS Technology VIP | | | 484,850 | | | | — | | | | .665 | % |
| DWS Turner Mid Cap Growth VIP | | | 368,747 | | | | 559 | | | | .71 | % |
In addition, for the year ended December 31, 2010, the Advisor waived $51,328 and $809 of other expenses for DWS Alternative Asset Allocation Plus VIP and DWS Core Fixed Income VIP, respectively.
DWS Alternative Asset Allocation Plus VIP indirectly bears its proportionate share of fees and expenses incurred by the Underlying Funds in which it is invested.
Administration Fee. Pursuant to an Administrative Services Agreement, DIMA provides most administrative services to the Funds. For all services provided under the Administrative Services Agreement, the Funds pay DIMA an annual fee ("Administration Fee") of 0.10% of the Funds' average daily net assets, computed and accrued daily and payable monthly. For the year ended December 31, 2010, the Administration Fee was as follows:
| Fund | | Total Aggregated ($) | | | Waived ($) | | | Unpaid at December 31, 2010 ($) | |
| DWS Alternative Asset Allocation Plus VIP | | | 13,080 | | | | 13,080 | | | | — | |
| DWS Balanced VIP | | | 307,796 | | | | — | | | | 26,033 | |
| DWS Blue Chip VIP | | | 105,571 | | | | — | | | | 9,119 | |
| DWS Core Fixed Income VIP | | | 96,537 | | | | — | | | | 7,487 | |
| DWS Diversified International Equity VIP | | | 79,960 | | | | — | | | | 6,963 | |
| DWS Dreman Small Mid Cap Value VIP | | | 254,770 | | | | — | | | | 23,011 | |
| DWS Global Thematic VIP | | | 68,518 | | | | — | | | | 6,051 | |
| DWS Government & Agency Securities VIP | | | 175,469 | | | | — | | | | 13,991 | |
| DWS High Income VIP | | | 189,257 | | | | — | | | | 15,979 | |
| DWS Large Cap Value VIP | | | 202,084 | | | | — | | | | 17,334 | |
| DWS Mid Cap Growth VIP | | | 22,413 | | | | — | | | | 2,228 | |
| DWS Money Market VIP | | | 247,168 | | | | — | | | | 19,561 | |
| DWS Small Cap Growth VIP | | | 78,923 | | | | — | | | | 7,452 | |
| DWS Strategic Income VIP | | | 74,679 | | | | — | | | | 6,418 | |
| DWS Strategic Value VIP | | | 264,774 | | | | — | | | | 22,475 | |
| DWS Technology VIP | | | 72,910 | | | | — | | | | 6,462 | |
| DWS Turner Mid Cap Growth VIP | | | 51,573 | | | | — | | | | 4,967 | |
Service Provider Fees. DWS Investments Service Company ("DISC"), an affiliate of the Advisor, is the transfer agent, dividend-paying agent and shareholder service agent for each Fund. Pursuant to a sub-transfer agency agreement between DISC and DST Systems, Inc. ("DST"), DISC has delegated certain transfer agent, dividend-paying agent and shareholder service agent functions to DST. DISC compensates DST out of the shareholder servicing fee it receives from each Fund. For the year ended December 31, 2010 and for the period ended February 5, 2010 for DWS Core Fixed Income VIP for Class B shares, the amounts charged to each Fund by DISC were as follows:
| Fund | | Total Aggregated ($) | | | Waived ($) | | | Unpaid at December 31, 2010 ($) | |
| DWS Alternative Asset Allocation Plus VIP Class A | | | 51 | | | | 51 | | | | — | |
| DWS Alternative Asset Allocation Plus VIP Class B | | | 53 | | | | — | | | | 12 | |
| DWS Balanced VIP Class A | | | 517 | | | | — | | | | 129 | |
| DWS Blue Chip VIP Class A | | | 223 | | | | — | | | | 59 | |
| DWS Blue Chip VIP Class B | | | 24 | | | | — | | | | 6 | |
| DWS Core Fixed Income VIP Class A | | | 74 | | | | — | | | | 33 | |
| DWS Core Fixed Income VIP Class B | | | 60 | | | | — | | | | 10 | |
| DWS Diversified International Equity VIP Class A | | | 138 | | | | — | | | | 34 | |
| DWS Dreman Small Mid Cap Value VIP Class A | | | 678 | | | | — | | | | 168 | |
| DWS Dreman Small Mid Cap Value VIP Class B | | | 390 | | | | — | | | | 102 | |
| DWS Global Thematic VIP Class A | | | 363 | | | | 363 | | | | — | |
| DWS Global Thematic VIP Class B | | | 83 | | | | — | | | | 18 | |
| DWS Government & Agency Securities VIP Class A | | | 325 | | | | — | | | | 77 | |
| DWS Government & Agency Securities VIP Class B | | | 56 | | | | — | | | | 12 | |
| DWS High Income VIP Class A | | | 307 | | | | — | | | | 71 | |
| DWS High Income VIP Class B | | | 24 | | | | — | | | | 6 | |
| DWS Large Cap Value VIP Class A | | | 279 | | | | — | | | | 71 | |
| DWS Large Cap Value VIP Class B | | | 47 | | | | — | | | | 12 | |
| DWS Mid Cap Growth VIP Class A | | | — | | | | — | | | | — | |
| DWS Money Market VIP Class A | | | 710 | | | | 710 | | | | — | |
| DWS Small Cap Growth VIP Class A | | | 336 | | �� | | — | | | | 92 | |
| DWS Strategic Income VIP Class A | | | 162 | | | | 162 | | | | — | |
| DWS Strategic Value VIP Class A | | | 433 | | | | 433 | | | | — | |
| DWS Strategic Value VIP Class B | | | 197 | | | | — | | | | 48 | |
| DWS Technology VIP Class A | | | 134 | | | | — | | | | 35 | |
| DWS Technology VIP Class B | | | 107 | | | | — | | | | 24 | |
| DWS Turner Mid Cap Growth VIP Class A | | | 120 | | | | 120 | | | | — | |
Distribution Service Agreement. Under the Funds' Class B 12b-1 plans, DWS Investments Distributors, Inc. ("DIDI") received a fee ("Distribution Service Fee") of 0.25% of average daily net assets of Class B shares. For the year ended December 31, 2010 and for the period ended February 5, 2010 for DWS Core Fixed Income VIP, the Distribution Service Fee was as follows:
| Fund | | Total Aggregated ($) | | | Unpaid at December 31, 2010 ($) | |
| DWS Alternative Asset Allocation Plus VIP | | | 25,810 | | | | 4,472 | |
| DWS Blue Chip VIP | | | 399 | | | | 277 | |
| DWS Core Fixed Income VIP | | | 14 | | | | — | |
| DWS Dreman Small Mid Cap Value VIP | | | 59,943 | | | | 5,482 | |
| DWS Global Thematic VIP | | | 11,552 | | | | 1,002 | |
| DWS Government & Agency Securities VIP | | | 15,782 | | | | 1,330 | |
| DWS High Income VIP | | | 367 | | | | 31 | |
| DWS Large Cap Value VIP | | | 2,177 | | | | 235 | |
| DWS Strategic Value VIP | | | 4,271 | | | | 393 | |
| DWS Technology VIP | | | 2,449 | | | | 31 | |
Typesetting and Filing Service Fees. Under an agreement with DIMA, DIMA is compensated for providing typesetting and certain regulatory filing services to each Fund. For the year ended December 31, 2010, the amount charged to each Fund by DIMA included in the Statement of Operations under "reports to shareholders" was as follows:
| Fund | | Amount ($) | | | Unpaid at December 31, 2010 ($) | |
| DWS Alternative Asset Allocation Plus VIP | | | 13,134 | | | | 2,147 | |
| DWS Balanced VIP | | | 10,742 | | | | 3,844 | |
| DWS Blue Chip VIP | | | 12,605 | | | | 3,200 | |
| DWS Core Fixed Income VIP | | | 11,979 | | | | 3,064 | |
| DWS Diversified International Equity VIP | | | 11,959 | | | | 2,922 | |
| DWS Dreman Small Mid Cap Value VIP | | | 12,427 | | | | 3,129 | |
| DWS Global Thematic VIP | | | 10,208 | | | | 1,734 | |
| DWS Government & Agency Securities VIP | | | 12,898 | | | | 3,141 | |
| DWS High Income VIP | | | 11,655 | | | | 2,493 | |
| DWS Large Cap Value VIP | | | 11,866 | | | | 2,924 | |
| DWS Mid Cap Growth VIP | | | 11,630 | | | | 3,135 | |
| DWS Money Market VIP | | | 10,874 | | | | 1,873 | |
| DWS Small Cap Growth VIP | | | 10,959 | | | | 3,135 | |
| DWS Strategic Income VIP | | | 11,019 | | | | 3,562 | |
| DWS Strategic Value VIP | | | 13,417 | | | | 4,180 | |
| DWS Technology VIP | | | 11,852 | | | | 2,738 | |
| DWS Turner Mid Cap Growth VIP | | | 11,771 | | | | 3,031 | |
Trustees' Fees and Expenses. The Funds paid each Trustee not affiliated with the Advisor retainer fees plus specified amounts for various committee services and for the Board Chairperson.
Affiliated Cash Management Vehicles. The Funds may invest uninvested cash balances in Central Cash Management Fund, which is managed by the Advisor. The Funds indirectly bear their proportionate share of the expenses of the underlying money market funds. Central Cash Management Fund does not pay the Advisor an investment management fee. Central Cash Management Fund seeks a high level of current income consistent with liquidity and the preservation of capital.
E. Investing in High Yield Securities
The Funds' performance could be hurt if a security declines in credit quality or goes into default, or if an issuer does not make timely payments of interest or principal. Because the issuers of high-yield debt securities or junk bonds (debt securities rated below the fourth-highest category) may be in uncertain financial health, the prices of their debt securities can be more vulnerable to bad economic news, or even the expectation of bad news, than investment-grade debt securities. Because the Funds may invest in securities not paying current interest or in securities already in default, these risks may be more pronounced.
F. Investing in Emerging Markets
Investing in emerging markets may involve special risks and considerations not typically associated with investing in developed markets. These risks include revaluation of currencies, high rates of inflation or deflation, repatriation restrictions on income and capital, and future adverse political, social and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls or delayed settlements, and may have prices that are more volatile or less easily assessed than those of comparable securities of issuers in developed markets.
G. Ownership of the Funds
At December 31, 2010, the beneficial ownership in each Fund was as follows:
DWS Alternative Asset Allocation Plus VIP: One Participating Insurance Company was the owner of record of 10% or more of the total outstanding Class A shares of the Fund, owning 98%. Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Fund, owning 83% and 17%.
DWS Balanced VIP: Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 45%, 22% and 15%.
DWS Blue Chip VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 53% and 39%. One Participating Insurance Company was the owner of record of 10% or more of the total outstanding Class B shares of the Fund, owning 100%.
DWS Core Fixed Income VIP: Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 44%, 41% and 13%.
DWS Diversified International Equity VIP: Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 42%, 29% and 28%.
DWS Dreman Small Mid Cap Value VIP: Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 39%, 26% and 15%. Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Fund, each owning 41%, 19% and 11%.
DWS Global Thematic VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 57% and 33%. One Participating Insurance Company was the owner of record of 10% or more of the total outstanding Class B shares of the Fund, owning 98%.
DWS Government & Agency Securities VIP: Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 40%, 38% and 16%. One Participating Insurance Company was the owner of record of 10% or more of the total outstanding Class B shares of the Fund, owning 96%.
DWS High Income VIP: Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 34%, 32% and 28%. One Participating Insurance Company was the owner of record of 10% or more of the total outstanding Class B shares of the Fund, owning 100%.
DWS Large Cap Value VIP: Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 53%, 30% and 10%. Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Fund, each owning 86% and 14%.
DWS Mid Cap Growth VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 63% and 35%.
DWS Money Market VIP: Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 28%, 20% and 15%.
DWS Small Cap Growth VIP: Three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 42%, 28% and 25%.
DWS Strategic Income VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 59% and 39%.
DWS Strategic Value VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 56% and 30%. Five Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Fund, each owning 26%, 25%, 15%, 11% and 11%.
DWS Technology VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 57% and 37%. Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Fund, owning 79% and 12%.
DWS Turner Mid Cap Growth VIP: Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 75% and 25%.
H. Line of Credit
The Trust and other affiliated funds (the "Participants") share in a $450 million revolving credit facility provided by a syndication of banks. The Funds may borrow for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Participants are charged an annual commitment fee which is allocated based on net assets, among each of the Participants. Interest is calculated at a rate per annum equal to the sum of the Federal Funds Rate plus 1.25 percent plus if LIBOR exceeds the Federal Funds Rate the amount of such excess. The facility borrowing limit for each Fund as a percentage of net assets is as follows:
| Fund | Facility Borrowing Limit |
| DWS Balanced VIP | 33% |
| DWS Blue Chip VIP | 33% |
| DWS Core Fixed Income VIP | 33% |
| DWS Diversified International Equity VIP | 33% |
| DWS Dreman Small Mid Cap Value VIP | 33% |
| DWS Global Thematic VIP | 33% |
| DWS Government & Agency Securities VIP | 33% |
| DWS High Income VIP | 33% |
| DWS Large Cap Value VIP | 33% |
| DWS Mid Cap Growth VIP | 33% |
| DWS Money Market VIP | 33% |
| DWS Small Cap Growth VIP | 33% |
| DWS Strategic Income VIP | 33% |
| DWS Strategic Value VIP | 33% |
| DWS Technology VIP | 20% |
| DWS Turner Mid Cap Growth VIP | 33% |
I. Payments by Affiliates
During the year ended December 31, 2010, the Advisor agreed to reimburse DWS Large Cap Value VIP, DWS Strategic Value VIP and DWS Technology VIP $62,550, $289,394 and $1,507, respectively, for losses incurred on trades executed incorrectly. The amounts of the reimbursement are 0.03%, 0.11% and 0.00%, respectively, of the Funds' average net assets.
J. Acquisition of Assets
On April 24, 2009, DWS Large Cap Value VIP acquired all of the net assets of DWS Davis Venture Value VIP pursuant to a plan of reorganization approved by shareholders on November 21, 2008. The primary reason for the acquisition was to consolidate Funds managed by the Advisor with comparable investment objectives. The acquisition was accomplished by a tax-free exchange of 17,064,120 Class A shares and 32,154 Class B shares of DWS Davis Venture Value VIP for 12,224,432 Class A shares and 22,957 Class B shares of DWS Large Cap Value VIP, respectively, outstanding on April 24, 2009. DWS Davis Venture Value VIP's net assets at that date, $107,655,331, including $5,676,099 of net unrealized appreciation, were combined with those of DWS Large Cap Value VIP. The aggregate net assets of the Fund immediately before the acquisit ion were $106,678,067. The combined net assets of the Fund immediately following the acquisition were $214,333,398.
K. Subsequent Events
On January 12, 2011, the Board of the following Acquired Funds approved, in principle, the mergers of each Acquired Fund into the Acquiring Fund. Completion of each merger is subject to a number of conditions. The merger of DWS Technology VIP is subject to approval by shareholders of the Fund at a shareholder meeting expected to be held in April 2011. The mergers are expected to be completed on or about May 1, 2011.
| Acquired Funds | Acquiring Funds |
| DWS Variable Series II — DWS Mid Cap Growth VIP | DWS Variable Series II — DWS Small Cap Growth VIP |
| DWS Variable Series II — DWS Strategic Value VIP | DWS Variable Series II — DWS Large Cap Value VIP |
| DWS Variable Series II — DWS Technology VIP | DWS Variable Series I — DWS Capital Growth VIP |
| DWS Variable Series II — DWS Turner Mid Cap Growth VIP | DWS Variable Series II — DWS Small Cap Growth VIP |
In addition, on January 12, 2011, the Board approved changes to the name and strategy of DWS Small Cap Growth VIP. Effective on or about May 1, 2011, DWS Small Cap Growth VIP's investment objective will change from maximum appreciation of investors capital to long-term capital appreciation. In connection with the implementation of the new investment objective, the name will change from DWS Small Cap Growth VIP to DWS Small Mid Cap Growth VIP. In addition, the Russell 2500 Growth Index will replace the Russell 2000 Growth Index as the benchmark index because the Advisor believes that it better reflects the new investment strategy. For a description of the new investment objective, please see the supplement dated January 19, 2011 to DWS Small Cap Growth VIP's current prospectus posted on www.dws-investments.com.
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of DWS Variable Series II:
We have audited the accompanying statements of assets and liabilities of DWS Variable Series II (the "Trust"), comprising the DWS Alternative Asset Allocation Plus VIP, DWS Balanced VIP, DWS Blue Chip VIP, DWS Core Fixed Income VIP, DWS Diversified International Equity VIP (formerly DWS International Select Equity VIP), DWS Dreman Small Mid Cap Value VIP, DWS Global Thematic VIP, DWS Government & Agency Securities VIP, DWS High Income VIP, DWS Large Cap Value VIP, DWS Mid Cap Growth VIP, DWS Money Market VIP, DWS Small Cap Growth VIP, DWS Strategic Income VIP, DWS Strategic Value VIP (formerly DWS Dreman High Return Equity VIP), DWS Technology VIP and DWS Turner Mid Cap Growth VIP, including the investment portfolios, as of December 31, 2010, and the related statements of operations, the statements of changes in n et assets and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Trust's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2010, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the aforementioned funds of the DWS Variable Series II at December 31, 2010, the results of their operations, the changes in their net assets and the financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts February 14, 2011 | | |
Tax Information (Unaudited)
The following Funds designated as capital gain dividends for their year ended December 31, 2010:
| Fund | | Capital Gain ($) | | | % Representing 15% Rate Gains | |
| DWS Alternative Asset Allocation Plus VIP | | | 109,000 | | | | 100 | |
| DWS Government & Agency Securities VIP | | | 1,388,000 | | | | 100 | |
For corporate shareholders, the following percentage of income dividends paid during the following Funds' fiscal year ended December 31, 2010 qualified for the dividends received deduction:
| Fund | Dividends Received % |
| DWS Alternative Asset Allocation Plus VIP | 8 |
| DWS Balanced VIP | 22 |
| DWS Blue Chip VIP | 100 |
| DWS Diversified International Equity VIP | 4 |
| DWS Dreman Small Mid Cap Value VIP | 100 |
| DWS Global Thematic VIP | 59 |
| DWS Large Cap Value VIP | 100 |
| DWS Strategic Value VIP | 100 |
| DWS Technology VIP | 100 |
| DWS Turner Mid Cap Growth VIP | 100 |
DWS Diversified International Equity VIP paid foreign taxes of $274,450 and earned $1,655,652 of foreign source income during the year ended December 31, 2010. Pursuant to Section 853 of the Internal Revenue Code, the Fund designates $0.03 per share as foreign taxes paid and $0.16 per share as income earned from foreign sources for the year ended December 31, 2010.
DWS Global Thematic VIP paid foreign taxes of $117,000 and earned $347,000 of foreign source income during the year ended December 31, 2010. Pursuant to Section 853 of the International Revenue Code, the Fund designates $0.02 per share as foreign taxes paid and $0.04 per share as income earned from foreign sources for the year ended December 31, 2010.
Please consult a tax advisor if you have questions about federal or state income tax laws, or on how to prepare your tax returns. If you have specific questions about your account, please contact your insurance provider.
The Trust's policies and procedures for voting proxies for portfolio securities and information about how the Trust voted proxies related to its portfolio securities during the 12-month period ended June 30 are available on our Web site — www.dws-investments.com (click on "proxy voting" at the bottom of the page) — or on the SEC's Web site — www.sec.gov. To obtain a written copy of the Trust's policies and procedures without charge, upon request, call us toll free at (800) 728-3337.
Investment Management Agreement Approval
DWS Alternative Asset Allocation Plus VIP
The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS"), sub-advisory agreements (each a "Sub-Advisory Agreement") between DWS and RREEF America L.L.C. ("RREEF"), an affiliate of DWS, and DWS and QS Investors, LLC ("QS Investors") and sub-sub-advisory agreements (the "Sub-Sub-Advisory Agreements," and together with the Agreement and Sub-Advisory Agreements, the "Agreements") between RREEF and each of Deutsche Alternatives Asset Management (Global) Limited, Deutsche Asset Management (Hond Kong) Limited and Deutsche Investments Australia Limted (the "Sub-Sub-Advisors"), all affiliates of DWS, in September 2010.
In terms of the process that the Board followed prior to approving the Agreements, shareholders should know that:
• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.
• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Fixed Income and Quant Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreements, the Board also reviewed the terms of the Fund's Rule 12b-1 plan, distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund. DWS, RREEF and the Sub-Sub-Advisors are part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investing expertise and resources, incl uding hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's, QS Investors', RREEF's and the Sub-Sub-Advisors' personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures. In addition, in connection with approving the continuation of the Fund's Sub-Advisory Agreement with QS Investors, the Board noted it had engaged in a comprehensive review of the agreement in connection with its initial approval in May 2010.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreements, including the scope of advisory services provided under the Agreements. The Board noted that, under the Agreements, DWS, QS Investors, RREEF and the Sub-Sub-Advisors provide portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board di d not consider comparative performance information due to the Fund's limited operating history. The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by Lipper Inc.), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds.
On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS, QS Investors, RREEF and the Sub-Sub-Advisors historically have been and continue to be satisfactory.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, sub-advisory fee schedules, sub-sub-advisory fee schedules, operating expenses, and total expense ratios and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include a 0.10% fee paid to DWS under the Fund's administrative services agreement, were higher than the median (3rd quartile) of the applicable Lippe r peer group (based on Lipper data provided as of December 31, 2009). With respect to the sub-advisory fees paid to QS Investors and RREEF, the Board noted that the fees are paid by DWS out of its fee and not directly by the Fund. With respect to the sub-sub-advisory fees paid to the Sub-Sub-Advisors, the Board noted that the fees are paid by RREEF out of its fee and not directly by the Fund. The Board noted that the Fund's Class A shares total (net) operating expenses were expected to be higher than the median (4th quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board also reviewed data comparing each share class's total (net) operating expenses to the applicable Lipper Universe Expenses. The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual fund s and considered differences in fund and fee structures between the DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size). The Board also noted that the expense limitations agreed to by DWS helped to ensure that the Fund's total (net) operating expenses would remain competitive.
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Euro pe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS, QS Investors, RREEF and the Sub-Sub-Advisors.
Profitability. The Board reviewed detailed information regarding revenues received by DWS from advising the DWS Funds along with the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality. The Board did not receive profitability information with respect to the Fund, but did receive such information with respect to the funds in which the Fund invests. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in som e cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available. The Board did not consider the profitability of QS Investors with respect to the Fund. The Board noted that DWS pays QS Investors' fee out of its management fee, and its understanding that the Fund's sub-advisory fee schedule was the product of an arm's length negotiation with DWS.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. In this regard, the Board noted that while the Fund's current investment management fee schedule does not include breakpoints, the Board intends to consider implementation of one or more breakpoints once the Fund reaches an efficient operating size. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DWS and QS Investors and Their Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and QS Investors and their affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered benefits to DWS and QS Investors related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS and QS Investors related to DWS Funds advertising and cros s-selling opportunities among DWS products and services. The Board concluded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters. The Board also considered the attention and resources dedicated by DWS to the oversight of QS Investors' compliance program and compliance with the applicable fund policies and procedures.
Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreements is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreements.
DWS Balanced VIP
The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") and sub-advisory agreements (the "Sub-Advisory Agreements" and together with the Agreement, the "Agreements") between DWS and Deutsche Asset Management International GmbH ("DeAMi"), an affiliate of DWS, and DWS and QS Investors, LLC ("QS Investors") in September 2010.
In terms of the process that the Board followed prior to approving the Agreements, shareholders should know that:
• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.
• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Fixed Income and Quant Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreements, the Board also reviewed the terms of the Fund's distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by the Fund's shareholders. DWS and DeAMi are part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investing expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's, DeAMi's and QS Investors' personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures. In addition, in connection with approving the continuation of the Fund's Sub-Advisory Agreement with QS Investors, the Board noted it had engaged in a comprehensive review of the agreement in connection with its initial approval in May 2010.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreements, including the scope of advisory services provided under the Agreements. The Board noted that, under the Agreements, DWS, DeAMi and QS Investors provide portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared tho se returns to various agreed-upon performance measures, including market indices and a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by Lipper), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one-, three- and five-year periods ended December 31, 2009, the Fund's performance (Class A shares) was in the 2nd quartile, 4th quartile and 4th quartile, respectively, of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has outperformed its benchmark in the one-year period and has underperformed its benchmark in the three- and five-year periods ended December 31, 2009.
On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS, DeAMi and QS Investors historically have been and continue to be satisfactory.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, sub-advisory fee schedules, operating expenses, and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include the 0.10% fee paid to DWS under the Fund's administrative services agreement, were lower than the median (1st quartile) of the applicable Lipper peer group (based on Lipper data provided as of December 31, 2009). With respect to the sub-advisory fees paid to DeAMi and QS Investors, the Board noted that the fees are paid by DWS out of its fee and not directly by the Fund. The Board noted that the Fund's Class A shares total (net) operating expenses were expected to be lower than the median (2nd quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund and fee structures between the DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size).
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Euro pe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS, DeAMi and QS Investors.
Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available. The Board did not consider the profitability of QS Investors with respect to the Fund. The Board noted that DWS pays QS Investors' fee out of its management fee, and its understanding that the Fund's sub-advisory fee schedule was the product of an arm's length negotiation with DWS.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DWS and QS Investors and Their Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and QS Investors and their affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered benefits to DWS and QS Investors related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS and QS Investors related to DWS Funds advertising and cros s-selling opportunities among DWS products and services. The Board concluded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters. The Board also considered the attention and resources dedicated by DWS to the oversight of QS Investors' compliance program and compliance with the applicable fund policies and procedures.
Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreements is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreements.
DWS Blue Chip VIP
The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") and sub-advisory agreement (the "Sub-Advisory Agreement" and together with the Agreement the "Agreements") between DWS and QS Investors, LLC ("QS Investors") in September 2010.
In terms of the process that the Board followed prior to approving the Agreements, shareholders should know that:
• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.
• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Fixed Income and Quant Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreements, the Board also reviewed the terms of the Fund's Rule 12b-1 plan, distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by the Fund's shareholders. DWS is part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investin g expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's and QS Investors' personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures. In addition, in connection with approving the continuation of the Fund's Sub-Advisory Agreement, the Board noted it had engaged in a comprehensive review of the agreement in connection with its initial approval in May 2010.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreements, including the scope of advisory services provided under the Agreements. The Board noted that, under the Agreements, DWS and QS Investors provide portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared those retu rns to various agreed-upon performance measures, including market indices and a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by Lipper), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one-, three- and five-year periods ended December 31, 2009, the Fund's performance (Class A shares) was in the 2nd quartile of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has outperformed its benchmark in the o ne-, three- and five-year periods ended December 31, 2009.
On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS and QS Investors historically have been and continue to be satisfactory.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, sub-advisory fee schedule, operating expenses, and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include the 0.10% fee paid to DWS under the Fund's administrative services agreement, were lower than the median (2nd quartile) of the applicable Lipper peer group (based on Lipper d ata provided as of December 31, 2009). With respect to the sub-advisory fee paid to QS Investors, the Board noted that the fee is paid by DWS out of its fee and not directly by the Fund. The Board noted that the Fund's Class A shares total (net) operating expenses were expected to be lower than the median (2nd quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board also reviewed data comparing each share class's total (net) operating expenses to the applicable Lipper Universe Expenses. The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund and fee structures between the DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more cu stomized peer group selected by Lipper (based on such factors as asset size).
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Euro pe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS and QS Investors.
Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available. The Board did not consider the profitability of QS Investors with respect to the Fund. The Board noted that DWS pays QS Investors' fee out of its management fee, and its understanding that the Fund's sub-advisory fee schedule was the product of an arm's length negotiation with DWS.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DWS and QS Investors and Their Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and QS Investors and their affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered benefits to DWS and QS Investors related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS and QS Investors related to DWS Funds advertising and cros s-selling opportunities among DWS products and services. The Board concluded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters. The Board also considered the attention and resources dedicated by DWS to the oversight of the investment sub-advisor's compliance program and compliance with the applicable fund policies and procedures.
Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreements is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreements.
DWS Core Fixed Income VIP
The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") in September 2010.
In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:
• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.
• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Fixed Income and Quant Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by the Fund's shareholders. DWS is part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investin g expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DWS provides portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared those returns to various agre ed-upon performance measures, including market indices and a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by Lipper), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one-, three- and five-year periods ended December 31, 2009, the Fund's performance (Class A shares) was in the 4th quartile of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has outperformed its benchmark in the one-year period and has underperformed its benchmark in the three- and five-year periods ended December 31, 2009. The Board noted the disappointing investment performance of the Fund in recent periods and continued to discuss with senior management of DWS the factors contributing to such underperformance and actions being taken to improve performance. The Board recognized that DWS has made significant changes in its investment personnel and processes in recent years in an effort to improve long-term performance.
On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS historically have been and continue to be satisfactory.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, operating expenses, and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include the 0.10% fee paid to DWS under the Fund's administrative services agreement, were higher than the median (3rd quartile) of the applicable Lipper peer group (based on Lipper data provided as of Decembe r 31, 2009). The Board noted that the Fund's Class A shares total (net) operating expenses were expected to be higher than the median (3rd quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund and fee structures between the DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size). The Board also noted that the expense limitation agreed to by DWS helped to ensure that the Fund's total (net) operating expenses would remain competitive.
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Euro pe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS.
Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DWS and Its Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and its affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered benefits to DWS related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS related to DWS Funds advertising and cross-selling opportunities among DWS products and services. The Board concl uded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters.
Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.
DWS Diversified International Equity VIP
The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") and sub-advisory agreement (the "Sub-Advisory Agreement" and together with the Agreement the "Agreements") between DWS and QS Investors, LLC ("QS Investors") in September 2010.
In terms of the process that the Board followed prior to approving the Agreements, shareholders should know that:
• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.
• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Fixed Income and Quant Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreements, the Board also reviewed the terms of the Fund's distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by the Fund's shareholders. DWS is part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investin g expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's and QS Investors' personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures. In addition, in connection with approving the continuation of the Fund's Sub-Advisory Agreement, the Board noted it had engaged in a comprehensive review of the agreement in connection with its initial approval in May 2010.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreements, including the scope of advisory services provided under the Agreements. The Board noted that, under the Agreements, DWS and QS Investors provide portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared those retu rns to various agreed-upon performance measures, including market indices and a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by Lipper), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one-, three- and five-year periods ended December 31, 2009, the Fund's performance (Class A shares) was in the 3rd quartile, 4th quartile and 4th quartile, respectively, of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that th e Fund has underperformed its benchmark in the one-, three- and five-year periods ended December 31, 2009. The Board noted the disappointing investment performance of the Fund in recent periods and continued to discuss with senior management of DWS and QS Investors the factors contributing to such underperformance and actions being taken to improve performance. The Board recognized that DWS has made significant changes in its investment personnel and processes in recent years in an effort to improve long-term performance.
On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS and QS Investors historically have been and continue to be satisfactory.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, sub-advisory fee schedule, operating expenses, and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include the 0.10% fee paid to DWS under the Fund's administrative services agreement, were lower than the median (1st quartile) of the applicable Lipper peer group (based on Lipper d ata provided as of December 31, 2009). With respect to the sub-advisory fee paid to QS Investors, the Board noted that the fee is paid by DWS out of its fee and not directly by the Fund. The Board noted that the Fund's Class A shares total (net) operating expenses were expected to be higher than the median (3rd quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund and fee structures between the DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size).
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Euro pe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS and QS Investors.
Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available. The Board did not consider the profitability of QS Investors with respect to the Fund. The Board noted that DWS pays QS Investors' fee out of its management fee, and its understanding that the Fund's sub-advisory fee schedule was the product of an arm's length negotiation with DWS.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DWS and QS Investors and Their Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and QS Investors and their affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered benefits to DWS and QS Investors related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS and QS Investors related to DWS Funds advertising and cros s-selling opportunities among DWS products and services. The Board concluded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters. The Board also considered the attention and resources dedicated by DWS to the oversight of the investment sub-advisor's compliance program and compliance with the applicable fund policies and procedures.
Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreements is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreements.
DWS Dreman Small Mid Cap Value VIP
The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") and sub-advisory agreement (the "Sub-Advisory Agreement" and together with the Agreement, the "Agreements") between DWS and Dreman Value Management L.L.C. ("DVM") in September 2010.
In terms of the process that the Board followed prior to approving the Agreements, shareholders should know that:
• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.
• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Equity Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreements, the Board also reviewed the terms of the Fund's Rule 12b-1 plan, distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by the Fund's shareholders. DWS is part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investin g expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's and DVM's personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreements, including the scope of advisory services provided under the Agreements. The Board noted that, under the Agreements, DWS and DVM provide portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared those returns to va rious agreed-upon performance measures, including market indices and a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by Lipper), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one-, three- and five-year periods ended December 31, 2009, the Fund's performance (Class A shares) was in the 2nd quartile, 1st quartile and 1st quartile, respectively, of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund ha s outperformed its benchmark in the one-, three- and five-year periods ended December 31, 2009.
On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS and DVM historically have been and continue to be satisfactory.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, sub-advisory fee schedule, operating expenses, and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include the 0.10% fee paid to DWS under the Fund's administrative services agreement, were lower than the median (1st quartile) of the applicable Lipper peer group (based on Lipper d ata provided as of December 31, 2009). With respect to the sub-advisory fee paid to DVM, the Board noted that the fee is paid by DWS out of its fee and not directly by the Fund. The Board noted that the Fund's Class A shares total (net) operating expenses were expected to be lower than the median (1st quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board also reviewed data comparing each share class's total (net) operating expenses to the applicable Lipper Universe Expenses. The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund and fee structures between the DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size).
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Euro pe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS and DVM.
Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available. The Board did not consider the profitability of DVM with respect to the Fund. The Board noted that DWS pays DVM's fee out of its management fee, and its understanding that the Fund's sub-advisory fee schedule was the product of an arm's length negotiation with DWS.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DWS and DVM and Their Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and DVM and their affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered the incidental public relations benefits to DWS and DVM related to DWS Funds advertising and cross-selling opportunities among DWS products and services. The Board concluded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters. The Board also considered the attention and resources dedicated by DWS to the oversight of the investment sub-advisor's compliance program and compliance with the applicable fund policies and procedures.
Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreements is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreements.
DWS Global Thematic VIP
The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") and sub-advisory agreement (the "Sub-Advisory Agreement" and together with the Agreement the "Agreements") between DWS and Global Thematic Partners, LLC ("Global Thematic") in September 2010.
In terms of the process that the Board followed prior to approving the Agreements, shareholders should know that:
• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.
• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Equity Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreements, the Board also reviewed the terms of the Fund's Rule 12b-1 plan, distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by the Fund's shareholders. DWS is part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investin g expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's and Global Thematic's personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures. In addition, in connection with approving the continuation of the Fund's Sub-Advisory Agreement, the Board noted it had engaged in a comprehensive review of the agreement in connection with its initial approval in May 2010.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreements, including the scope of advisory services provided under the Agreements. The Board noted that, under the Agreements, DWS and Global Thematic provide portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared those r eturns to various agreed-upon performance measures, including market indices and a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by Lipper), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one-, three- and five-year periods ended December 31, 2009, the Fund's performance (Class A shares) was in the 1st quartile, 4th quartile and 1st quartile, respectively, of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has outperformed its benchmark in the one- and five-year periods and has underperformed its benchmark in the three-year period ended December 31, 2009.
On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS and Global Thematic historically have been and continue to be satisfactory.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, sub-advisory fee schedule, operating expenses, and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include the 0.10% fee paid to DWS under the Fund's administrative services agreement, were higher than the median (4th quartile) of the applicable Lipper peer group (based on Lipper data provided as of December 31, 2009). With respect to the sub-advisory fee paid to Global Thematic, the Board noted that the fee is paid by DWS out of its fee and not directly by the Fund. The Board noted that the Fund's Class A shares total (net) operating expenses were expected to be higher than the median (4th quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board also reviewed data comparing each share class's total (net) operating expenses to the applicable Lipper Universe Expenses. The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund and fee structures between the DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a mo re customized peer group selected by Lipper (based on such factors as asset size). The Board also noted that the expense limitations agreed to by DWS helped to ensure that the Fund's total (net) operating expenses would remain competitive.
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Euro pe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS and Global Thematic.
Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available. The Board did not consider the profitability of Global Thematic with respect to the Fund. The Board noted that DWS pays Global Thematic's fee out of its management fee, and its understanding that the Fund's sub-advisory fee schedule was the product of an arm's length negotiation with DWS.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DWS and Global Thematic and Their Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and Global Thematic and their affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered benefits to DWS and Global Thematic related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS and Global Thematic related to DWS Funds advertis ing and cross-selling opportunities among DWS products and services. The Board concluded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters. The Board also considered the attention and resources dedicated by DWS to the oversight of the investment sub-advisor's compliance program and compliance with the applicable fund policies and procedures.
Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreements is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreements.
DWS Government & Agency Securities VIP
The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") in September 2010.
In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:
• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.
• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Fixed Income and Quant Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's Rule 12b-1 plan, distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by the Fund's shareholders. DWS is part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investin g expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DWS provides portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared those returns to various agre ed-upon performance measures, including market indices and a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by Lipper), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one-, three- and five-year periods ended December 31, 2009, the Fund's performance (Class A shares) was in the 1st quartile of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has outperformed its benchmark in the one-year period and has underperformed its benchmark in the three- and five-year periods ended December 31, 2009.
On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS historically have been and continue to be satisfactory.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, operating expenses, and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include the 0.10% fee paid to DWS under the Fund's administrative services agreement, were at the median (2nd quartile) of the applicable Lipper peer group (based on Lipper data provided as of December 31, 200 9). The Board noted that the Fund's Class A shares total (net) operating expenses were expected to be higher than the median (3rd quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board also reviewed data comparing each share class's total (net) operating expenses to the applicable Lipper Universe Expenses. The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund and fee structures between the DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size).
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Euro pe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS.
Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DWS and Its Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and its affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered benefits to DWS related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS related to DWS Funds advertising and cross-selling opportunities among DWS products and services. The Board concl uded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters.
Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.
DWS High Income VIP
The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") in September 2010.
In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:
• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.
• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Fixed Income and Quant Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's Rule 12b-1 plan, distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by the Fund's shareholders. DWS is part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investin g expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DWS provides portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared those returns to various agre ed-upon performance measures, including market indices and a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by Lipper), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one-, three- and five-year periods ended December 31, 2009, the Fund's performance (Class A shares) was in the 3rd quartile, 4th quartile and 3rd quartile, respectively, of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has underper formed its benchmark in the one-, three- and five-year periods ended December 31, 2009.
On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS historically have been and continue to be satisfactory.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, operating expenses, and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include the 0.10% fee paid to DWS under the Fund's administrative services agreement, were lower than the median (1st quartile) of the applicable Lipper peer group (based on Lipper data provided as of December 31, 2009). The Board noted that the Fund's Class A shares total (net) operating expenses were expected to be lower than the median (2nd quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board also reviewed data comparing each share class's total (net) operating expenses to the applicable Lipper Universe Expenses. The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund and fee structures between the DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size).
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Euro pe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS.
Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DWS and Its Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and its affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered benefits to DWS related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS related to DWS Funds advertising and cross-selling opportunities among DWS products and services. The Board concl uded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters.
Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.
DWS Large Cap Value VIP
The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") and sub-advisory agreement (the "Sub-Advisory Agreement" and together with the Agreement, the "Agreements") between DWS and Deutsche Asset Management International GmbH ("DeAMi"), an affiliate of DWS, in September 2010.
In terms of the process that the Board followed prior to approving the Agreements, shareholders should know that:
• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.
• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Equity Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreements, the Board also reviewed the terms of the Fund's Rule 12b-1 plan, distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by the Fund's shareholders. DWS and DeAMi are part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investing expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's and DeAMi's personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreements, including the scope of advisory services provided under the Agreements. The Board noted that, under the Agreements, DWS and DeAMi provide portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared those returns to various agreed-upon performance measures, including market indices and a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by Lipper), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one-, three- and five-year periods ended December 31, 2009, the Fund's performance (Class A shares) was in the 2nd quartile, 1st quartile and 1st quartile, respectively, of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has outperformed its benchmark in the one-, three- and five-year periods ended December 31, 2009.
On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS and DeAMi historically have been and continue to be satisfactory.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, sub-advisory fee schedule, operating expenses, and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include the 0.10% fee paid to DWS under the Fund's administrative services agreement, were at the median (2nd quartile) of the applicable Lipper peer group (based on Lipper data prov ided as of December 31, 2009). With respect to the sub-advisory fee paid to DeAMi, the Board noted that the fee is paid by DWS out of its fee and not directly by the Fund. The Board noted that the Fund's Class A shares total (net) operating expenses were expected to be higher than the median (3rd quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board also reviewed data comparing each share class's total (net) operating expenses to the applicable Lipper Universe Expenses. The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund and fee structures between the DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size).
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Euro pe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS and DeAMi.
Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DWS and Its Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and its affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered benefits to DWS related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS related to DWS Funds advertising and cross-selling opportunities among DWS products and services. The Board concl uded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters.
Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreements is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreements.
DWS Mid Cap Growth VIP
The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") in September 2010.
In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:
• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.
• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Equity Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by the Fund's shareholders. DWS is part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investin g expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DWS provides portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared those returns to various agre ed-upon performance measures, including market indices and a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by Lipper), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one-, three- and five-year periods ended December 31, 2009, the Fund's performance (Class A shares) was in the 2nd quartile, 4th quartile and 4th quartile, respectively, of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has underper formed its benchmark in the one-, three- and five-year periods ended December 31, 2009.
On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS historically have been and continue to be satisfactory.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, operating expenses, and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include the 0.10% fee paid to DWS under the Fund's administrative services agreement, were at the median (2nd quartile) of the applicable Lipper peer group (based on Lipper data provided as of December 31, 200 9). The Board noted that the Fund's Class A shares total (net) operating expenses were expected to be higher than the median (4th quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund and fee structures between the DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size). The Board also noted that the expense limitation agreed to by DWS helped to ensure that the Fund's total (net) operating expenses would remain competitive.
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Euro pe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS.
Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DWS and Its Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and its affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered benefits to DWS related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS related to DWS Funds advertising and cross-selling opportunities among DWS products and services. The Board concl uded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters.
Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.
DWS Money Market VIP
The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") in September 2010.
In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:
• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.
• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Fixed Income and Quant Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by the Fund's shareholders. DWS is part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investin g expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DWS provides portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared those returns to various agre ed-upon performance measures, including a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by iMoneyNet, Inc.), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one-, three- and five-year periods ended December 31, 2009, the Fund's gross performance (Class A shares) was in the 1st quartile of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers).
On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS historically have been and continue to be satisfactory.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, operating expenses, and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include the 0.10% fee paid to DWS under the Fund's administrative services agreement, were lower than the median (2nd quartile) of the applicable Lipper peer group (based on Lipper data provided as of December 31, 2009). The Board noted that the Fund's Class A shares total (net) operating expenses were expected to be lower than the median (2nd quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund and fee structures between DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size). The Board also noted that the expense limitation agreed to by DWS helped to ensure that the Fund's total (net) operating expenses would remain competitive.
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Euro pe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS.
Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DWS and Its Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and its affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered benefits to DWS related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS related to DWS Funds advertising and cross-selling opportunities among DWS products and services. The Board concl uded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters.
Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.
DWS Small Cap Growth VIP
The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") in September 2010.
In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:
• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.
• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Equity Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by the Fund's shareholders. DWS is part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investin g expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DWS provides portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared those returns to various agre ed-upon performance measures, including market indices and a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by Lipper), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one-, three- and five-year periods ended December 31, 2009, the Fund's performance (Class A shares) was in the 1st quartile, 4th quartile and 4th quartile, respectively, of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has outperfo rmed its benchmark in the one-year period and has underperformed its benchmark in the three- and five-year periods ended December 31, 2009.
On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS historically have been and continue to be satisfactory.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, operating expenses, and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include the 0.10% fee paid to DWS under the Fund's administrative services agreement, were lower than the median (1st quartile) of the applicable Lipper peer group (based on Lipper data provided as of December 31, 2009). The Board noted that the Fund's Class A shares total (net) operating expenses were expected to be lower than the median (1st quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund and fee structures between the DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size).
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Euro pe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS.
Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DWS and Its Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and its affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered benefits to DWS related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS related to DWS Funds advertising and cross-selling opportunities among DWS products and services. The Board concl uded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters.
Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.
DWS Strategic Income VIP
The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") and sub-advisory agreement (the "Sub-Advisory Agreement" and together with the Agreement the "Agreements") between DWS and QS Investors, LLC ("QS Investors") in September 2010.
In terms of the process that the Board followed prior to approving the Agreements, shareholders should know that:
• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.
• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Fixed Income and Quant Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreements, the Board also reviewed the terms of the Fund's distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by the Fund's shareholders. DWS is part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investin g expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's and QS Investors' personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures. In addition, in connection with approving the continuation of the Fund's Sub-Advisory Agreement, the Board noted it had engaged in a comprehensive review of the agreement in connection with its initial approval in May 2010.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreements, including the scope of advisory services provided under the Agreements. The Board noted that, under the Agreements, DWS and QS Investors provide portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared those retu rns to various agreed-upon performance measures, including market indices and a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by Lipper), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one-, three- and five-year periods ended December 31, 2009, the Fund's performance (Class A shares) was in the 2nd quartile, 1st quartile and 1st quartile, respectively, of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that th e Fund has outperformed its benchmark in the one-year period and has underperformed its benchmark in the three- and five-year periods ended December 31, 2009.
On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS and QS Investors historically have been and continue to be satisfactory.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, sub-advisory fee schedule, operating expenses, and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include the 0.10% fee paid to DWS under the Fund's administrative services agreement, were at the median (2nd quartile) of the applicable Lipper peer group (based on Lipper data prov ided as of December 31, 2009). With respect to the sub-advisory fee paid to QS Investors, the Board noted that the fee is paid by DWS out of its fee and not directly by the Fund. The Board noted that the Fund's Class A shares total (net) operating expenses were expected to be higher than the median (4th quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund and fee structures between the DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size). The Board also noted that the expense limitation agreed to by DWS helped to ensure that the Fund's total (net) operating expenses would remain competitive.
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Euro pe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS and QS Investors.
Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available. The Board did not consider the profitability of QS Investors with respect to the Fund. The Board noted that DWS pays QS Investors' fee out of its management fee, and its understanding that the Fund's sub-advisory fee schedule was the product of an arm's length negotiation with DWS.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DWS and QS Investors and Their Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and QS Investors and their affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered benefits to DWS and QS Investors related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS and QS Investors related to DWS Funds advertising and cros s-selling opportunities among DWS products and services. The Board concluded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters. The Board also considered the attention and resources dedicated by DWS to the oversight of the investment sub-advisor's compliance program and compliance with the applicable fund policies and procedures.
Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreements is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreements.
DWS Strategic Value VIP
The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") in September 2010.
In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:
• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.
• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Equity Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's Rule 12b-1 plan, distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by the Fund's shareholders. DWS is part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investin g expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DWS provides portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared those returns to various agre ed-upon performance measures, including market indices and a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by Lipper), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one, three- and five-year periods ended December 31, 2009, the Fund's performance (Class A shares) was in the 2nd quartile, 4th quartile and 4th quartile, respectively, of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has underperf ormed its benchmark in the one-, three- and five-year periods ended December 31, 2009.
On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS historically have been and continue to be satisfactory.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, operating expenses, and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include the 0.10% fee paid to DWS under the Fund's administrative services agreement, were higher than the median (3rd quartile) of the applicable Lipper peer group (based on Lipper data provided as of Decembe r 31, 2009). The Board noted that the Fund's Class A shares total (net) operating expenses were expected to be higher than the median (3rd quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board also reviewed data comparing each share class's total (net) operating expenses to the applicable Lipper Universe Expenses. The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund and fee structures between the DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size).
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Euro pe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS.
Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DWS and Its Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and its affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered benefits to DWS related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS related to DWS Funds advertising and cross-selling opportunities among DWS products and services. The Board concl uded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters.
Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.
DWS Technology VIP
The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") in September 2010.
In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:
• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.
• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Equity Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's Rule 12b-1 plan, distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by the Fund's shareholders. DWS is part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investin g expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DWS provides portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared those returns to various agre ed-upon performance measures, including market indices and a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by Lipper), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one-, three- and five-year periods ended December 31, 2009, the Fund's performance (Class A shares) was in the 2nd quartile, 3rd quartile and 4th quartile, respectively, of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has underper formed its benchmark in the one-, three- and five-year periods ended December 31, 2009.
On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS historically have been and continue to be satisfactory.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, operating expenses, and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include the 0.10% fee paid to DWS under the Fund's administrative services agreement, were at the median (2nd quartile) of the applicable Lipper peer group (based on Lipper data provided as of December 31, 200 9). The Board noted that the Fund's Class A shares total (net) operating expenses were expected to be lower than the median (1st quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board also reviewed data comparing the each share class's total (net) operating expenses to the applicable Lipper Universe Expenses. The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund and fee structures between the DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size).
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Euro pe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS.
Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DWS and Its Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and its affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered benefits to DWS related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS related to DWS Funds advertising and cross-selling opportunities among DWS products and services. The Board concl uded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters.
Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.
DWS Turner Mid Cap Growth VIP
The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") and sub-advisory agreement (the "Sub-Advisory Agreement" and together with the Agreement, the "Agreements") between DWS and Turner Investment Partners, Inc. ("Turner") in September 2010.
In terms of the process that the Board followed prior to approving the Agreements, shareholders should know that:
• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.
• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Equity Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.
• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").
• In connection with reviewing the Agreements, the Board also reviewed the terms of the Fund's distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by the Fund's shareholders. DWS is part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investin g expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's and Turner's personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreements, including the scope of advisory services provided under the Agreements. The Board noted that, under the Agreements, DWS and Turner provide portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared those returns to various agreed-upon performance measures, including market indices and a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by Lipper), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one-, three- and five-year periods ended December 31, 2009, the Fund's performance (Class A shares) was in the 1st quartile, 2nd quartile and 3rd quartile, respectively, of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has outperformed its benchmark in the one-, three- and five-year periods ended December 31, 2009.
On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS and Turner historically have been and continue to be satisfactory.
Fees and Expenses. The Board considered the Fund's investment management fee schedule, sub-advisory fee schedule, operating expenses, and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include the 0.10% fee paid to DWS under the Fund's administrative services agreement, were higher than the median (3rd quartile) of the applicable Lipper peer group (based on Lipper data provided as of December 31, 2009). With respect to the sub-advisory fee paid to Turner, the Board noted that the fee is paid by DWS out of its fee and not directly by the Fund. The Board noted that the Fund's Class A shares total (net) operating expenses were expected to be higher than the median (3rd quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund and fee structures between the DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size). The Board also noted that the expense limitation agreed to by DWS helped to ensure that the Fund's total (net) operating expenses would remain competitive.
The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Euro pe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS and Turner.
Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available. The Board did not consider the profitability of Turner with respect to the Fund. The Board noted that DWS pays Turner's fee out of its management fee, and its understanding that the Fund's sub-advisory fee schedule was the product of an arm's length negotiation with DWS.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DWS and Turner and Their Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and Turner and their affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered benefits to DWS and Turner related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS and Turner related to DWS Funds advertising and cross-selling opportunities among DWS products and services. The Board concluded that management fees were reasonable in light of these fallout benefits.
Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters. The Board also considered the attention and resources dedicated by DWS to the oversight of the investment sub-advisor's compliance program and compliance with the applicable fund policies and procedures.
Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreements is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreements.
Summary of Management Fee Evaluation by Independent Fee Consultant
October 3, 2010
Pursuant to an Order entered into by Deutsche Investment Management Americas and affiliates (collectively, "DeAM") with the Attorney General of New York, I, Thomas H. Mack, have been appointed the Independent Fee Consultant for the DWS Funds (formerly the DWS Scudder Funds). My duties include preparing an annual written evaluation of the management fees DeAM charges the Funds, considering among other factors the management fees charged by other mutual fund companies for like services, management fees DeAM charges other clients for like services, DeAM's costs of supplying services under the management agreements and related profit margins, possible economies of scale if a Fund grows larger, and the nature and quality of DeAM's services, including fund performance. This rep ort summarizes my evaluation for 2010, including my qualifications, the evaluation process for each of the DWS Funds, consideration of certain complex-level factors, and my conclusions. I served in substantially the same capacity in 2007, 2008, and 2009.
Qualifications
For more than 35 years I have served in various professional capacities within the investment management business. I have held investment analysis and advisory positions, including securities analyst, portfolio strategist and director of investment policy with a large investment firm. I have also performed business management functions, including business development, financial management and marketing research and analysis.
Since 1991, I have been an independent consultant within the asset management industry. I have provided services to over 125 client organizations, including investment managers, mutual fund boards, product distributors and related organizations. Over the past ten years I have completed a number of assignments for mutual fund boards, specifically including assisting boards with management contract renewal.
I hold a Master of Business Administration degree, with highest honors, from Harvard University and Master of Science and Bachelor of Science (highest honors) degrees from the University of California at Berkeley. I am an independent director and audit committee financial expert for two closed-end mutual funds and have served in various leadership and financial oversight capacities with non-profit organizations.
Evaluation of Fees for each DWS Fund
My work focused primarily on evaluating, fund-by-fund, the fees charged to each of the 118 publicly offered Fund portfolios in the DWS Fund family. For each Fund, I considered each of the key factors mentioned above, as well as any other relevant information. In doing so I worked closely with the Funds' Independent Directors in their annual contract renewal process, as well as in their approval of contracts for several new funds (documented separately).
In evaluating each Fund's fees, I reviewed comprehensive materials provided by or on behalf of DeAM, including expense information prepared by Lipper Analytical, comparative performance information, profitability data, manager histories, and other materials. I also accessed certain additional information from the Lipper and Morningstar databases and drew on my industry knowledge and experience.
To facilitate evaluating this considerable body of information, I prepared for each Fund a document summarizing the key data elements in each area as well as additional analytics discussed below. This made it possible to consider each key data element in the context of the others.
In the course of contract renewal, DeAM agreed to implement a number of fee and expense adjustments requested by the Independent Directors which will favorably impact future fees and expenses, and my evaluation includes the effects of these changes.
Fees and Expenses Compared with Other Funds
The competitive fee and expense evaluation for each fund focused on two primary comparisons:
The Fund's contractual management fee (the advisory fee plus the administration fee where applicable) compared with those of a group of typically 12-15 funds in the same Lipper investment category (e.g. Large Capitalization Growth) having similar distribution arrangements and being of similar size.
The Fund's total expenses compared with a broader universe of funds from the same Lipper investment category and having similar distribution arrangements.
These two comparisons provide a view of not only the level of the fee compared with funds of similar scale but also the total expense the Fund bears for all the services it receives, in comparison with the investment choices available in the Fund's investment category and distribution channel. The principal figure-of-merit used in these comparisons was the subject Fund's percentile ranking against peers.
DeAM's Fees for Similar Services to Others
DeAM provided management fee schedules for all of its US domiciled fund and non-fund investment management accounts in any of the investment categories where there is a DWS Fund. These similar products included the other DWS Funds, non-fund pooled accounts, institutional accounts and sub-advisory accounts. Using this information, I calculated for each Fund the fee that would be charged to each similar product, at the subject Fund's asset level.
Evaluating information regarding non-fund products is difficult because there are varying levels of services required for different types of accounts, with mutual funds generally requiring considerably more regulatory and administrative types of service as well as having more frequent cash flows than other types of accounts. Also, while mutual fund fees for similar fund products can be expected to be similar, there will be some differences due to different pricing conditions in different distribution channels (e.g. retail funds versus those used in variable insurance products), differences in underlying investment processes and other factors.
Costs and Profit Margins
DeAM provided a detailed profitability analysis for each Fund. After making some adjustments so that the presentation would be more comparable to the available industry figures, I reviewed profit margins from investment management alone, from investment management plus other fund services (excluding distribution) provided to the Funds by DeAM (principally shareholder services), and DeAM profits from all sources, including distribution. A later section comments on overall profitability.
Economies of Scale
Economies of scale — an expected decline in management cost per dollar of fund assets as fund assets grow — are very rarely quantified and documented because of inherent difficulties in collecting and analyzing relevant data. However, in virtually every investment category that I reviewed, larger funds tend to have lower fees and lower total expenses than smaller funds. To see how each DWS Fund compares with this industry observation, I reviewed:
The trend in Fund assets over the last five years and the accompanying trend in total expenses. This shows if the Fund has grown and, if so, whether total expense (management fees as well as other expenses) have declined as a percent of assets.
Whether the Fund has break-points in its management fee schedule, the extent of the fee reduction built into the schedule and the asset levels where the breaks take effect, and in the case of a sub-advised Fund how the Fund's break-points compare with those of the sub-advisory fee schedule.
How the Fund's contractual fee schedule compares with trends in the industry data. To accomplish this, I constructed a chart showing how actual latest-fiscal-year contractual fees of the Fund and of other similar funds relate to average fund assets, with the subject Fund's contractual fee schedule superimposed.
Quality of Service — Performance
The quality-of-service evaluation focused on investment performance, which is the principal result of the investment management service. Each Fund's performance was reviewed over the past 1, 3, 5 and 10 years, as applicable, and compared with that of other funds in the same investment category and with a suitable market index.
In addition, I calculated and reviewed risk-adjusted returns relative to an index of similar mutual funds' returns and a suitable market index. The risk-adjusted returns analysis provides a way of determining the extent to which the Fund's return comparisons are mainly the product of investment value-added (or lack thereof) or alternatively taking considerably more or less risk than is typical in its investment category.
I also received and considered the history of portfolio manager changes for each Fund, as this provided an important context for evaluating the performance results.
Complex-Level Considerations
While this evaluation was conducted mainly at the individual fund level, there are some issues relating to the reasonableness of fees that can alternatively be considered across the whole fund complex:
I reviewed DeAM's profitability analysis for all DWS Funds, with a view toward determining if the allocation procedures used were reasonable and how profit levels compared with public data for other investment managers.
I considered whether DeAM and affiliates receive any significant ancillary or "fall-out" benefits that should be considered in interpreting the direct profitability results. These would be situations where serving as the investment manager of the Funds is beneficial to another part of the Deutsche Bank organization.
I considered how aggregated DWS Fund expenses had varied over the years, by asset class and in the context of trends in asset levels.
I reviewed the structure of the DeAM organization, trends in staffing levels, and information on compensation of investment management and other professionals compared with industry data.
Findings
Based on the process and analysis discussed above, which included reviewing a wide range of information from management and external data sources and considering among other factors the fees DeAM charges other clients, the fees charged by other fund managers, DeAM's costs and profits associated with managing the Funds, economies of scale, possible fall-out benefits, and the nature and quality of services provided, in my opinion the management fees charged the DWS Funds are reasonable.
Thomas H. Mack
Summary of Administrative Fee Evaluation by Independent Fee Consultant
DWS Money Market VIP
October 4, 2010
Pursuant to an Order entered into by Deutsche Asset Management (DeAM) with the Attorney General of New York, I, Thomas H. Mack, have been appointed the Independent Fee Consultant for the DWS Funds and have as part of my duties evaluated the reasonableness of a proposed pass-through to the funds of certain reporting costs associated with new regulations for money funds. My evaluation considered the following:
• My recently completed annual evaluation (please see my summary report of October 3, 2010), concluding that the prospective fees and expenses of all the DWS-sponsored money funds are reasonable.
• The fact that in my opinion the services DWS would provide under the combination of the Advisory and proposed Administration Agreements continues to be comparable with those typically provided to competitive funds under their management agreements.
• Management's analysis showing that the maximum total expense ratio impact of this change on any fund share class would be 1.3 basis points, which in my opinion is not material to my conclusions about the reasonableness of expenses.
Based on the foregoing considerations, in my opinion the proposed fees and expenses for the affected DWS-sponsored money funds are reasonable.
Thomas H. Mack
Board Members and Officers
The following table presents certain information regarding the Board Members and Officers of the Trust as of December 31, 2010. Each Board Member's year of birth is set forth in parentheses after his or her name. Unless otherwise noted, (i) each Board Member has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity; and (ii) the address of each Independent Board Member is c/o Paul K. Freeman, Independent Chairman, DWS Funds, PO Box 101833, Denver, CO 80250-1833. Except as otherwise noted below, the term of office for each Board Member is until the election and qualification of a successor, or until such Board Member sooner dies, resigns, is removed or as otherwise provided in the governing documents of the fund. Because the fund does not hold an annual meeting of shareholders, each Board Member will hold office for an indeterminate period. The Board Members may also serve in similar capacities with other funds in the fund complex. The Length of Time Served represents the year in which the Board Member joined the board of one or more DWS funds now overseen by the Board.
| Independent Board Members |
Name, Year of Birth, Position with the Fund and Length of Time Served1 | Business Experience and Directorships During the Past Five Years | Number of Funds in DWS Fund Complex Overseen |
Paul K. Freeman (1950) Chairperson since 2009 Board Member since 1993 | Consultant, World Bank/Inter-American Development Bank; Executive and Governing Council of the Independent Directors Council (education committees); formerly, Project Leader, International Institute for Applied Systems Analysis (1998-2001); Chief Executive Officer, The Eric Group, Inc. (environmental insurance) (1986-1998) | 122 |
John W. Ballantine (1946) Board Member since 1999 | Retired; formerly, Executive Vice President and Chief Risk Management Officer, First Chicago NBD Corporation/The First National Bank of Chicago (1996-1998); Executive Vice President and Head of International Banking (1995-1996). Directorships: Healthways, Inc. (provider of disease and care management services); Portland General Electric (utility company); Stockwell Capital Investments PLC (private equity). Former Directorships: First Oak Brook Bancshares, Inc. and Oak Brook Bank; Prisma Energy International | 122 |
Henry P. Becton, Jr. (1943) Board Member since 1990 | Vice Chair and former President, WGBH Educational Foundation. Directorships: Association of Public Television Stations; Lead Director, Becton Dickinson and Company3 (medical technology company); Lead Director, Belo Corporation3 (media company); Public Radio International; Public Radio Exchange (PRX); The PBS Foundation. Former Directorships: Boston Museum of Science; American Public Television; Concord Academy; New England Aquarium; Mass. Corporation for Educational Telecommunications; Committee for Economic De velopment; Public Broadcasting Service | 122 |
Dawn-Marie Driscoll (1946) Board Member since 1987 | President, Driscoll Associates (consulting firm); Executive Fellow, Center for Business Ethics, Bentley University; formerly, Partner, Palmer & Dodge (1988-1990); Vice President of Corporate Affairs and General Counsel, Filene's (1978-1988). Directorships: Trustee of 22 open-end mutual funds managed by Sun Capital Advisers, Inc. (since 2007); Director of ICI Mutual Insurance Company (since 2007); Advisory Board, Center for Business Ethics, Bentley University; Trustee, Southwest Florida Community Foundation (charitable organization). Former Directorships: Investment Company Institute (audit, executive, nominating committees) and Independent Directors Council (governance, executive committees) | 122 |
Keith R. Fox (1954) Board Member since 1996 | Managing General Partner, Exeter Capital Partners (a series of private investment funds). Directorships: Progressive International Corporation (kitchen goods importer and distributor); BoxTop Media Inc. (advertising); The Kennel Shop (retailer); former Chairman, National Association of Small Business Investment Companies | 122 |
Kenneth C. Froewiss (1945) Board Member since 2001 | Adjunct Professor of Finance, NYU Stern School of Business (September 2009-present; Clinical Professor from 1997-September 2009); Member, Finance Committee, Association for Asian Studies (2002-present); Director, Mitsui Sumitomo Insurance Group (US) (2004-present); prior thereto, Managing Director, J.P. Morgan (investment banking firm) (until 1996) | 122 |
Richard J. Herring (1946) Board Member since 1990 | Jacob Safra Professor of International Banking and Professor, Finance Department, The Wharton School, University of Pennsylvania (since July 1972); Co-Director, Wharton Financial Institutions Center (since July 2000); Co-Chair, U.S. Shadow Financial Regulatory Committee; Executive Director, Financial Economists Roundtable; Director, Japan Equity Fund, Inc. (since September 2007), Thai Capital Fund, Inc. (since September 2007), Singapore Fund, Inc. (since September 2007); Independent Director of Barclays Bank Delaware (since September 2010). Formerly, Vice Dean and Director, Wharton Undergraduate Division (July 1995-June 2000); Director, Lauder Institute of International Management Studies (July 2000-June 2006) | 122 |
William McClayton (1944) Board Member since 2004+ | Private equity investor (since October 2009); previously, Managing Director, Diamond Management & Technology Consultants, Inc. (global consulting firm) (2001-2009); Directorship: Board of Managers, YMCA of Metropolitan Chicago; formerly: Senior Partner, Arthur Andersen LLP (accounting) (1966-2001); Trustee, Ravinia Festival | 122 |
Rebecca W. Rimel (1951) Board Member since 1995 | President and Chief Executive Officer, The Pew Charitable Trusts (charitable organization) (1994 to present); Trustee, Thomas Jefferson Foundation (charitable organization) (1994 to present); Trustee, Executive Committee, Philadelphia Chamber of Commerce (2001-2007); Director, CardioNet, Inc.2 (2009-present) (health care). Formerly, Executive Vice President, The Glenmede Trust Company (investment trust and wealth management) (1983-2004); Board Member, Investor Education (charitable organization) (2004-2005); Director, Viasys Health Care2 (January 2007-June 2007); Trustee, Pro Publica (charitable organization) (2007-2010) | 122 |
William N. Searcy, Jr. (1946) Board Member since 1993 | Private investor since October 2003; Trustee of 22 open-end mutual funds managed by Sun Capital Advisers, Inc. (since October 1998). Formerly, Pension & Savings Trust Officer, Sprint Corporation2 (telecommunications) (November 1989-September 2003) | 122 |
Jean Gleason Stromberg (1943) Board Member since 1997 | Retired. Formerly, Consultant (1997-2001); Director, Financial Markets US Government Accountability Office (1996-1997); Partner, Fulbright & Jaworski, L.L.P. (law firm) (1978-1996). Directorships: The William and Flora Hewlett Foundation. Former Directorships: Service Source, Inc., Mutual Fund Directors Forum (2002-2004), American Bar Retirement Association (funding vehicle for retirement plans) (1987-1990 and 1994-1996) | 122 |
Robert H. Wadsworth (1940) Board Member since 1999 | President, Robert H. Wadsworth & Associates, Inc. (consulting firm) (1983 to present); Director, The Phoenix Boys Choir Association | 125 |
Interested Board Member and Officer4 |
Name, Year of Birth, Position with the Trust/ Corporation and Length of Time Served1,5 | Business Experience and Directorships During the Past Five Years | Number of Funds in DWS Fund Complex Overseen |
Ingo Gefeke7 (1967) Board Member since 2010 Executive Vice President since 2010 | Managing Director3, Deutsche Asset Management; Global Head of Distribution and Product Management, DWS Global Head of Trading and Securities Lending. Member of the Board of Directors of DWS Investment GmbH Frankfurt (since July 2009) and DWS Holding & Service GmbH Frankfurt (since January 2010); formerly, Global Chief Administrative Officer, Deutsche Asset Management (2004-2009); Global Chief Operating Officer, Global Transaction Banking, Deutsche Bank AG, New York (2001-2004); Chief Operating Officer, Global Banking Division Americas, Deutsche Bank AG, New York (1999-2001); Central Management, Global Banking Services, Deutsche Bank AG, Frankfurt (1998-1999); Relationship Management, Deutsche Bank AG, Tokyo, Japan (1997-1998) | 55 |
Officers4 |
Name, Year of Birth, Position with the Fund and Length of Time Served5 | Principal Occupation(s) During Past 5 Years and Other Directorships Held |
Michael G. Clark6 (1965) President, 2006-present | Managing Director3, Deutsche Asset Management (2006-present); President of DWS family of funds; Director, ICI Mutual Insurance Company (since October 2007); formerly, Director of Fund Board Relations (2004-2006) and Director of Product Development (2000-2004), Merrill Lynch Investment Managers; Senior Vice President Operations, Merrill Lynch Asset Management (1999-2000) |
John Millette8 (1962) Vice President and Secretary, 1999-present | Director3, Deutsche Asset Management |
Paul H. Schubert6 (1963) Chief Financial Officer, 2004-present Treasurer, 2005-present | Managing Director3, Deutsche Asset Management (since July 2004); formerly, Executive Director, Head of Mutual Fund Services and Treasurer for UBS Family of Funds (1998-2004); Vice President and Director of Mutual Fund Finance at UBS Global Asset Management (1994-1998) |
Caroline Pearson8 (1962) Chief Legal Officer, April 2010-present | Managing Director3, Deutsche Asset Management; formerly, Assistant Secretary for DWS family of funds (1997-2010) |
Rita Rubin9 (1970) Assistant Secretary, 2009-present | Vice President and Counsel, Deutsche Asset Management (since October 2007); formerly, Vice President, Morgan Stanley Investment Management (2004-2007) |
Paul Antosca8 (1957) Assistant Treasurer, 2007-present | Director3, Deutsche Asset Management (since 2006); Vice President, The Manufacturers Life Insurance Company (U.S.A.) (1990-2006) |
Jack Clark8 (1967) Assistant Treasurer, 2007-present | Director3, Deutsche Asset Management (since 2007); formerly, Vice President, State Street Corporation (2002-2007) |
Diane Kenneally8 (1966) Assistant Treasurer, 2007-present | Director3, Deutsche Asset Management |
John Caruso9 (1965) Anti-Money Laundering Compliance Officer, 2010-present | Managing Director3, Deutsche Asset Management |
Robert Kloby9 (1962) Chief Compliance Officer, 2006-present | Managing Director3, Deutsche Asset Management |
1 The length of time served represents the year in which the Board Member joined the board of one or more DWS funds currently overseen by the Board.
2 A publicly held company with securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.
3 Executive title, not a board directorship.
4 As a result of their respective positions held with the Advisor, these individuals are considered "interested persons" of the Advisor within the meaning of the 1940 Act. Interested persons receive no compensation from the fund.
5 The length of time served represents the year in which the officer was first elected in such capacity for one or more DWS funds.
6 Address: 100 Plaza One, Jersey City, NJ 07311.
7 Effective January 11, 2011, Mr. Gefeke, an interested Board Member and Executive Vice President, resigned from the fund's Board and as an officer.
The mailing address of Mr. Gefeke is 345 Park Avenue, New York, New York 10154. Mr. Gefeke was an interested Board Member of certain DWS funds by virtue of his positions with Deutsche Asset Management. As an interested person, Mr. Gefeke received no compensation from the fund.
8 Address: One Beacon Street, Boston, MA 02108.
9 Address: 60 Wall Street, New York, New York 10005.
The fund's Statement of Additional Information ("SAI") includes additional information about the Board Members. The SAI is available, without charge, upon request. If you would like to request a copy of the SAI, you may do so by calling the following toll-free number: (800) 728-3337.
Notes
Notes
DWS Investments is part of Deutsche Bank's Asset Management division and, within the US, represents the retail asset management activities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company.
The views expressed in this report reflect those of the portfolio managers only through the end of the period of the report as stated on the cover. The managers' views are subject to change at any time based on market and other conditions and should not be construed as a recommendation.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by individual investors.
DWS Investment Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606
(800) 621-1148
VS2-1 (R-20593-1 2/11)
