UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-CSRS
Investment Company Act file number: 811-05002
DWS Variable Series II
(Exact Name of Registrant as Specified in Charter)
345 Park Avenue
New York, NY 10154-0004
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, including Area Code: (212) 250-3220
Paul Schubert
60 Wall Street
New York, NY 10005
(Name and Address of Agent for Service)
Date of fiscal year end: | 12/31 |
Date of reporting period: | 6/30/2012 |
ITEM 1. | REPORT TO STOCKHOLDERS |
JUNE 30, 2012
SEMIANNUAL REPORT
DWS VARIABLE SERIES II
DWS Alternative Asset Allocation VIP
(formerly DWS Alternative Asset Allocation Plus VIP)
Contents
3 Performance Summary 4 Portfolio Summary 4 Portfolio Management Team 5 Investment Portfolio 6 Statement of Assets and Liabilities 6 Statement of Operations 7 Statement of Changes in Net Assets 9 Financial Highlights 11 Notes to Financial Statements 14 Information About Your Fund's Expenses 15 Proxy Voting 16 Summary of Management Fee Evaluation by Independent Fee Consultant |
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.
Although allocation among different asset categories generally limits risk, fund management 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. Short sales — which involve selling borrowed securities in anticipation of a price decline, then returning an equal number of the securities at some point in the future — could magnify losses and increase volatility. The Fund may use derivatives, including as part of its Global Tactical Asset Allocation (GTAA) 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.
DWS Investments is part of Deutsche Bank's Asset Management division and, within the U.S., represents the retail asset management activities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company.
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
Fund 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 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, 2012 are 1.91% and 2.16% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report. These expense ratios include net expenses of the underlying funds in which the Fund invests.
Growth of an Assumed $10,000 Investment in DWS Alternative Asset Allocation VIP from 2/2/09 to 6/30/12 | ||
The Morgan Stanley Capital International (MSCI) World Index is an unmanaged, capitalization-weighted measure of global stock markets including the U.S., Canada, Europe, Australia and the Far East. The index is calculated using closing local market prices and translates into U.S. dollars using the London close foreign exchange rates. The Barclays U.S. Aggregate Bond Index is an unmanaged, market-value-weighted measure of Treasury issues, agency issues, corporate bond issues and mortgage securities. 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 U.S. Aggregate Bond Index (30%)). These results are summed to produce the aggregate benchmark. Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index. | ||
Comparative Results | |||||||||||||||||
DWS Alternative Asset Allocation VIP | 6-Month‡ | 1-Year | 3-Year | Life of Fund* | |||||||||||||
Class A | Growth of $10,000 | $ | 10,396 | $ | 9,853 | $ | 12,852 | $ | 14,343 | ||||||||
Average annual total return | 3.96 | % | -1.47 | % | 8.72 | % | 11.15 | % | |||||||||
MSCI World Index | Growth of $10,000 | $ | 10,591 | $ | 9,502 | $ | 13,666 | $ | 15,930 | ||||||||
Average annual total return | 5.91 | % | -4.98 | % | 10.97 | % | 14.60 | % | |||||||||
Barclays U.S. Aggregate Bond Index | Growth of $10,000 | $ | 10,237 | $ | 10,747 | $ | 12,227 | $ | 12,571 | ||||||||
Average annual total return | 2.37 | % | 7.47 | % | 6.93 | % | 6.93 | % | |||||||||
Blended Index | Growth of $10,000 | $ | 10,282 | $ | 9,716 | $ | 13,109 | $ | 14,843 | ||||||||
Average annual total return | 2.82 | % | -2.84 | % | 9.44 | % | 12.24 | % | |||||||||
DWS Alternative Asset Allocation VIP | 6-Month‡ | 1-Year | 3-Year | Life of Class** | |||||||||||||
Class B | Growth of $10,000 | $ | 10,385 | $ | 9,835 | $ | 12,761 | $ | 13,090 | ||||||||
Average annual total return | 3.85 | % | -1.65 | % | 8.47 | % | 9.03 | % | |||||||||
MSCI World Index | Growth of $10,000 | $ | 10,591 | $ | 9,502 | $ | 13,666 | $ | 13,605 | ||||||||
Average annual total return | 5.91 | % | -4.98 | % | 10.97 | % | 10.50 | % | |||||||||
Barclays U.S. Aggregate Bond Index | Growth of $10,000 | $ | 10,237 | $ | 10,747 | $ | 10,227 | $ | 12,297 | ||||||||
Average annual total return | 2.37 | % | 7.47 | % | 6.93 | % | 6.94 | % | |||||||||
Blended Index | Growth of $10,000 | $ | 10,282 | $ | 9,716 | $ | 13,109 | $ | 13,555 | ||||||||
Average annual total return | 2.82 | % | -2.84 | % | 9.44 | % | 10.33 | % |
The growth of $10,000 is cumulative.
‡ Total returns shown for periods less than one year are not annualized.
* The Fund commenced offering Class A shares on February 2, 2009. The performance shown for each index is for the time period of January 31, 2009 through June 30, 2012, which is based on the performance period of the life of the Fund.
** The Fund commenced offering Class B shares on May 18, 2009. The performance shown for each index is for the time period of May 31, 2009 through June 30, 2012, which is based on the performance period of the life of Class B.
Asset Allocation (As a % of Investment Portfolio) | 6/30/12 | 12/31/11 | |||||||
Market Neutral | DWS Disciplined Market Neutral Fund | 16 | % | 16 | % | ||||
Emerging Markets | DWS Emerging Markets Equity Fund DWS Enhanced Emerging Markets Fixed Income Fund WisdomTree Emerging Markets Local Debt Fund | 15 | % | 16 | % | ||||
Commodities | DWS Enhanced Commodity Strategy Fund | 14 | % | 14 | % | ||||
Floating Rate Notes | DWS Floating Rate Fund | 11 | % | 10 | % | ||||
Treasury Inflation Protected Securities | DWS Global Inflation Fund | 10 | % | 11 | % | ||||
Global Infrastructure | DWS RREEF Global Infrastructure Fund | 10 | % | 10 | % | ||||
Global Real Estate | DWS RREEF Global Real Estate Securities Fund | 10 | % | 12 | % | ||||
Preferred Stock | iShares S&P U.S. Preferred Stock Index Fund | 3 | % | 2 | % | ||||
International Treasury Bond | SPDR Barclays International Treasury Bond | 3 | % | 2 | % | ||||
Agriculture | Market Vectors Agribusiness Fund | 2 | % | — | |||||
Convertible | SPDR Barclays Convertible Securities | 2 | % | 2 | % | ||||
International and Emerging-Market Small Cap | Vanguard FTSE All World ex-U.S. Small-Cap Fund WisdomTree Emerging Markets SmallCap Dividend Fund | 2 | % | 2 | % | ||||
Money Market Fund | Central Cash Management Fund | 2 | % | 3 | % | ||||
Timber | iShares S&P Global Timber & Forestry Index Fund | 0 | % | — | |||||
100 | % | 100 | % |
Portfolio holdings and characteristics are subject to change.
For more complete details about the Fund's investment portfolio, see page 5.
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.
Robert Wang
Inna Okounkova
Ellen Tesler
Portfolio Managers, QS Investors, LLC, Subadvisor to the Fund
Shares | Value ($) | |||||||
Mutual Funds 84.4% | ||||||||
DWS Disciplined Market Neutral Fund "Institutional" (a) | 1,024,903 | 9,695,587 | ||||||
DWS Emerging Markets Equity Fund "Institutional" (a) | 187,740 | 2,842,390 | ||||||
DWS Enhanced Commodity Strategy Fund "Institutional" (a) | 2,485,864 | 8,178,493 | ||||||
DWS Enhanced Emerging Markets Fixed Income Fund "Institutional" (a) | 442,780 | 4,627,051 | ||||||
DWS Floating Rate Fund "Institutional" (a) | 683,713 | 6,317,510 | ||||||
DWS Global Inflation Fund "Institutional" (a) | 544,139 | 5,996,412 | ||||||
DWS RREEF Global Infrastructure Fund "Institutional" (a) | 529,030 | 5,835,203 | ||||||
DWS RREEF Global Real Estate Securities Fund "Institutional" (a) | 732,274 | 5,609,218 | ||||||
Total Mutual Funds (Cost $48,695,973) | 49,101,864 | |||||||
Exchange-Traded Funds 14.6% | ||||||||
iShares S&P Global Timber & Forestry Index Fund | 7,768 | 290,756 | ||||||
iShares S&P U.S. Preferred Stock Index Fund | 50,448 | 1,970,499 | ||||||
Shares | Value ($) | |||||||
Market Vectors Agribusiness Fund | 23,708 | 1,175,443 | ||||||
SPDR Barclays Capital Convertible Securities | 30,017 | 1,127,438 | ||||||
SPDR Barclays Capital International Treasury Bond | 28,559 | 1,688,979 | ||||||
Vanguard FTSE All World ex-U.S. Small-Cap Fund | 5,784 | 470,702 | ||||||
WisdomTree Emerging Markets Local Debt Fund | 22,717 | 1,149,935 | ||||||
WisdomTree Emerging Markets SmallCap Dividend Fund | 14,940 | 647,350 | ||||||
Total Exchange-Traded Funds (Cost $8,489,000) | 8,521,102 | |||||||
Cash Equivalents 1.9% | ||||||||
Central Cash Management Fund, 0.14% (a) (b) (Cost $1,104,003) | 1,104,003 | 1,104,003 |
% of Net Assets | Value ($) | |||||||
Total Investment Portfolio (Cost $58,288,976)+ | 100.9 | 58,726,969 | ||||||
Other Assets and Liabilities, Net | (0.9 | ) | (538,450 | ) | ||||
Net Assets | 100.0 | 58,188,519 |
+ The cost for federal income tax purposes was $58,970,759. At June 30, 2012, net unrealized depreciation for all securities based on tax cost was $243,790. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $1,851,595 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $2,095,385.
(a) Affiliated fund managed by Deutsche Investment Management Americas Inc.
(b) The rate shown is the annualized seven-day yield at period end.
FTSE: Financial Times and the London Stock Exchange
SPDR: Standard & Poor's 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 June 30, 2012 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 | ||||||||||||
Mutual Funds | $ | 49,101,864 | $ | — | $ | — | $ | 49,101,864 | ||||||||
Exchange-Traded Funds | 8,521,102 | — | — | 8,521,102 | ||||||||||||
Short-Term Investments | 1,104,003 | — | — | 1,104,003 | ||||||||||||
Total | $ | 58,726,969 | $ | — | $ | — | $ | 58,726,969 |
There have been no transfers between Level 1 and Level 2 fair value measurements during the period June 30, 2012.
as of June 30, 2012 (Unaudited) | ||||
Assets | ||||
Investments: Investments in affiliated Underlying Funds, at value (cost $49,799,976) | $ | 50,205,867 | ||
Investments in non-affiliated Underlying Funds, at value (cost $8,489,000) | 8,521,102 | |||
Total investments in securities, at value (cost $58,288,976) | 58,726,969 | |||
Receivable for investments sold | 230,000 | |||
Receivable for Fund shares sold | 19,325 | |||
Interest receivable | 126 | |||
Other assets | 501 | |||
Total assets | 58,976,921 | |||
Liabilities | ||||
Payable for investments purchased | 715,000 | |||
Payable for Fund shares redeemed | 27,252 | |||
Accrued management fee | 3,485 | |||
Accrued Trustees' fees | 36 | |||
Other accrued expenses and payables | 42,629 | |||
Total liabilities | 788,402 | |||
Net assets, at value | $ | 58,188,519 | ||
Net Assets Consist of | ||||
Undistributed net investment income | 305,941 | |||
Net unrealized appreciation (depreciation) on investments | 437,993 | |||
Accumulated net realized gain (loss) | (1,155,753 | ) | ||
Paid-in capital | 58,600,338 | |||
Net assets, at value | $ | 58,188,519 | ||
Class A Net Asset Value, offering and redemption price per share ($8,327,164 ÷ 632,125 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | $ | 13.17 | ||
Class B Net Asset Value, offering and redemption price per share ($49,861,355 ÷ 3,783,327 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | $ | 13.18 |
The accompanying notes are an integral part of the financial statements.
Statement of Operations
for the six months ended June 30, 2012 (Unaudited) | ||||
Investment Income | ||||
Income: Income distributions from affiliated Underlying Funds | $ | 377,643 | ||
Dividends | 90,621 | |||
Total income | 468,264 | |||
Expenses: Management fee | 83,637 | |||
Administration fee | 26,665 | |||
Services to shareholders | 720 | |||
Distribution service fee (Class B) | 56,785 | |||
Custodian fee | 4,992 | |||
Audit and tax fees | 20,202 | |||
Legal fees | 2,519 | |||
Reports to shareholders | 15,539 | |||
Trustees' fees and expenses | 2,015 | |||
Other | 389 | |||
Total expenses before expense reductions | 213,463 | |||
Expense reductions | (71,351 | ) | ||
Total expenses after expense reductions | 142,112 | |||
Net investment income (loss) | 326,152 | |||
Realized and Unrealized Gain (Loss) | ||||
Net realized gain (loss) from: Sale of affiliated Underlying Funds | (401,879 | ) | ||
Sale of non-affiliated Underlying Funds | (68,639 | ) | ||
(470,518 | ) | |||
Change in net unrealized appreciation (depreciation) on investments | 2,041,670 | |||
Net gain (loss) | 1,571,152 | |||
Net increase (decrease) in net assets resulting from operations | $ | 1,897,304 |
The accompanying notes are an integral part of the financial statements.
Increase (Decrease) in Net Assets | Six Months Ended June 30, 2012 (Unaudited) | Year Ended December 31, 2011 | ||||||
Operations: Net investment income | $ | 326,152 | $ | 1,795,540 | ||||
Net realized gain (loss) | (470,518 | ) | (194,968 | ) | ||||
Change in net unrealized appreciation (depreciation) | 2,041,670 | (3,200,100 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 1,897,304 | (1,599,528 | ) | |||||
Distributions to shareholders from: Net investment income: Class A | (277,485 | ) | (92,242 | ) | ||||
Class B | (1,538,242 | ) | (344,882 | ) | ||||
Net realized gains: Class A | (65,328 | ) | (18,623 | ) | ||||
Class B | (390,800 | ) | (86,109 | ) | ||||
Total distributions | (2,271,855 | ) | (541,856 | ) | ||||
Fund share transactions: Class A Proceeds from shares sold | 1,939,358 | 4,338,660 | ||||||
Reinvestment of distributions | 342,813 | 110,865 | ||||||
Payments for shares redeemed | (1,134,982 | ) | (1,860,159 | ) | ||||
Net increase (decrease) in net assets from Class A share transactions | 1,147,189 | 2,589,366 | ||||||
Class B Proceeds from shares sold | 10,284,662 | 26,120,308 | ||||||
Reinvestment of distributions | 1,929,042 | 430,991 | ||||||
Payments for shares redeemed | (2,938,872 | ) | (6,800,233 | ) | ||||
Net increase (decrease) in net assets from Class B share transactions | 9,274,832 | 19,751,066 | ||||||
Increase (decrease) in net assets | 10,047,470 | 20,199,048 | ||||||
Net assets at beginning of period | 48,141,049 | 27,942,001 | ||||||
Net assets at end of period (including undistributed net investment income of $305,941 and $1,795,516, respectively) | $ | 58,188,519 | $ | 48,141,049 | ||||
Other Information | ||||||||
Class A Shares outstanding at beginning of period | 545,891 | 362,411 | ||||||
Shares sold | 143,549 | 314,437 | ||||||
Shares issued to shareholders in reinvestment of distributions | 25,795 | 7,774 | ||||||
Shares redeemed | (83,110 | ) | (138,731 | ) | ||||
Net increase (decrease) in Class A shares | 86,234 | 183,480 | ||||||
Shares outstanding at end of period | 632,125 | 545,891 | ||||||
Class B Shares outstanding at beginning of period | 3,093,124 | 1,656,043 | ||||||
Shares sold | 761,903 | 1,910,807 | ||||||
Shares issued to shareholders in reinvestment of distributions | 145,041 | 30,203 | ||||||
Shares redeemed | (216,741 | ) | (503,929 | ) | ||||
Net increase (decrease) in Class B shares | 690,203 | 1,437,081 | ||||||
Shares outstanding at end of period | 3,783,327 | 3,093,124 |
The accompanying notes are an integral part of the financial statements.
Years Ended December 31, | ||||||||||||||||
Class A | Six Months Ended 6/30/12 (Unaudited) | 2011 | 2010 | Period Ended 12/31/09a | ||||||||||||
Selected Per Share Data | ||||||||||||||||
Net asset value, beginning of period | $ | 13.24 | $ | 13.85 | $ | 12.63 | $ | 10.00 | ||||||||
Income (loss) from investment operations: Net investment incomeb | .10 | .64 | .46 | .57 | ||||||||||||
Net realized and unrealized gain (loss) | .43 | (1.02 | ) | 1.09 | 2.06 | |||||||||||
Total from investment operations | .53 | (.38 | ) | 1.55 | 2.63 | |||||||||||
Less distributions from: Net investment income | (.49 | ) | (.19 | ) | (.18 | ) | — | |||||||||
Net realized gains | (.11 | ) | (.04 | ) | (.15 | ) | — | |||||||||
Total distributions | (.60 | ) | (.23 | ) | (.33 | ) | — | |||||||||
Net asset value, end of period | $ | 13.17 | $ | 13.24 | $ | 13.85 | $ | 12.63 | ||||||||
Total Return (%)c,d | 3.96 | ** | (2.87 | ) | 12.46 | 26.30 | ** | |||||||||
Ratios to Average Net Assets and Supplemental Data | ||||||||||||||||
Net assets, end of period ($ millions) | 8 | 7 | 5 | 1 | ||||||||||||
Ratio of expenses before expense reductions (%)e | .59 | * | .61 | .94 | 11.67 | * | ||||||||||
Ratio of expenses after expense reductions (%)e | .32 | * | .30 | .21 | .21 | * | ||||||||||
Ratio of net investment income (%) | 1.43 | * | 4.72 | 3.51 | 5.39 | * | ||||||||||
Portfolio turnover rate (%) | 10 | ** | 39 | 6 | 155 | ** | ||||||||||
a For the period from February 2, 2009 (commencement of operations of Class A shares) to December 31, 2009. b Based on average shares outstanding during the period. c Total return would have been lower had certain expenses not been reduced. d Total return would have been lower if the Advisor had not reduced some affiliated Underlying Funds' expenses. e The Fund invests in other Funds and indirectly bears its proportionate share of fees and expenses incurred by the Underlying Funds in which the Fund is invested. This ratio does not include these indirect fees and expenses. * Annualized ** Not annualized |
Years Ended December 31, | ||||||||||||||||
Class B | Six Months Ended 6/30/12 (Unaudited) | 2011 | 2010 | Period Ended 12/31/09a | ||||||||||||
Selected Per Share Data | ||||||||||||||||
Net asset value, beginning of period | $ | 13.23 | $ | 13.84 | $ | 12.61 | $ | 10.87 | ||||||||
Income (loss) from investment operations: Net investment incomeb | .08 | .61 | .42 | .35 | ||||||||||||
Net realized and unrealized gain (loss) | .43 | (1.03 | ) | 1.09 | 1.39 | |||||||||||
Total from investment operations | .51 | (.42 | ) | 1.51 | 1.74 | |||||||||||
Less distributions from: Net investment income | (.45 | ) | (.15 | ) | (.13 | ) | — | |||||||||
Net realized gains | (.11 | ) | (.04 | ) | (.15 | ) | — | |||||||||
Total distributions | (.56 | ) | (.19 | ) | (.28 | ) | — | |||||||||
Net asset value, end of period | $ | 13.18 | $ | 13.23 | $ | 13.84 | $ | 12.61 | ||||||||
Total Return (%)c,d | 3.85 | ** | (3.12 | ) | 12.15 | 16.01 | ** | |||||||||
Ratios to Average Net Assets and Supplemental Data | ||||||||||||||||
Net assets, end of period ($ millions) | 50 | 41 | 23 | 3 | ||||||||||||
Ratio of expenses before expense reductions (%)e | .84 | * | .86 | 1.19 | 5.37 | * | ||||||||||
Ratio of expenses after expense reductions (%)e | .57 | * | .55 | .46 | .61 | * | ||||||||||
Ratio of net investment income (%) | 1.19 | * | 4.47 | 3.26 | 4.66 | * | ||||||||||
Portfolio turnover rate (%) | 10 | ** | 39 | 6 | 155 | ** | ||||||||||
a For the period from May 18, 2009 (commencement of operations of Class B shares) to December 31, 2009. b Based on average shares outstanding during the period. c Total return would have been lower had certain expenses not been reduced. d Total return would have been lower if the Advisor had not reduced some affiliated Underlying Funds' expenses. e The Fund invests in other Funds and indirectly bears its proportionate share of fees and expenses incurred by the Underlying Funds in which the Fund is invested. This ratio does not include these indirect fees and expenses. * Annualized ** Not annualized |
A. Organization and Significant Accounting Policies
DWS Alternative Asset Allocation VIP (formerly DWS Alternative Asset Allocation Plus VIP) (the "Fund") is a diversified series of DWS Variable Series II (the "Trust"), which 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 Fund invests in other affiliated DWS funds (the "Underlying DWS Funds"), derivative investments and exchange-traded funds ("ETFs"). ETFs and Underlying DWS Funds are collectively referred to as "Underlying Funds." Each Underlying DWS Fund's accounting policies and investment holdings are outlined in the Underlying DWS Funds' financial statements and are available upon request.
Multiple Classes of Shares of Beneficial Interest. The Fund offers two classes of shares (Class A shares and Class B shares). Sales of Class B shares are subject to 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 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). 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 Fund'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 Fund 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 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.
Investments in the Underlying DWS Funds are valued at the net asset value per share of each class of the Underlying DWS Funds and are categorized as Level 1.
ETFs are valued at the most recent sale price or official closing price reported on the exchange (U.S. or foreign) or over-the-counter market on which they trade and are categorized as Level 1 securities. 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.
Disclosure about the classification of fair value measurements is included in a table following the Fund's Investment Portfolio.
Federal Income Taxes. The 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.
Under the Regulated Investment Company Modernization Act of 2010, net capital losses may be carried forward indefinitely, and their character is retained as short-term and/or long-term. Previously, net capital losses were carried forward for eight years and treated as short-term losses.
The Fund has reviewed the tax positions for the open tax years as of December 31, 2011 and has determined that no provision for income tax is required in the Fund's financial statements. The Fund's federal tax returns for the prior three fiscal years remain open subject to examination by the Internal Revenue Service.
Distribution of Income and Gains. Net investment income of the Fund, if any, is declared and distributed to shareholders annually. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed and, therefore, will be distributed to shareholders at least annually.
The timing and characterization of certain income and capital gain 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 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, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.
The tax character of current year distributions will be determined at the end of the current fiscal year.
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, the Fund may enter into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet been made. However, based on experience, the Fund expects the risk of loss to be remote.
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. Distributions of income and capital gains from the Underlying Funds are recorded on the ex-dividend date. Realized gains and losses from investment transactions are recorded on an identified cost basis.
B. Purchases and Sales of Securities
During the six months ended June 30, 2012, purchases and sales of affiliated Underlying Funds (excluding short-term investments) aggregated $10,303,093 and $4,780,000, respectively. Purchases and sales of non-affiliated Underlying Funds (excluding short-term investments) aggregated $4,329,297 and $614,474, respectively.
C. 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 the Fund in accordance with its investment objectives, policies and restrictions. The Advisor determines the securities, instruments and other contracts relating to investments in Underlying Funds to be purchased, sold or entered into by the Fund or delegates such responsibility to the Fund's subadvisors.
QS Investors, LLC ("QS Investors") acts as an investment subadvisor to the Fund. As an investment subadvisor to the Fund, QS Investors renders strategic asset allocation services and manages the portion of assets allocated to the Fund's global tactical asset allocation overlay strategy. QS Investors is paid by the Advisor for the services QS Investors provides to the Fund.
RREEF America L.L.C. ("RREEF") acts as an investment subadvisor to the Fund. As an investment subadvisor to the Funds, RREEF provides investment management services to the portions of the Fund's portfolio allocated to direct investments in global real estate and global infrastructure securities. RREEF is paid by the Advisor for the services RREEF provides to the Fund. As of the date of this report, the Fund obtained its exposure to global real estate and global infrastructure securities indirectly through investments in other Underlying DWS Funds.
The Fund does not invest in the Underlying DWS Funds for the purpose of exercising management or control; however, investments within the set limits may represent 5% or more of an Underlying DWS Fund's outstanding shares. At June 30, 2012, the Fund did not invest in more than 5% of any Underlying DWS Fund.
Pursuant to the Investment Management Agreement with the Advisor, the Fund pays a monthly management fee based on the Fund's average daily net assets, computed and accrued daily and payable monthly, at the following annual rates:
On assets invested in other DWS Funds | .200% |
On assets invested in all other assets not considered DWS Funds | 1.200% |
In addition, the Advisor will receive management fees from managing the Underlying DWS Funds in which the Fund invests.
For the period from January 1, 2012 through April 30, 2013, 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:
Class A | .32% |
Class B | .57% |
For the six months ended June 30, 2012, the Advisor has contractually agreed to waive 0.15% of the monthly management fee based on average daily net assets for the Fund.
Accordingly, for the six months ended June 30, 2012, the Advisor waived a portion of its management fee pursuant to the Investment Management Agreement aggregating $71,143, and the amount charged aggregated $12,494, which was equivalent to an annualized effective rate of 0.05% of the Fund's average daily net assets.
The Fund 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 Fund. For all services provided under the Administrative Services Agreement, the Fund pays DIMA an annual fee ("Administration Fee") of 0.10% of the Fund's average daily net assets, computed and accrued daily and payable monthly. For the six months ended June 30, 2012, the Administration Fee was $26,665, of which $6,335 is unpaid.
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 the 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 the Fund. For the six months ended June 30, 2012, the amounts charged to the Fund by DISC were as follows:
Services to Shareholders | Total Aggregated | Waived | ||||||
Class A | $ | 34 | $ | 34 | ||||
Class B | 23 | 23 | ||||||
$ | 57 | $ | 57 |
Distribution Service Agreement. Under the Fund's 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 six months ended June 30, 2012, the Distribution Service Fee aggregated $56,785, of which $151 was waived and $9,899 is unpaid.
Typesetting and Filing Service Fees. Under an agreement with DIMA, DIMA is compensated for providing typesetting and certain regulatory filing services to the Fund. For the six months ended June 30, 2012, the amount charged to the Fund by DIMA included in the Statement of Operations under "reports to shareholders" aggregated $11,613, of which $610 is unpaid.
Trustees' Fees and Expenses. The Fund paid retainer fees to each Trustee not affiliated with the Advisor, plus specified amounts to the Board Chairperson and to each committee Chairperson.
Affiliated Cash Management Vehicle. The Fund may invest uninvested cash balances in Central Cash Management Fund, which is managed by the Advisor. The Fund indirectly bears its proportionate share of the expenses of Central Cash Management Fund. 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.
D. Ownership of the Fund
At June 30, 2012, 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%. One Participating Insurance Company was the owner of record of 10% or more of the total outstanding Class B shares of the Fund, owning 92%.
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 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 expense 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 (January 1, 2012 to June 30, 2012).
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 June 30, 2012 | ||||||||
Actual Fund Return | Class A | Class B | ||||||
Beginning Account Value 1/1/12 | $ | 1,000.00 | $ | 1,000.00 | ||||
Ending Account Value 6/30/12 | $ | 1,039.60 | $ | 1,038.50 | ||||
Expenses Paid per $1,000* | $ | 1.62 | $ | 2.89 | ||||
Hypothetical 5% Fund Return | Class A | Class B | ||||||
Beginning Account Value 1/1/12 | $ | 1,000.00 | $ | 1,000.00 | ||||
Ending Account Value 6/30/12 | $ | 1,023.27 | $ | 1,022.03 | ||||
Expenses Paid per $1,000* | $ | 1.61 | $ | 2.87 |
* 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 182 (the number of days in the most recent six-month period), then divided by 366.
Annualized Expense Ratios** | Class A | Class B |
DWS Variable Series II — DWS Alternative Asset Allocation VIP | .32% | .57% |
** The Fund invests in other funds and indirectly bears its proportionate share of fees and expenses incurred by the Underlying Funds in which the Fund is invested. These ratios do not include these indirect fees and expenses.
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 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.
September 26, 2011
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 report summarizes my evaluation for 2011, 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, 2009 and 2010.
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 109 mutual 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
President, Thomas H. Mack & Co., Inc.
DWS Investments Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606
(800) 621-1148
VS2AAA-3 (R-028379-1 8/12)
JUNE 30, 2012
SEMIANNUAL REPORT
DWS VARIABLE SERIES II
DWS Diversified International Equity VIP
Contents
3 Performance Summary 4 Portfolio Summary 4 Portfolio Management Team 5 Investment Portfolio 15 Statement of Assets and Liabilities 16 Statement of Operations 17 Statement of Changes in Net Assets 19 Financial Highlights 20 Notes to Financial Statements 24 Information About Your Fund's Expenses 24 Proxy Voting 26 Summary of Management Fee Evaluation by Independent Fee Consultant |
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.
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. The Fund may lend securities to approved institutions. Stocks may decline in value. See the prospectus for details.
DWS Investments is part of Deutsche Bank's Asset Management division and, within the U.S., represents the retail asset management activities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company.
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
Fund 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, 2012 is 1.07% for Class A shares and may differ from the expense ratio disclosed in the Financial Highlights table in this report.
Growth of an Assumed $10,000 Investment in DWS Diversified International Equity VIP | ||
The Morgan Stanley Capital International (MSCI) Europe, Australasia and the Far East 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 U.S. dollars using the London close foreign exchange rates. Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index. | ||
Yearly periods ended June 30 |
Comparative Results | |||||||||||||||||||||
DWS Diversified International Equity VIP | 6-Month‡ | 1-Year | 3-Year | 5-Year | 10-Year | ||||||||||||||||
Class A | Growth of $10,000 | $ | 10,289 | $ | 8,622 | $ | 12,277 | $ | 6,992 | $ | 15,092 | ||||||||||
Average annual total return | 2.89 | % | -13.78 | % | 7.08 | % | -6.91 | % | 4.20 | % | |||||||||||
MSCI EAFE Index | Growth of $10,000 | $ | 10,296 | $ | 8,617 | $ | 11,898 | $ | 7,301 | $ | 16,513 | ||||||||||
Average annual total return | 2.96 | % | -13.83 | % | 5.96 | % | -6.10 | % | 5.14 | % |
The growth of $10,000 is cumulative.
‡ Total returns shown for periods less than one year are not annualized.
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | 6/30/12 | 12/31/11 |
Common Stocks | 88% | 89% |
Exchange-Traded Funds | 10% | 10% |
Cash Equivalents* | 2% | 0% |
Preferred Stocks | 0% | 1% |
100% | 100% |
Sector Diversification (As a % of Common and Preferred Stocks and Rights) | 6/30/12 | 12/31/11 |
Telecommunication Services | 17% | 14% |
Health Care | 12% | 13% |
Financials | 12% | 11% |
Consumer Staples | 12% | 13% |
Information Technology | 10% | 7% |
Materials | 9% | 9% |
Utilities | 9% | 11% |
Industrials | 8% | 8% |
Consumer Discretionary | 7% | 9% |
Energy | 4% | 5% |
100% | 100% |
Geographical Diversification (As a % of Investment Portfolio excluding Cash Equivalents and Securities Lending Collateral) | 6/30/12 | 12/31/11 |
Continental Europe | 54% | 49% |
Japan | 12% | 13% |
Emerging Markets | 10% | 10% |
Canada | 7% | 11% |
United Kingdom | 7% | 8% |
Asia (excluding Japan) | 6% | 5% |
Australia | 4% | 4% |
100% | 100% |
* 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.
Portfolio holdings and characteristics are subject to change.
For more complete details about the Fund's investment portfolio, see page 5.
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.
Robert Wang
Russell Shtern, CFA
Portfolio Managers, QS Investors, LLC, Subadvisor to the Fund
Shares | Value ($) | |||||||
Common Stocks 87.2% | ||||||||
Australia 3.8% | ||||||||
AGL Energy Ltd. | 11,731 | 177,905 | ||||||
APA Group | 12,919 | 66,201 | ||||||
Asciano Ltd. | 5,759 | 25,902 | ||||||
Australia & New Zealand Banking Group Ltd. | 2,339 | 53,098 | ||||||
BHP Billiton Ltd. | 4,758 | 155,094 | ||||||
Brambles Ltd. | 9,482 | 60,141 | ||||||
Coca-Cola Amatil Ltd. | 2,294 | 31,507 | ||||||
Cochlear Ltd. | 479 | 32,441 | ||||||
Commonwealth Bank of Australia | 1,367 | 74,811 | ||||||
Crown Ltd. | 7,919 | 69,173 | ||||||
CSL Ltd. | 3,616 | 146,659 | ||||||
Echo Entertainment Group Ltd. | 6,555 | 28,755 | ||||||
Fairfax Media Ltd. | 36,454 | 20,871 | ||||||
Leighton Holdings Ltd. | 986 | 16,621 | ||||||
National Australia Bank Ltd. | 2,126 | 51,631 | ||||||
Newcrest Mining Ltd. | 1,231 | 28,653 | ||||||
Origin Energy Ltd. | 6,869 | 86,401 | ||||||
QR National Ltd. | 11,307 | 39,646 | ||||||
Rio Tinto Ltd. | 735 | 43,202 | ||||||
Santos Ltd. | 6,168 | 67,739 | ||||||
Sonic Healthcare Ltd. | 3,281 | 42,788 | ||||||
SP AusNet | 47,515 | 49,607 | ||||||
TABCORP Holdings Ltd. | 15,130 | 45,592 | ||||||
Tatts Group Ltd. | 24,689 | 66,554 | ||||||
Telstra Corp., Ltd. | 117,048 | 443,538 | ||||||
Toll Holdings Ltd. | 4,694 | 19,275 | ||||||
Transurban Group (Units) | 7,777 | 45,345 | ||||||
Wesfarmers Ltd. | 3,054 | 94,020 | ||||||
Westfield Group (REIT) (Units) | 2,462 | 23,986 | ||||||
Westpac Banking Corp. | 2,057 | 44,749 | ||||||
Woodside Petroleum Ltd. | 3,625 | 116,089 | ||||||
Woolworths Ltd. | 2,335 | 64,223 | ||||||
WorleyParsons Ltd. | 1,091 | 28,338 | ||||||
(Cost $1,779,338) | 2,360,555 | |||||||
Austria 0.6% | ||||||||
Erste Group Bank AG* | 7,544 | 143,422 | ||||||
Immofinanz AG* (a) | 33,264 | 105,888 | ||||||
Raiffeisen Bank International AG | 1,765 | 57,808 | ||||||
Vienna Insurance Group AG Wiener Versicherung Gruppe | 1,323 | 53,450 | ||||||
(Cost $350,192) | 360,568 | |||||||
Belgium 1.6% | ||||||||
Ageas | 64,523 | 127,806 | ||||||
Anheuser-Busch InBev NV | 5,193 | 403,718 | ||||||
Delhaize Group | 593 | 21,719 | ||||||
Groupe Bruxelles Lambert SA | 2,184 | 148,424 | ||||||
KBC Groep NV (a) | 4,365 | 92,664 | ||||||
Solvay SA | 1,060 | 104,869 | ||||||
Umicore SA | 2,235 | 103,319 | ||||||
(Cost $796,309) | 1,002,519 | |||||||
Bermuda 0.1% | ||||||||
Seadrill Ltd. (a) (Cost $25,496) | 2,436 | 86,965 | ||||||
Shares | Value ($) | |||||||
Canada 6.9% | ||||||||
Alimentation Couche-Tard, Inc. "B" | 1,500 | 65,504 | ||||||
Bank of Montreal (a) | 800 | 44,208 | ||||||
Bank of Nova Scotia (a) | 1,100 | 56,983 | ||||||
Barrick Gold Corp. (a) | 2,100 | 79,103 | ||||||
BCE, Inc. (a) | 3,000 | 123,701 | ||||||
Bell Aliant, Inc. (a) | 1,400 | 35,107 | ||||||
Bombardier, Inc. "B" (a) | 6,500 | 25,665 | ||||||
Brookfield Asset Management, Inc. "A" (a) | 1,000 | 33,111 | ||||||
CAE, Inc. (a) | 2,200 | 21,371 | ||||||
Canadian Imperial Bank of Commerce (a) | 500 | 35,188 | ||||||
Canadian National Railway Co. (a) | 1,500 | 126,854 | ||||||
Canadian Natural Resources Ltd. | 1,400 | 37,554 | ||||||
Canadian Pacific Railway Ltd. | 700 | 51,374 | ||||||
Canadian Tire Corp., Ltd. "A" | 500 | 33,828 | ||||||
Canadian Utilities Ltd. "A" | 1,800 | 117,484 | ||||||
CGI Group, Inc. "A"* | 22,900 | 550,401 | ||||||
Eldorado Gold Corp. | 1,800 | 22,171 | ||||||
Empire Co., Ltd. "A" | 500 | 26,353 | ||||||
EnCana Corp. (a) | 1,000 | 20,823 | ||||||
Finning International, Inc. (a) | 900 | 20,933 | ||||||
First Quantum Minerals Ltd. (a) | 800 | 14,144 | ||||||
Fortis, Inc. (a) | 6,400 | 202,982 | ||||||
George Weston Ltd. | 700 | 39,768 | ||||||
Gildan Activewear, Inc. (a) | 800 | 22,041 | ||||||
Goldcorp, Inc. | 1,800 | 67,767 | ||||||
Kinross Gold Corp. | 2,300 | 18,773 | ||||||
Loblaw Companies Ltd. (a) | 1,500 | 47,736 | ||||||
Magna International, Inc. "A" (a) | 1,106 | 43,682 | ||||||
Manulife Financial Corp. | 2,600 | 28,321 | ||||||
Metro, Inc. "A" | 1,300 | 66,564 | ||||||
National Bank of Canada (a) | 400 | 28,591 | ||||||
Open Text Corp.* | 5,900 | 295,608 | ||||||
Potash Corp. of Saskatchewan, Inc. (a) | 1,300 | 56,822 | ||||||
Research In Motion Ltd.* (a) | 48,200 | 356,967 | ||||||
Rogers Communications, Inc. "B" (a) | 4,800 | 174,018 | ||||||
Royal Bank of Canada (a) | 1,300 | 66,602 | ||||||
Saputo, Inc. (a) | 1,800 | 74,839 | ||||||
Shaw Communications, Inc. "B" (a) | 2,400 | 45,355 | ||||||
Shoppers Drug Mart Corp. (a) | 2,700 | 108,865 | ||||||
Silver Wheaton Corp. | 1,100 | 29,572 | ||||||
SNC-Lavalin Group, Inc. | 600 | 22,477 | ||||||
Sun Life Financial, Inc. (a) | 1,000 | 21,756 | ||||||
Suncor Energy, Inc. | 2,020 | 58,412 | ||||||
Teck Resources Ltd. "B" | 1,200 | 37,163 | ||||||
Telus Corp. | 800 | 48,042 | ||||||
Telus Corp. (Non-Voting Shares) (a) | 1,900 | 111,171 | ||||||
Thomson Reuters Corp. (a) (b) | 800 | 22,764 | ||||||
Thomson Reuters Corp. (b) | 1,158 | 32,945 | ||||||
Tim Hortons, Inc. | 1,000 | 52,716 | ||||||
Toronto-Dominion Bank (a) | 900 | 70,437 | ||||||
TransAlta Corp. (a) | 8,600 | 145,713 | ||||||
Valeant Pharmaceuticals International, Inc.* | 6,700 | 300,549 | ||||||
Viterra, Inc. | 3,700 | 58,693 | ||||||
Yamana Gold, Inc. | 1,100 | 16,974 | ||||||
(Cost $4,489,378) | 4,316,545 | |||||||
Shares | Value ($) | |||||||
Denmark 2.1% | ||||||||
A P Moller-Maersk AS "A" | 7 | 43,745 | ||||||
A P Moller-Maersk AS "B" | 18 | 118,456 | ||||||
Carlsberg AS "B" | 6,056 | 477,196 | ||||||
Coloplast AS "B" | 211 | 37,923 | ||||||
Danske Bank AS* | 19,616 | 273,311 | ||||||
DSV AS | 2,622 | 52,026 | ||||||
Novo Nordisk AS "B" | 1,898 | 274,586 | ||||||
Tryg AS | 621 | 34,867 | ||||||
William Demant Holding AS* | 291 | 26,152 | ||||||
(Cost $1,033,737) | 1,338,262 | |||||||
Finland 3.5% | ||||||||
Fortum Oyj | 14,781 | 280,844 | ||||||
Kone Oyj "B" | 1,991 | 120,565 | ||||||
Metso Corp. (a) | 1,709 | 59,170 | ||||||
Nokia Oyj | 463,367 | 954,555 | ||||||
Pohjola Bank PLC | 3,258 | 38,049 | ||||||
Sampo Oyj "A" | 10,661 | 277,129 | ||||||
Stora Enso Oyj "R" | 23,027 | 142,121 | ||||||
UPM-Kymmene Oyj | 20,179 | 228,703 | ||||||
Wartsila Oyj | 2,307 | 75,836 | ||||||
(Cost $2,533,714) | 2,176,972 | |||||||
France 7.1% | ||||||||
Air Liquide SA | 1,652 | 189,006 | ||||||
Alcatel-Lucent* (a) | 30,877 | 51,300 | ||||||
Arkema | 421 | 27,585 | ||||||
AtoS | 697 | 41,738 | ||||||
AXA SA | 6,001 | 80,319 | ||||||
BNP Paribas SA | 2,926 | 112,955 | ||||||
Bouygues SA | 734 | 19,780 | ||||||
Cap Gemini | 2,014 | 74,244 | ||||||
Carrefour SA (a) | 3,071 | 56,746 | ||||||
Casino Guichard-Perrachon SA | 501 | 43,991 | ||||||
Cie de St-Gobain (a) | 755 | 27,938 | ||||||
DANONE SA | 2,453 | 152,288 | ||||||
Dassault Systemes SA (a) | 830 | 77,972 | ||||||
Electricite de France | 2,181 | 48,557 | ||||||
Essilor International SA | 2,945 | 273,573 | ||||||
France Telecom SA (a) | 28,037 | 368,957 | ||||||
GDF Suez | 12,916 | 308,162 | ||||||
Iliad SA (a) | 426 | 61,637 | ||||||
L'Oreal SA | 996 | 116,674 | ||||||
Lafarge SA (a) | 843 | 37,729 | ||||||
LVMH Moet Hennessy Louis Vuitton SA | 420 | 64,016 | ||||||
Pernod Ricard SA | 1,025 | 109,651 | ||||||
Sanofi | 15,106 | 1,145,504 | ||||||
Schneider Electric SA | 894 | 49,812 | ||||||
Societe Generale* | 2,229 | 52,553 | ||||||
Suez Environnement Co. | 1,869 | 20,119 | ||||||
Technip SA | 427 | 44,560 | ||||||
Total SA | 6,134 | 276,822 | ||||||
Unibail-Rodamco SE (REIT) | 265 | 48,891 | ||||||
Veolia Environnement | 4,218 | 53,375 | ||||||
Vinci SA | 944 | 44,182 | ||||||
Vivendi (a) | 20,385 | 378,970 | ||||||
(Cost $4,237,786) | 4,459,606 | |||||||
Germany 5.2% | ||||||||
Adidas AG | 551 | 39,519 | ||||||
Allianz SE (Registered) | 1,916 | 192,663 | ||||||
Shares | Value ($) | |||||||
BASF SE | 1,618 | 112,433 | ||||||
Bayer AG | 3,762 | 271,273 | ||||||
Bayerische Motoren Werke (BMW) AG | 704 | 51,010 | ||||||
Beiersdorf AG | 1,386 | 89,928 | ||||||
Commerzbank AG* | 17,612 | 29,917 | ||||||
Continental AG | 289 | 24,091 | ||||||
Daimler AG (Registered) | 1,589 | 71,464 | ||||||
Deutsche Boerse AG | 688 | 37,133 | ||||||
Deutsche Post AG (Registered) | 3,555 | 62,963 | ||||||
Deutsche Telekom AG (Registered) | 72,396 | 794,202 | ||||||
E.ON AG | 12,448 | 268,135 | ||||||
Fresenius Medical Care AG & Co. KGaA | 1,256 | 88,902 | ||||||
Fresenius SE & Co. KGaA | 632 | 65,535 | ||||||
GEA Group AG | 1,223 | 32,474 | ||||||
Henkel AG & Co. KGaA | 1,794 | 99,417 | ||||||
Infineon Technologies AG | 4,778 | 32,397 | ||||||
K+S AG (Registered) | 447 | 20,395 | ||||||
Kabel Deutschland Holding AG* | 301 | 18,732 | ||||||
Linde AG | 332 | 51,712 | ||||||
Merck KGaA | 430 | 42,911 | ||||||
Metro AG | 2,014 | 58,750 | ||||||
Muenchener Rueckversicherungs- Gesellschaft AG (Registered) | 761 | 107,369 | ||||||
RWE AG | 3,136 | 128,196 | ||||||
SAP AG | 3,204 | 189,207 | ||||||
Siemens AG (Registered) | 2,778 | 233,512 | ||||||
Suedzucker AG | 1,189 | 42,059 | ||||||
Volkswagen AG | 110 | 16,596 | ||||||
(Cost $2,835,950) | 3,272,895 | |||||||
Hong Kong 2.4% | ||||||||
AIA Group Ltd. | 23,000 | 79,303 | ||||||
Cathay Pacific Airways Ltd. | 15,000 | 24,302 | ||||||
Cheung Kong (Holdings) Ltd. | 5,000 | 61,786 | ||||||
Cheung Kong Infrastructure Holdings Ltd. (a) | 7,000 | 42,033 | ||||||
CLP Holdings Ltd. | 23,000 | 195,477 | ||||||
Galaxy Entertainment Group Ltd.* (a) | 12,000 | 30,110 | ||||||
Hang Lung Properties Ltd. | 12,000 | 40,848 | ||||||
Hang Seng Bank Ltd. (a) | 2,200 | 30,036 | ||||||
Hong Kong & China Gas Co., Ltd. | 45,813 | 97,320 | ||||||
Hong Kong Exchanges & Clearing Ltd. (a) | 3,500 | 50,162 | ||||||
Hutchison Whampoa Ltd. | 31,000 | 268,116 | ||||||
Li & Fung Ltd. (a) | 36,000 | 69,762 | ||||||
Link (REIT) (a) | 11,000 | 44,902 | ||||||
MTR Corp., Ltd. | 17,500 | 59,889 | ||||||
Noble Group Ltd. | 51,363 | 45,859 | ||||||
NWS Holdings Ltd. (a) | 30,000 | 43,605 | ||||||
Orient Overseas International Ltd. | 5,000 | 24,534 | ||||||
Power Assets Holdings Ltd. (a) | 14,000 | 105,027 | ||||||
Shangri-La Asia Ltd. (a) | 12,000 | 22,890 | ||||||
SJM Holdings Ltd. | 12,000 | 22,327 | ||||||
Sun Hung Kai Properties Ltd. (a) | 5,000 | 59,299 | ||||||
Swire Pacific Ltd. "A" | 2,000 | 23,303 | ||||||
Wharf Holdings Ltd. | 6,000 | 33,397 | ||||||
Yue Yuen Industrial (Holdings) Ltd. (a) | 5,000 | 15,609 | ||||||
(Cost $1,209,738) | 1,489,896 | |||||||
Shares | Value ($) | |||||||
Ireland 2.7% | ||||||||
CRH PLC (b) | 20,956 | 402,877 | ||||||
CRH PLC (b) | 55,133 | 1,069,886 | ||||||
Elan Corp. PLC* | 14,234 | 207,495 | ||||||
Experian PLC | 1,159 | 16,372 | ||||||
(Cost $1,602,046) | 1,696,630 | |||||||
Italy 4.2% | ||||||||
Assicurazioni Generali SpA | 8,011 | 108,714 | ||||||
Atlantia SpA | 7,403 | 94,552 | ||||||
Autogrill SpA | 2,933 | 26,636 | ||||||
Enel Green Power SpA | 16,188 | 25,665 | ||||||
Enel SpA (a) | 78,094 | 252,015 | ||||||
Eni SpA | 11,163 | 238,234 | ||||||
Fiat Industrial SpA | 20,463 | 201,651 | ||||||
Fiat SpA* (a) | 22,794 | 115,339 | ||||||
Finmeccanica SpA* | 7,959 | 32,186 | ||||||
Intesa Sanpaolo (a) | 68,028 | 97,301 | ||||||
Luxottica Group SpA | 2,649 | 92,883 | ||||||
Mediaset SpA | 19,700 | 34,466 | ||||||
Pirelli & C. SpA (a) | 5,969 | 62,965 | ||||||
Prysmian SpA | 5,291 | 79,139 | ||||||
Saipem SpA | 1,672 | 74,463 | ||||||
Snam SpA | 16,191 | 72,180 | ||||||
Telecom Italia SpA | 554,210 | 546,139 | ||||||
Telecom Italia SpA (RSP) | 357,071 | 287,228 | ||||||
Terna — Rete Elettrica Nationale SpA (a) | 14,939 | 53,827 | ||||||
UBI Banca — Unione di Banche Italiane ScpA (a) | 3,919 | 12,863 | ||||||
UniCredit SpA* | 26,606 | 100,817 | ||||||
(Cost $2,959,504) | 2,609,263 | |||||||
Japan 11.4% | ||||||||
AEON Co., Ltd. (a) | 5,200 | 64,818 | ||||||
Ajinomoto Co., Inc. (a) | 6,000 | 83,412 | ||||||
Alfresa Holdings Corp. | 500 | 26,502 | ||||||
Asahi Group Holdings Ltd. (a) | 3,400 | 73,024 | ||||||
Asahi Kasei Corp. | 5,000 | 27,125 | ||||||
Astellas Pharma, Inc. | 3,800 | 165,984 | ||||||
Bridgestone Corp. | 1,200 | 27,525 | ||||||
Canon, Inc. (a) | 1,500 | 60,064 | ||||||
Central Japan Railway Co. | 3 | 23,709 | ||||||
Chubu Electric Power Co., Inc. | 9,900 | 160,735 | ||||||
Chugai Pharmaceutical Co., Ltd. (a) | 2,300 | 43,544 | ||||||
Chugoku Electric Power Co., Inc. | 4,300 | 70,798 | ||||||
Dai-ichi Life Insurance Co., Ltd. | 35 | 40,544 | ||||||
Daiichi Sankyo Co., Ltd. (a) | 5,800 | 97,655 | ||||||
Dainippon Sumitomo Pharma Co., Ltd. | 1,800 | 18,360 | ||||||
Daito Trust Construction Co., Ltd. | 400 | 37,944 | ||||||
Daiwa House Industry Co., Ltd. | 2,000 | 28,393 | ||||||
Daiwa Securities Group, Inc. (a) | 10,000 | 37,650 | ||||||
Denso Corp. | 800 | 27,239 | ||||||
Eisai Co., Ltd. (a) | 2,100 | 92,198 | ||||||
Electric Power Development Co., Ltd. | 1,600 | 41,961 | ||||||
FamilyMart Co., Ltd. | 500 | 22,894 | ||||||
FANUC Corp. (a) | 200 | 32,859 | ||||||
FUJIFILM Holdings Corp. | 1,200 | 22,686 | ||||||
Hisamitsu Pharmaceutical Co., Inc. (a) | 700 | 34,477 | ||||||
Hitachi Ltd. | 7,000 | 43,051 | ||||||
Shares | Value ($) | |||||||
Hokkaido Electric Power Co., Inc. | 2,100 | 27,142 | ||||||
Hokuriku Electric Power Co. | 2,800 | 43,577 | ||||||
Honda Motor Co., Ltd. | 1,600 | 55,735 | ||||||
HOYA Corp. | 1,400 | 30,847 | ||||||
Idemitsu Kosan Co., Ltd. | 300 | 26,827 | ||||||
INPEX Corp. (a) | 21 | 117,733 | ||||||
Japan Real Estate Investment Corp. (REIT) | 5 | 45,968 | ||||||
Japan Tobacco, Inc. | 7,400 | 219,288 | ||||||
JFE Holdings, Inc. | 1,400 | 23,409 | ||||||
JX Holdings, Inc. | 22,920 | 117,740 | ||||||
Kansai Electric Power Co., Inc. | 11,900 | 142,558 | ||||||
Kao Corp. | 4,500 | 124,110 | ||||||
KDDI Corp. | 34 | 219,312 | ||||||
Keyence Corp. | 110 | 27,205 | ||||||
Kikkoman Corp. | 2,000 | 24,734 | ||||||
Kirin Holdings Co., Ltd. | 8,000 | 94,286 | ||||||
Komatsu Ltd. | 900 | 21,571 | ||||||
Kyocera Corp. | 400 | 34,539 | ||||||
Kyowa Hakko Kirin Co., Ltd. | 3,000 | 30,823 | ||||||
Kyushu Electric Power Co., Inc. | 5,600 | 66,433 | ||||||
Lawson, Inc. (a) | 500 | 34,981 | ||||||
MEIJI Holdings Co., Ltd. | 500 | 22,953 | ||||||
Mitsubishi Chemical Holdings Corp. | 6,500 | 28,627 | ||||||
Mitsubishi Corp. | 1,900 | 38,368 | ||||||
Mitsubishi Estate Co., Ltd. | 4,000 | 71,756 | ||||||
Mitsubishi Tanabe Pharma Corp. | 2,200 | 31,612 | ||||||
Mitsubishi UFJ Financial Group, Inc. | 43,700 | 209,139 | ||||||
Mitsui & Co., Ltd. | 2,500 | 37,092 | ||||||
Mitsui Fudosan Co., Ltd. | 3,000 | 58,196 | ||||||
Mizuho Financial Group, Inc. | 77,200 | 130,687 | ||||||
MS&AD Insurance Group Holdings, Inc. | 2,400 | 42,008 | ||||||
Nintendo Co., Ltd. | 200 | 23,337 | ||||||
Nippon Building Fund, Inc. (REIT) | 4 | 38,732 | ||||||
Nippon Meat Packers, Inc. | 2,000 | 26,486 | ||||||
Nippon Steel Corp. | 16,000 | 36,256 | ||||||
Nippon Telegraph & Telephone Corp. | 5,409 | 251,314 | ||||||
Nishi-Nippon City Bank Ltd. | 8,000 | 19,495 | ||||||
Nissan Motor Co., Ltd. (a) | 3,400 | 32,200 | ||||||
Nisshin Seifun Group, Inc. | 3,000 | 35,117 | ||||||
Nissin Foods Holdings Co., Ltd. | 700 | 26,670 | ||||||
NKSJ Holdings, Inc. | 1,750 | 37,299 | ||||||
Nomura Holdings, Inc. | 12,000 | 44,815 | ||||||
Nomura Real Estate Office Fund, Inc. (REIT) | 5 | 28,231 | ||||||
NTT DoCoMo, Inc. | 187 | 311,201 | ||||||
Olympus Corp.* | 1,900 | 30,816 | ||||||
Ono Pharmaceutical Co., Ltd. | 700 | 44,029 | ||||||
Oriental Land Co., Ltd. | 200 | 22,873 | ||||||
ORIX Corp. | 580 | 53,985 | ||||||
Osaka Gas Co., Ltd. | 30,000 | 125,747 | ||||||
Otsuka Holdings KK | 2,600 | 79,665 | ||||||
Panasonic Corp. (a) | 3,100 | 25,214 | ||||||
Resona Holdings, Inc. | 6,900 | 28,479 | ||||||
Santen Pharmaceutical Co., Ltd. (a) | 700 | 28,709 | ||||||
Seven & I Holdings Co., Ltd. | 6,200 | 186,814 | ||||||
Shikoku Electric Power Co., Inc. (a) | 2,600 | 55,209 | ||||||
Shin-Etsu Chemical Co., Ltd. | 700 | 38,512 | ||||||
Shionogi & Co., Ltd. | 3,400 | 46,235 | ||||||
Shiseido Co., Ltd. (a) | 3,500 | 55,179 | ||||||
SOFTBANK Corp. (a) | 11,000 | 408,970 | ||||||
Shares | Value ($) | |||||||
Sony Corp. | 1,300 | 18,500 | ||||||
Sumitomo Chemical Co., Ltd. | 6,000 | 18,452 | ||||||
Sumitomo Mitsui Financial Group, Inc. | 4,800 | 158,347 | ||||||
Sumitomo Mitsui Trust Holdings, Inc. | 13,410 | 40,062 | ||||||
Sumitomo Realty & Development Co., Ltd. | 2,000 | 49,210 | ||||||
Suzuken Co., Ltd. | 900 | 30,355 | ||||||
Sysmex Corp. (a) | 400 | 15,808 | ||||||
T&D Holdings, Inc. | 3,600 | 38,395 | ||||||
Taisho Pharmaceutical Holdings Co., Ltd. | 300 | 25,361 | ||||||
Takeda Pharmaceutical Co., Ltd. | 6,300 | 285,890 | ||||||
Terumo Corp. (a) | 1,400 | 57,517 | ||||||
Toho Gas Co., Ltd. | 7,000 | 43,475 | ||||||
Tohoku Electric Power Co., Inc.* | 6,200 | 62,291 | ||||||
Tokio Marine Holdings, Inc. | 2,200 | 55,317 | ||||||
Tokyo Electric Power Co., Inc.* (a) | 24,100 | 46,581 | ||||||
Tokyo Gas Co., Ltd. | 35,000 | 178,747 | ||||||
TonenGeneral Sekiyu KK | 4,000 | 35,504 | ||||||
Toray Industries, Inc. | 4,000 | 27,281 | ||||||
Toshiba Corp. | 8,000 | 30,363 | ||||||
Toyo Suisan Kaisha Ltd. | 1,000 | 26,695 | ||||||
Toyota Motor Corp. | 2,200 | 88,672 | ||||||
Unicharm Corp. (a) | 900 | 51,270 | ||||||
Yakult Honsha Co., Ltd. (a) | 700 | 27,405 | ||||||
(Cost $6,569,564) | 7,157,494 | |||||||
Luxembourg 0.4% | ||||||||
ArcelorMittal | 4,154 | 64,171 | ||||||
Millicom International Cellular SA (SDR) (a) | 1,194 | 112,652 | ||||||
Tenaris SA (a) | 2,802 | 48,990 | ||||||
(Cost $178,537) | 225,813 | |||||||
Macau 0.1% | ||||||||
Sands China Ltd. (a) | 16,000 | 51,254 | ||||||
Wynn Macau Ltd. (a) | 9,200 | 21,681 | ||||||
(Cost $36,554) | 72,935 | |||||||
Netherlands 6.6% | ||||||||
AEGON NV | 16,984 | 79,113 | ||||||
Akzo Nobel NV | 2,534 | 119,199 | ||||||
ASML Holding NV | 26,790 | 1,365,146 | ||||||
Corio NV (REIT) | 729 | 32,110 | ||||||
Gemalto NV | 952 | 68,464 | ||||||
Heineken Holding NV | 913 | 40,864 | ||||||
Heineken NV | 1,492 | 77,934 | ||||||
ING Groep NV (CVA)* | 36,097 | 243,540 | ||||||
Koninklijke (Royal) KPN NV (a) | 76,082 | 728,517 | ||||||
Koninklijke Ahold NV | 6,503 | 80,581 | ||||||
Koninklijke DSM NV (a) | 1,774 | 87,525 | ||||||
Koninklijke Philips Electronics NV | 6,373 | 126,017 | ||||||
Koninklijke Vopak NV | 374 | 23,983 | ||||||
Randstad Holding NV | 918 | 27,110 | ||||||
Reed Elsevier NV | 27,842 | 318,494 | ||||||
Royal Dutch Shell PLC "A" | 1,952 | 65,756 | ||||||
Royal Dutch Shell PLC "B" | 2,331 | 81,352 | ||||||
TNT Express NV | 2,201 | 25,747 | ||||||
Unilever NV (CVA) | 9,392 | 314,354 | ||||||
Wolters Kluwer NV | 13,342 | 212,399 | ||||||
(Cost $3,521,259) | 4,118,205 | |||||||
Shares | Value ($) | |||||||
Norway 2.0% | ||||||||
DnB ASA | 26,828 | 266,891 | ||||||
Gjensidige Forsikring ASA | 5,502 | 64,013 | ||||||
Norsk Hydro ASA (a) | 22,115 | 99,810 | ||||||
Statoil ASA | 7,119 | 170,230 | ||||||
Telenor ASA | 27,914 | 465,537 | ||||||
Yara International ASA | 4,676 | 204,778 | ||||||
(Cost $804,779) | 1,271,259 | |||||||
Singapore 3.3% | ||||||||
CapitaLand Ltd. (a) | 20,000 | 43,175 | ||||||
ComfortDelGro Corp., Ltd. | 29,000 | 35,536 | ||||||
DBS Group Holdings Ltd. | 10,000 | 110,380 | ||||||
Fraser & Neave Ltd. | 13,000 | 72,448 | ||||||
Genting Singapore PLC (a) | 175,000 | 196,393 | ||||||
Global Logistic Properties Ltd. | 17,000 | 28,321 | ||||||
Golden Agri-Resources Ltd. | 173,000 | 92,483 | ||||||
Hutchison Port Holdings Trust (Units) | 63,000 | 45,037 | ||||||
Jardine Cycle & Carriage Ltd. | 3,000 | 110,686 | ||||||
Keppel Corp., Ltd. | 15,400 | 126,189 | ||||||
Olam International Ltd. (a) | 43,000 | 62,574 | ||||||
Oversea-Chinese Banking Corp., Ltd. | 14,000 | 97,802 | ||||||
SembCorp Industries Ltd. | 16,000 | 65,413 | ||||||
SembCorp Marine Ltd. | 8,000 | 30,546 | ||||||
Singapore Airlines Ltd. | 6,000 | 49,324 | ||||||
Singapore Exchange Ltd. | 7,000 | 35,140 | ||||||
Singapore Press Holdings Ltd. | 37,000 | 114,250 | ||||||
Singapore Technologies Engineering Ltd. | 15,000 | 37,016 | ||||||
Singapore Telecommunications Ltd. | 157,000 | 410,071 | ||||||
StarHub Ltd. | 14,000 | 37,960 | ||||||
United Overseas Bank Ltd. | 7,000 | 104,024 | ||||||
Wilmar International Ltd. (a) | 50,000 | 143,742 | ||||||
(Cost $1,513,521) | 2,048,510 | |||||||
Spain 5.0% | ||||||||
Abertis Infraestructuras SA | 8,822 | 119,449 | ||||||
Acciona SA | 263 | 15,705 | ||||||
ACS, Actividades de Construccion y Servicios SA (a) | 3,929 | 84,228 | ||||||
Amadeus IT Holding SA "A" | 19,394 | 410,709 | ||||||
Banco Bilbao Vizcaya Argentaria SA (a) | 15,923 | 114,763 | ||||||
Banco Santander SA | 30,537 | 203,950 | ||||||
Enagas SA | 2,258 | 41,204 | ||||||
Ferrovial SA | 10,842 | 122,245 | ||||||
Gas Natural SDG SA | 4,736 | 60,838 | ||||||
Iberdrola SA (a) | 50,661 | 239,874 | ||||||
Industria de Diseno Textil SA | 4,242 | 438,748 | ||||||
Red Electrica Corporacion SA (a) | 1,484 | 64,717 | ||||||
Repsol YPF SA (a) | 24,012 | 386,069 | ||||||
Telefonica SA (a) | 61,238 | 807,915 | ||||||
Zardoya Otis SA (a) | 3,050 | 33,940 | ||||||
(Cost $3,292,036) | 3,144,354 | |||||||
Sweden 3.5% | ||||||||
Assa Abloy AB "B" | 1,207 | 33,751 | ||||||
Atlas Copco AB "A" | 2,084 | 44,996 | ||||||
Boliden AB (a) | 5,037 | 70,458 | ||||||
Shares | Value ($) | |||||||
Electrolux AB "B" | 1,087 | 21,703 | ||||||
Hennes & Mauritz AB "B" | 5,804 | 208,670 | ||||||
Hexagon AB "B" | 2,788 | 48,078 | ||||||
Holmen AB "B" | 1,214 | 33,050 | ||||||
Husqvarna AB "B" (a) | 4,852 | 22,969 | ||||||
Modern Times Group "B" | 537 | 24,922 | ||||||
Nordea Bank AB | 10,270 | 88,912 | ||||||
Sandvik AB | 3,095 | 39,846 | ||||||
Skandinaviska Enskilda Banken AB "A" | 4,035 | 26,302 | ||||||
Skanska AB "B" | 1,724 | 26,441 | ||||||
SKF AB "B" | 1,279 | 25,304 | ||||||
SSAB AB "A" (a) | 2,870 | 23,883 | ||||||
Svenska Cellulosa AB "B" | 8,288 | 124,472 | ||||||
Svenska Handelsbanken AB "A" | 1,999 | 65,896 | ||||||
Swedbank AB "A" | 3,758 | 59,428 | ||||||
Swedish Match AB | 10,942 | 441,596 | ||||||
Tele2 AB "B" (a) | 5,797 | 89,845 | ||||||
Telefonaktiebolaget LM Ericsson "B" | 42,182 | 384,907 | ||||||
TeliaSonera AB | 38,625 | 247,099 | ||||||
Volvo AB "B" | 2,677 | 30,667 | ||||||
(Cost $1,868,386) | 2,183,195 | |||||||
Switzerland 7.3% | ||||||||
ABB Ltd. (Registered)* (a) | 7,290 | 118,974 | ||||||
Actelion Ltd. (Registered)* | 481 | 19,756 | ||||||
Adecco SA (Registered)* | 824 | 36,669 | ||||||
Aryzta AG* | 598 | 29,718 | ||||||
Compagnie Financiere Richemont SA "A" | 2,708 | 148,616 | ||||||
Credit Suisse Group AG (Registered)* | 2,979 | 54,423 | ||||||
Geberit AG (Registered)* (a) | 246 | 48,524 | ||||||
Givaudan SA (Registered)* | 61 | 59,913 | ||||||
Holcim Ltd. (Registered)* | 1,280 | 70,914 | ||||||
Lindt & Spruengli AG (Registered)* | 1 | 36,738 | ||||||
Lonza Group AG (Registered)* | 466 | 19,405 | ||||||
Nestle SA (Registered) | 20,152 | 1,202,095 | ||||||
Novartis AG (Registered) | 11,006 | 613,914 | ||||||
Roche Holding AG (Genusschein) | 3,449 | 595,392 | ||||||
Sika AG (a) | 19 | 36,593 | ||||||
Sonova Holding AG (Registered)* | 289 | 27,887 | ||||||
STMicroelectronics NV | 8,506 | 46,779 | ||||||
Swatch Group AG (Bearer) | 186 | 73,593 | ||||||
Swiss Re AG.* | 723 | 45,421 | ||||||
Swisscom AG (Registered) (a) | 2,114 | 849,828 | ||||||
Syngenta AG (Registered) | 435 | 148,502 | ||||||
UBS AG (Registered)* | 8,918 | 104,291 | ||||||
Wolseley PLC | 918 | 34,299 | ||||||
Xstrata PLC | 2,858 | 36,074 | ||||||
Zurich Insurance Group AG* | 398 | 89,797 | ||||||
(Cost $3,015,915) | 4,548,115 | |||||||
United Kingdom 7.2% | ||||||||
Anglo American PLC | 1,947 | 63,881 | ||||||
ARM Holdings PLC | 37,523 | 298,811 | ||||||
AstraZeneca PLC | 8,219 | 367,381 | ||||||
BAE Systems PLC | 8,559 | 38,733 | ||||||
Barclays PLC | 8,467 | 21,674 | ||||||
BG Group PLC | 3,267 | 66,868 | ||||||
BHP Billiton PLC | 3,282 | 93,722 | ||||||
Shares | Value ($) | |||||||
BP PLC | 14,756 | 98,868 | ||||||
British American Tobacco PLC | 2,622 | 133,455 | ||||||
British Sky Broadcasting Group PLC | 3,065 | 33,452 | ||||||
BT Group PLC | 34,124 | 113,118 | ||||||
Burberry Group PLC | 877 | 18,293 | ||||||
Capita PLC | 1,652 | 16,987 | ||||||
Centrica PLC | 23,148 | 115,397 | ||||||
Compass Group PLC | 1,662 | 17,433 | ||||||
Diageo PLC | 3,511 | 90,321 | ||||||
GlaxoSmithKline PLC | 32,944 | 747,033 | ||||||
HSBC Holdings PLC | 12,924 | 113,957 | ||||||
Imperial Tobacco Group PLC | 1,507 | 57,985 | ||||||
Inmarsat PLC | 3,673 | 28,254 | ||||||
International Consolidated Airlines Group SA* | 24,813 | 62,357 | ||||||
Kingfisher PLC | 7,038 | 31,822 | ||||||
Lloyds Banking Group PLC* | 35,330 | 17,378 | ||||||
Marks & Spencer Group PLC | 6,157 | 31,476 | ||||||
National Grid PLC | 14,501 | 153,488 | ||||||
Pearson PLC (a) | 2,051 | 40,735 | ||||||
Reckitt Benckiser Group PLC | 814 | 42,932 | ||||||
Reed Elsevier PLC | 4,792 | 38,444 | ||||||
Rio Tinto PLC | 1,800 | 85,967 | ||||||
Rolls-Royce Holdings PLC* | 1,946 | 26,253 | ||||||
Rolls-Royce Holdings PLC "C" (Entitlment Shares)* | 206,276 | 323 | ||||||
SABMiller PLC | 1,281 | 51,454 | ||||||
Severn Trent PLC | 1,531 | 39,653 | ||||||
Shire PLC | 3,629 | 104,300 | ||||||
Smith & Nephew PLC | 6,163 | 61,694 | ||||||
Smiths Group PLC | 1,710 | 27,218 | ||||||
SSE PLC | 4,799 | 104,627 | ||||||
Standard Chartered PLC | 1,687 | 36,778 | ||||||
Subsea 7 SA (a) | 1,418 | 28,150 | ||||||
Tesco PLC | 10,251 | 49,829 | ||||||
The Sage Group PLC | 35,008 | 152,114 | ||||||
Unilever PLC | 1,529 | 51,388 | ||||||
United Utilities Group PLC | 5,004 | 52,945 | ||||||
Veripos, Inc.* | 141 | 383 | ||||||
Vodafone Group PLC | 218,220 | 613,119 | ||||||
William Morrison Supermarkets PLC | 5,677 | 23,693 | ||||||
WPP PLC | 3,863 | 46,952 | ||||||
(Cost $3,348,856) | 4,511,095 | |||||||
United States 0.2% | ||||||||
SXC Health Solutions Corp.* (Cost $130,856) | 1,400 | 139,037 | ||||||
Total Common Stocks (Cost $48,133,451) | 54,590,688 | |||||||
Preferred Stocks 0.4% | ||||||||
Germany 0.4% | ||||||||
Bayerische Motoren Werke (BMW) AG | 416 | 20,523 | ||||||
Henkel AG & Co. KGaA | 2,339 | 155,337 | ||||||
Porsche Automobil Holding SE (a) | 395 | 19,669 | ||||||
Volkswagen AG | 277 | 43,918 | ||||||
Total Preferred Stocks (Cost $134,955) | 239,447 | |||||||
Shares | Value ($) | |||||||
Rights 0.0% | ||||||||
Australia | ||||||||
Echo Entertainment Group Ltd., Expiration Date 7/9/2012* (Cost $0) | 1,311 | 1,315 | ||||||
Exchange-Traded Funds 9.9% | ||||||||
Emerging Markets | ||||||||
iShares MSCI Emerging Markets Index Fund (a) | 77,400 | 3,033,306 | ||||||
Vanguard MSCI Emerging Markets Fund | 79,900 | 3,192,005 | ||||||
Total Exchange-Traded Funds (Cost $5,123,459) | 6,225,311 | |||||||
Shares | Value ($) | |||||||
Securities Lending Collateral 15.7% | ||||||||
Daily Assets Fund Institutional, 0.24% (c) (d) (Cost $9,798,815) | 9,798,815 | 9,798,815 | ||||||
Cash Equivalents 1.7% | ||||||||
Central Cash Management Fund, 0.14% (c) (Cost $1,049,423) | 1,049,423 | 1,049,423 |
% of Net Assets | Value ($) | |||||||
Total Investment Portfolio (Cost $64,240,103)+ | 114.9 | 71,904,999 | ||||||
Other Assets and Liabilities, Net | (14.9 | ) | (9,308,422 | ) | ||||
Net Assets | 100.0 | 62,596,577 |
* Non-income producing security.
+ The cost for federal income tax purposes was $64,568,142. At June 30, 2012, net unrealized appreciation for all securities based on tax cost was $7,336,857. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $12,231,587 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $4,894,730.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at June 30, 2012 amounted to $9,699,610, which is 15.5% of net assets.
(b) Securities with the same description are the same corporate entity but trade on different stock exchanges.
(c) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(d) Represents collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates.
CVA: Certificaten Van Aandelen
MSCI: Morgan Stanley Capital International
REIT: Real Estate Investment Trust
RSP: Risparmio (Convertible Savings Shares)
SDR: Swedish Depositary Receipt
At June 30, 2012, open futures contracts purchased were as follows:
Futures | Currency | Expiration Date | Contracts | Notional Value ($) | Unrealized Appreciation/ (Depreciation) ($) | |||||||||
ASX SPI 200 Index | AUD | 9/20/2012 | 1 | 103,808 | (592 | ) | ||||||||
Euro Stoxx 50 Index | EUR | 9/20/2012 | 31 | 884,647 | 46,187 | |||||||||
FTSE 100 Index | GBP | 9/20/2012 | 1 | 86,499 | 1,564 | |||||||||
Nikkei 225 Index | USD | 9/20/2012 | 4 | 182,500 | 12,334 | |||||||||
Total net unrealized appreciation | 59,493 |
Currency Abbreviations |
AUD Australian Dollar EUR Euro GBP British Pound USD United States Dollar |
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.
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 June 30, 2012 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, Preferred Stocks and Rights | ||||||||||||||||
Australia | $ | 1,315 | $ | 2,360,555 | $ | — | $ | 2,361,870 | ||||||||
Austria | — | 360,568 | — | 360,568 | ||||||||||||
Belgium | — | 1,002,519 | — | 1,002,519 | ||||||||||||
Bermuda | — | 86,965 | — | 86,965 | ||||||||||||
Canada | 4,283,600 | 32,945 | — | 4,316,545 | ||||||||||||
Denmark | — | 1,338,262 | — | 1,338,262 | ||||||||||||
Finland | — | 2,176,972 | — | 2,176,972 | ||||||||||||
France | — | 4,459,606 | — | 4,459,606 | ||||||||||||
Germany | — | 3,512,342 | — | 3,512,342 | ||||||||||||
Hong Kong | — | 1,489,896 | — | 1,489,896 | ||||||||||||
Ireland | — | 1,696,630 | — | 1,696,630 | ||||||||||||
Italy | — | 2,609,263 | — | 2,609,263 | ||||||||||||
Japan | — | 7,157,494 | — | 7,157,494 | ||||||||||||
Luxembourg | — | 225,813 | — | 225,813 | ||||||||||||
Macau | — | 72,935 | — | 72,935 | ||||||||||||
Netherlands | — | 4,118,205 | — | 4,118,205 | ||||||||||||
Norway | — | 1,271,259 | — | 1,271,259 | ||||||||||||
Singapore | — | 2,048,510 | — | 2,048,510 | ||||||||||||
Spain | — | 3,144,354 | — | 3,144,354 | ||||||||||||
Sweden | — | 2,183,195 | — | 2,183,195 | ||||||||||||
Switzerland | — | 4,548,115 | — | 4,548,115 | ||||||||||||
United Kingdom | — | 4,510,712 | 383 | 4,511,095 | ||||||||||||
United States | 139,037 | — | — | 139,037 | ||||||||||||
Exchange-Traded Funds | 6,225,311 | — | — | 6,225,311 | ||||||||||||
Short-Term Investments (e) | 10,848,238 | — | — | 10,848,238 | ||||||||||||
Derivatives (f) | 60,085 | — | — | 60,085 | ||||||||||||
Total | $ | 21,557,586 | $ | 50,407,115 | $ | 383 | $ | 71,965,084 | ||||||||
Liabilities | ||||||||||||||||
Derivatives (f) | $ | (592 | ) | $ | — | $ | — | $ | (592 | ) | ||||||
Total | $ | (592 | ) | $ | — | $ | — | $ | (592 | ) |
There have been no transfers between Level 1 and Level 2 fair value measurements during the period ended June 30, 2012.
(e) See Investment Portfolio for additional detailed categorizations.
(f) Derivatives include unrealized appreciation (depreciation) on open futures contracts.
The accompanying notes are an integral part of the financial statements.
as of June 30, 2012 (Unaudited) | ||||
Assets | ||||
Investments: Investments in non-affiliated securities, at value (cost $53,391,865) — including $9,699,610 of securities loaned | $ | 61,056,761 | ||
Investment in Daily Assets Fund Institutional (cost $9,798,815)* | 9,798,815 | |||
Investment in Central Cash Management Fund (cost $1,049,423) | 1,049,423 | |||
Total investments in securities, at value (cost $64,240,103) | 71,904,999 | |||
Foreign currency, at value (cost $225,743) | 226,358 | |||
Deposits with broker for futures contracts | 139,519 | |||
Receivable for investments sold | 45,073 | |||
Receivable for Fund shares sold | 16,364 | |||
Dividends receivable | 100,956 | |||
Interest receivable | 8,034 | |||
Receivable for variation margin on futures contracts | 59,493 | |||
Foreign taxes recoverable | 51,642 | |||
Total assets | 72,552,438 | |||
Liabilities | ||||
Payable upon return of securities loaned | 9,798,815 | |||
Payable for investments purchased | 18,872 | |||
Payable for Fund shares redeemed | 27,096 | |||
Accrued management fee | 32,088 | |||
Accrued Trustees' fees | 99 | |||
Other accrued expenses and payables | 78,891 | |||
Total liabilities | 9,955,861 | |||
Net assets, at value | $ | 62,596,577 | ||
Net Assets Consist of | ||||
Undistributed net investment income | 1,121,503 | |||
Net unrealized appreciation (depreciation) on: Investments | 7,664,896 | |||
Futures | 59,493 | |||
Foreign currency | 93 | |||
Accumulated net realized gain (loss) | (65,128,091 | ) | ||
Paid-in capital | 118,878,683 | |||
Net assets, at value | $ | 62,596,577 | ||
Class A Net Asset Value, offering and redemption price per share ($62,596,577 ÷ 8,968,539 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | $ | 6.98 |
* Represents collateral on securities loaned.
The accompanying notes are an integral part of the financial statements.
Statement of Operations
for the six months ended June 30, 2012 (Unaudited) | ||||
Investment Income | ||||
Income: Dividends (net of foreign taxes withheld of $182,362) | $ | 1,496,240 | ||
Interest | 392 | |||
Income distributions — Central Cash Management Fund | 442 | |||
Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates | 57,458 | |||
Total income | 1,554,532 | |||
Expenses: Management fee | 213,147 | |||
Administration fee | 32,792 | |||
Services to shareholders | 691 | |||
Custodian fee | 33,214 | |||
Legal fees | 3,934 | |||
Audit and tax fees | 28,419 | |||
Reports to shareholders | 15,690 | |||
Trustees' fees and expenses | 2,672 | |||
Other | 16,102 | |||
Total expenses | 346,661 | |||
Net investment income (loss) | 1,207,871 | |||
Realized and Unrealized Gain (Loss) | ||||
Net realized gain (loss) from: Investments (including foreign taxes of $153) | (202,408 | ) | ||
Futures | 99,828 | |||
Foreign currency | (12,663 | ) | ||
(115,243 | ) | |||
Change in net unrealized appreciation (depreciation) on: Investments | 870,821 | |||
Futures | 41,230 | |||
Foreign currency | 979 | |||
913,030 | ||||
Net gain (loss) | 797,787 | |||
Net increase (decrease) in net assets resulting from operations | $ | 2,005,658 |
The accompanying notes are an integral part of the financial statements.
Increase (Decrease) in Net Assets | Six Months Ended June 30, 2012 (Unaudited) | Year Ended December 31, 2011 | ||||||
Operations: Net investment income (loss) | $ | 1,207,871 | $ | 1,861,273 | ||||
Net realized gain (loss) | (115,243 | ) | 4,665,824 | |||||
Change in net unrealized appreciation (depreciation) | 913,030 | (15,377,629 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 2,005,658 | (8,850,532 | ) | |||||
Distributions to shareholders from: Net investment income: Class A | (1,885,705 | ) | (1,512,225 | ) | ||||
Total distributions | (1,885,705 | ) | (1,512,225 | ) | ||||
Fund share transactions: Class A Proceeds from shares sold | 1,437,868 | 5,120,530 | ||||||
Reinvestment of distributions | 1,885,705 | 1,512,225 | ||||||
Payments for shares redeemed | (5,652,721 | ) | (14,636,659 | ) | ||||
Net increase (decrease) in net assets from Class A share transactions | (2,329,148 | ) | (8,003,904 | ) | ||||
Increase (decrease) in net assets | (2,209,195 | ) | (18,366,661 | ) | ||||
Net assets at beginning of period | 64,805,772 | 83,172,433 | ||||||
Net assets at end of period (including undistributed net investment income of $1,121,503 and $1,799,337, respectively) | $ | 62,596,577 | $ | 64,805,772 | ||||
Other Information | ||||||||
Class A Shares outstanding at beginning of period | 9,288,789 | 10,297,508 | ||||||
Shares sold | 198,885 | 689,406 | ||||||
Shares issued to shareholders in reinvestment of distributions | 258,316 | 175,432 | ||||||
Shares redeemed | (777,451 | ) | (1,873,557 | ) | ||||
Net increase (decrease) in Class A shares | (320,250 | ) | (1,008,719 | ) | ||||
Shares outstanding at end of period | 8,968,539 | 9,288,789 |
The accompanying notes are an integral part of the financial statements.
Years Ended December 31, | ||||||||||||||||||||||||
Class A | Six Months Ended 6/30/12 (Unaudited) | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Selected Per Share Data | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.98 | $ | 8.08 | $ | 7.45 | $ | 6.22 | $ | 16.76 | $ | 16.31 | ||||||||||||
Income (loss) from investment operations: Net investment incomea | .13 | .19 | .14 | .12 | .33 | c | .25 | |||||||||||||||||
Net realized and unrealized gain (loss) | .08 | (1.14 | ) | .66 | 1.51 | (6.67 | ) | 2.24 | ||||||||||||||||
Total from investment operations | .21 | (.95 | ) | .80 | 1.63 | (6.34 | ) | 2.49 | ||||||||||||||||
Less distributions from: Net investment income | (.21 | ) | (.15 | ) | (.17 | ) | (.40 | ) | (.13 | ) | (.46 | ) | ||||||||||||
Net realized gains | — | — | — | — | (4.07 | ) | (1.58 | ) | ||||||||||||||||
Total distributions | (.21 | ) | (.15 | ) | (.17 | ) | (.40 | ) | (4.20 | ) | (2.04 | ) | ||||||||||||
Net asset value, end of period | $ | 6.98 | $ | 6.98 | $ | 8.08 | $ | 7.45 | $ | 6.22 | $ | 16.76 | ||||||||||||
Total Return (%) | 2.89 | ** | (12.07 | ) | 10.93 | 29.36 | (48.81 | )b,d | 16.71 | |||||||||||||||
Ratios to Average Net Assets and Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period ($ millions) | 63 | 65 | 83 | 86 | 91 | 236 | ||||||||||||||||||
Ratio of expenses before expense reductions (%) | 1.06 | * | 1.03 | .99 | .94 | 1.02 | .93 | |||||||||||||||||
Ratio of expenses after expense reductions (%) | 1.06 | * | 1.03 | .99 | .94 | 1.01 | .93 | |||||||||||||||||
Ratio of net investment income (%) | 3.68 | * | 2.44 | 1.90 | 1.89 | 3.04 | c | 1.53 | ||||||||||||||||
Portfolio turnover rate (%) | 15 | ** | 26 | 14 | 139 | 132 | 117 | |||||||||||||||||
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reimbursed. c Net investment income per share and ratio of net investment income include non-recurring dividend income amounting to $0.16 per share and 1.49% of average daily net assets, respectively. 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 0.14% lower. * Annualized ** Not annualized |
A. Organization and Significant Accounting Policies
DWS Diversified International Equity VIP (the "Fund") is a diversified series of DWS Variable Series II (the "Trust"), which 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 Fund'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 Fund 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 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.
Equity securities and exchange-traded funds ("ETFs") are valued at the most recent sale price or official closing price reported on the exchange (U.S. 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 certain indices and these securities are 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.
Investments in open-end investment companies are valued at their net asset value each business day 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 the 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 Fund's Investment Portfolio.
Securities Lending. The Fund 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 under 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.
Foreign Currency Translations. The books and records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing exchange rates at period end. Purchases and sales of investment securities, income and expenses are translated into U.S. 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 acquisition and disposition of foreign currencies, and the difference between the amount of net investment income accrued and the U.S. 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.
Taxes. The 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 Fund's understanding of the tax rules and rates related to income, gains and transactions for the foreign jurisdictions in which it invests, the Fund will provide for foreign taxes, and where appropriate, deferred foreign taxes.
Under the Regulated Investment Company Modernization Act of 2010, net capital losses may be carried forward indefinitely, and their character is retained as short-term and/or long-term. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
At December 31, 2011, the Fund had a net tax basis capital loss carryforward of approximately $64,396,000 of pre-enactment losses, which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until December 31, 2016 ($25,232,000) and December 31, 2017 ($39,164,000), the respective expiration dates, whichever occurs first.
The Fund has reviewed the tax positions for the open tax years as of December 31, 2011 and has determined that no provision for income tax is required in the Fund's financial statements. The Fund's federal tax returns for the prior three fiscal years remain open subject to examination by the Internal Revenue Service.
Distribution of Income and Gains. Net investment income of the Fund, if any, is declared and distributed to shareholders annually. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed and, therefore, will be distributed to shareholders at least annually. The Fund may also make additional distributions for tax purposes if necessary.
The timing and characterization of certain income and capital gain 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 investments in foreign denominated investments, investments in futures contracts, income received from passive foreign investment companies and 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, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.
The tax character of current year distributions will be determined at the end of the current fiscal year.
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, the Fund may enter into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet been made. However, based on experience, the Fund expects the risk of loss to be remote.
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 and may include proceeds from litigation.
B. Derivative Instruments
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 six months ended June 30, 2012, the Fund used futures contracts as a means of gaining exposure to a particular asset class or to keep cash on hand to meet shareholder redemptions or other needs while maintaining exposure to the market.
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 the risk that the futures contract is not well correlated with the security, index or currency to which it relates. Risk of loss may exceed amounts disclosed in the Statement of Assets and Liabilities.
A summary of the open futures contracts as of June 30, 2012 is included in a table following the Fund's Investment Portfolio. For the six months ended June 30, 2012, the investment in futures contracts purchased had a total notional value generally indicative of a range from approximately $750,000 to $1,265,000.
The following table summarizes the value of the Fund's derivative instruments held as of June 30, 2012 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) | $ | 60,085 |
The above derivative is located in the following Statement of Assets and Liabilities account:
(a) Includes cumulative appreciation of futures contracts as disclosed in the Investment Portfolio. Unsettled variation margin is disclosed separately within the Statement of Assets and Liabilities.
Liablity Derivative | Futures Contracts | |||
Equity Contracts (a) | $ | (592 | ) |
The above derivative is located in the following Statement of Assets and Liabilities account:
(a) Includes cumulative depreciation of futures contracts as disclosed in the Investment Portfolio. Unsettled variation margin is disclosed separately within the Statement of Assets and Liabilities.
Additionally, the amount of unrealized and realized gains and losses on derivative instruments recognized in Fund earnings during the six months ended June 30, 2012 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) | $ | 99,828 |
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) | $ | 41,230 |
The above derivative is located in the following Statement of Operations account:
(a) Change in net unrealized appreciation (depreciation) on futures
C. Purchases and Sales of Securities
During the six months ended June 30, 2012, purchases and sales of investment transactions (excluding short-term investments) aggregated $9,537,020 and $13,206,700, respectively.
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 the 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 the Fund or delegates such responsibility to the Fund's subadvisor.
QS Investors, LLC ("QS Investors") serves as subadvisor with respect to the investment and reinvestment of assets in the Fund, and is paid by the Advisor for its services.
Pursuant to the Investment Management Agreement with the Advisor, the Fund pays a monthly management fee based on the Fund's average daily net assets, computed and accrued daily and payable monthly, at the following annual rates:
First $1.5 billion | .650 | % | ||
Next $1.75 billion | .635 | % | ||
Next $1.75 billion | .620 | % | ||
Over $5 billion | .605 | % |
Accordingly, for the six months ended June 30, 2012, the fee pursuant to the Investment Management Agreement was equivalent to an annualized effective rate of 0.65% of the Fund's average daily net assets.
Administration Fee. Pursuant to an Administrative Services Agreement, DIMA provides most administrative services to the Fund. For all services provided under the Administrative Services Agreement, the Fund pays DIMA an annual fee ("Administration Fee") of 0.10% of the Fund's average daily net assets, computed and accrued daily and payable monthly. For the six months ended June 30, 2012, the Administration Fee was $32,792, of which $4,937 is unpaid.
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 the 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 the Fund. For the six months ended June 30, 2012, the amounts charged to the Fund by DISC aggregated $56, of which $19 is unpaid.
Typesetting and Filing Service Fees. Under an agreement with DIMA, DIMA is compensated for providing typesetting and certain regulatory filing services to the Fund. For the six months ended June 30, 2012, the amount charged to the Fund by DIMA included in the Statement of Operations under "reports to shareholders" aggregated $6,860, of which $1,123 is unpaid.
Trustees' Fees and Expenses. The Fund paid retainer fees to each Trustee not affiliated with the Advisor, plus specified amounts to the Board Chairperson and to each committee Chairperson.
Affiliated Cash Management Vehicle. The Fund may invest uninvested cash balances in Central Cash Management Fund, which is managed by the Advisor. The Fund indirectly bears its proportionate share of the expenses of Central Cash Management Fund. 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 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.
F. Ownership of the Fund
At June 30, 2012, 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%, 29% and 25%.
G. Line of Credit
The Fund and other affiliated funds (the "Participants") share in a $375 million revolving credit facility provided by a syndication of banks. The Fund 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 Fund may borrow up to a maximum of 33 percent of its net assets under the agreement. The Fund had no outstanding loans at June 30, 2012.
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 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 (January 1, 2012 to June 30, 2012).
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 June 30, 2012 | ||||
Actual Fund Return | Class A | |||
Beginning Account Value 1/1/12 | $ | 1,000.00 | ||
Ending Account Value 6/30/12 | $ | 1,028.90 | ||
Expenses Paid per $1,000* | $ | 5.35 | ||
Hypothetical 5% Fund Return | Class A | |||
Beginning Account Value 1/1/12 | $ | 1,000.00 | ||
Ending Account Value 6/30/12 | $ | 1,019.59 | ||
Expenses Paid per $1,000* | $ | 5.32 |
* Expenses are equal to the Fund's annualized expense ratio, multiplied by the average account value over the period, multiplied by 182 (the number of days in the most recent six-month period), then divided by 366.
Annualized Expense Ratio | Class A | |
DWS Variable Series II — DWS Diversified International Equity VIP | 1.06% |
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 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.
September 26, 2011
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 report summarizes my evaluation for 2011, 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, 2009 and 2010.
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 109 mutual 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
President, Thomas H. Mack & Co., Inc.
DWS Investments Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606
(800) 621-1148
VS2DIE-3 (R-028380-1 8/12)
JUNE 30, 2012
SEMIANNUAL REPORT
DWS VARIABLE SERIES II
DWS Dreman Small Mid Cap Value VIP
Contents
3 Performance Summary 4 Portfolio Summary 4 Portfolio Management Team 5 Investment Portfolio 8 Statement of Assets and Liabilities 9 Statement of Operations 9 Statement of Changes in Net Assets 11 Financial Highlights 13 Notes to Financial Statements 17 Information About Your Fund's Expenses 17 Proxy Voting 19 Summary of Management Fee Evaluation by Independent Fee Consultant |
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.
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. The Fund may lend securities to approved institutions. Stocks may decline in value. See the prospectus for details.
DWS Investments is part of Deutsche Bank's Asset Management division and, within the U.S., represents the retail asset management activities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company.
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
Fund 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 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, 2012 are 0.90% and 1.24% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Growth of an Assumed $10,000 Investment in DWS Dreman Small Mid Cap Value VIP | ||
The Russell 2500™ Value Index is an unmanaged Index of those securities in the Russell 3000® Index with lower price-to-book ratios and lower forecasted growth values. Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index. | ||
Yearly periods ended June 30 |
Comparative Results | |||||||||||||||||||||
DWS Dreman Small Mid Cap Value VIP | 6-Month‡ | 1-Year | 3-Year | 5-Year | 10-Year | ||||||||||||||||
Class A | Growth of $10,000 | $ | 10,477 | $ | 9,416 | $ | 15,509 | $ | 9,728 | $ | 22,047 | ||||||||||
Average annual total return | 4.77 | % | -5.84 | % | 15.75 | % | -0.55 | % | 8.23 | % | |||||||||||
Russell 2500 Value Index | Growth of $10,000 | $ | 10,815 | $ | 9,851 | $ | 16,760 | $ | 9,902 | $ | 20,625 | ||||||||||
Average annual total return | 8.15 | % | -1.49 | % | 18.78 | % | -0.20 | % | 7.51 | % | |||||||||||
DWS Dreman Small Mid Cap Value VIP | 6-Month‡ | 1-Year | 3-Year | 5-Year | Life of Class* | ||||||||||||||||
Class B | Growth of $10,000 | $ | 10,460 | $ | 9,386 | $ | 15,355 | $ | 9,562 | $ | 21,627 | ||||||||||
Average annual total return | 4.60 | % | -6.14 | % | 15.37 | % | -0.89 | % | 8.02 | % | |||||||||||
Russell 2500 Value Index | Growth of $10,000 | $ | 10,815 | $ | 9,851 | $ | 16,760 | $ | 9,902 | $ | 20,625 | ||||||||||
Average annual total return | 8.15 | % | -1.49 | % | 18.78 | % | -0.20 | % | 7.51 | % |
The growth of $10,000 is cumulative.
‡ Total returns shown for periods less than one year are not annualized.
* The Fund commenced offering Class B shares on July 1, 2002. The performance shown for the index is for the time period of June 30, 2002 through June 30, 2012, which is based on the performance period of the life of the class.
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | 6/30/12 | 12/31/11 |
Common Stocks | 99% | 99% |
Cash Equivalents | 1% | 1% |
100% | 100% |
Sector Diversification (As a % of Common Stocks) | 6/30/12 | 12/31/11 |
Financials | 28% | 26% |
Information Technology | 18% | 16% |
Industrials | 17% | 17% |
Consumer Discretionary | 12% | 12% |
Health Care | 6% | 8% |
Materials | 6% | 8% |
Energy | 6% | 6% |
Utilities | 4% | 4% |
Consumer Staples | 3% | 3% |
100% | 100% |
Portfolio holdings and characteristics are subject to change.
For more complete details about the Fund's investment portfolio, see page 5.
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.
The Fund's subadvisor is Dreman Value Management, L.L.C., a renowned investment firm with a 35-year history of style-pure value investing.
Mark Roach
Managing Director of Dreman Value Management, L.L.C. and Lead Portfolio Manager of the Fund. Joined the Fund in 2006.
David N. Dreman
Chairman of Dreman Value Management, L.L.C. and Portfolio Manager of the Fund. Joined the Fund in 2002.
E. Clifton Hoover, Jr., CFA
Chief Investment Officer and Managing Director of Dreman Value Management, L.L.C. and Portfolio Manager of the Fund.
Joined the Fund in 2006.
Mario Tufano
Dreman Value Management, L.L.C., Associate Portfolio Manager of the Fund. Joined the Fund in 2010.
Shares | Value ($) | |||||||
Common Stocks 98.6% | ||||||||
Consumer Discretionary 11.7% | ||||||||
Auto Components 1.2% | ||||||||
Cooper Tire & Rubber Co. | 159,050 | 2,789,737 | ||||||
Hotels, Restaurants & Leisure 2.7% | ||||||||
Brinker International, Inc. (a) | 102,655 | 3,271,615 | ||||||
International Speedway Corp. "A" | 116,975 | 3,062,405 | ||||||
6,334,020 | ||||||||
Household Durables 1.1% | ||||||||
Whirlpool Corp. (a) | 44,150 | 2,700,214 | ||||||
Leisure Equipment & Products 1.3% | ||||||||
Mattel, Inc. | 96,125 | 3,118,295 | ||||||
Media 1.5% | ||||||||
Meredith Corp. (a) | 108,375 | 3,461,498 | ||||||
Multiline Retail 1.4% | ||||||||
Big Lots, Inc.* (a) | 79,949 | 3,261,120 | ||||||
Textiles, Apparel & Luxury Goods 2.5% | ||||||||
Hanesbrands, Inc.* (a) | 123,975 | 3,437,827 | ||||||
The Jones Group, Inc. (a) | 247,215 | 2,363,375 | ||||||
5,801,202 | ||||||||
Consumer Staples 3.1% | ||||||||
Beverages 1.8% | ||||||||
Constellation Brands, Inc. "A"* | 153,650 | 4,157,769 | ||||||
Household Products 1.3% | ||||||||
Energizer Holdings, Inc.* (a) | 39,775 | 2,993,069 | ||||||
Energy 5.4% | ||||||||
Energy Equipment & Services 3.2% | ||||||||
Atwood Oceanics, Inc.* | 70,565 | 2,670,179 | ||||||
Nabors Industries Ltd.* | 201,925 | 2,907,720 | ||||||
Superior Energy Services, Inc.* | 96,400 | 1,950,172 | ||||||
7,528,071 | ||||||||
Oil, Gas & Consumable Fuels 2.2% | ||||||||
Arch Coal, Inc. (a) | 101,600 | 700,024 | ||||||
Rosetta Resources, Inc.* | 62,100 | 2,275,344 | ||||||
Ultra Petroleum Corp.* (a) | 93,372 | 2,154,092 | ||||||
5,129,460 | ||||||||
Financials 27.9% | ||||||||
Capital Markets 1.6% | ||||||||
Raymond James Financial, Inc. (a) | 107,825 | 3,691,928 | ||||||
Commercial Banks 10.4% | ||||||||
Associated Banc-Corp. | 259,250 | 3,419,507 | ||||||
Bank of Hawaii Corp. (a) | 69,225 | 3,180,889 | ||||||
BOK Financial Corp. (a) | 59,700 | 3,474,540 | ||||||
East West Bancorp., Inc. | 196,075 | 4,599,919 | ||||||
Fulton Financial Corp. | 320,625 | 3,203,044 | ||||||
Webster Financial Corp. | 161,400 | 3,495,924 | ||||||
Zions Bancorp. (a) | 154,125 | 2,993,108 | ||||||
24,366,931 | ||||||||
Insurance 8.6% | ||||||||
Allied World Assurance Co. Holdings AG | 51,525 | 4,094,692 | ||||||
Argo Group International Holdings Ltd. (a) | 108,063 | 3,163,004 | ||||||
Shares | Value ($) | |||||||
Axis Capital Holdings Ltd. | 96,700 | 3,147,585 | ||||||
Everest Re Group Ltd. (a) | 41,475 | 4,292,248 | ||||||
Hartford Financial Services Group, Inc. | 173,775 | 3,063,653 | ||||||
Unum Group (a) | 129,900 | 2,484,987 | ||||||
20,246,169 | ||||||||
Real Estate Investment Trusts 7.3% | ||||||||
CBL & Associates Properties, Inc. (REIT) (a) | 189,825 | 3,709,181 | ||||||
CommonWealth REIT (REIT) | 130,681 | 2,498,621 | ||||||
Entertainment Properties Trust (REIT) (a) | 73,775 | 3,032,890 | ||||||
Hospitality Properties Trust (REIT) | 151,300 | 3,747,701 | ||||||
Weingarten Realty Investors (REIT) (a) | 154,025 | 4,057,018 | ||||||
17,045,411 | ||||||||
Health Care 7.2% | ||||||||
Health Care Equipment & Supplies 1.5% | ||||||||
Teleflex, Inc. | 58,825 | 3,583,031 | ||||||
Health Care Providers & Services 3.1% | ||||||||
LifePoint Hospitals, Inc.* (a) | 91,575 | 3,752,743 | ||||||
Owens & Minor, Inc. (a) | 117,875 | 3,610,511 | ||||||
7,363,254 | ||||||||
Life Sciences Tools & Services 1.4% | ||||||||
Charles River Laboratories International, Inc.* | 96,275 | 3,153,969 | ||||||
Pharmaceuticals 1.2% | ||||||||
Endo Health Solutions, Inc.* (a) | 90,400 | 2,800,592 | ||||||
Industrials 15.5% | ||||||||
Aerospace & Defense 2.5% | ||||||||
Alliant Techsystems, Inc. | 46,650 | 2,359,090 | ||||||
Spirit AeroSystems Holdings, Inc. "A"* (a) | 141,400 | 3,369,562 | ||||||
5,728,652 | ||||||||
Commercial Services & Supplies 2.0% | ||||||||
Pitney Bowes, Inc. (a) | 148,050 | 2,216,309 | ||||||
The Brink's Co. | 104,625 | 2,425,207 | ||||||
4,641,516 | ||||||||
Construction & Engineering 2.1% | ||||||||
Tutor Perini Corp.* | 160,725 | 2,036,386 | ||||||
URS Corp. | 84,375 | 2,943,000 | ||||||
4,979,386 | ||||||||
Electrical Equipment 2.6% | ||||||||
General Cable Corp.* | 101,937 | 2,644,246 | ||||||
Hubbell, Inc. "B" | 45,125 | 3,517,042 | ||||||
6,161,288 | ||||||||
Machinery 3.6% | ||||||||
Crane Co. | 76,800 | 2,793,984 | ||||||
Oshkosh Corp.* | 135,575 | 2,840,296 | ||||||
SPX Corp. (a) | 43,400 | 2,834,888 | ||||||
8,469,168 | ||||||||
Road & Rail 1.1% | ||||||||
AMERCO (a) | 28,050 | 2,523,659 | ||||||
Trading Companies & Distributors 1.6% | ||||||||
Textainer Group Holdings Ltd. (a) | 102,575 | 3,785,018 | ||||||
Shares | Value ($) | |||||||
Information Technology 17.5% | ||||||||
Communications Equipment 1.7% | ||||||||
Arris Group, Inc.* | 277,750 | 3,863,503 | ||||||
Computers & Peripherals 2.6% | ||||||||
NCR Corp.* | 191,675 | 4,356,773 | ||||||
Synaptics, Inc.* (a) | 61,036 | 1,747,460 | ||||||
6,104,233 | ||||||||
Electronic Equipment, Instruments & Components 2.6% | ||||||||
Arrow Electronics, Inc.* | 78,015 | 2,559,672 | ||||||
Jabil Circuit, Inc. | 170,600 | 3,468,298 | ||||||
6,027,970 | ||||||||
IT Services 3.7% | ||||||||
Amdocs Ltd.* (a) | 100,850 | 2,997,262 | ||||||
DST Systems, Inc. | 68,175 | 3,702,584 | ||||||
ManTech International Corp. "A" (a) | 88,275 | 2,071,814 | ||||||
8,771,660 | ||||||||
Semiconductors & Semiconductor Equipment 5.1% | ||||||||
KLA-Tencor Corp. (a) | 68,700 | 3,383,475 | ||||||
Microsemi Corp.* | 160,975 | 2,976,428 | ||||||
PMC-Sierra, Inc.* | 466,650 | 2,865,231 | ||||||
Teradyne, Inc.* (a) | 197,700 | 2,779,662 | ||||||
12,004,796 | ||||||||
Software 1.8% | ||||||||
Synopsys, Inc.* | 142,850 | 4,204,076 | ||||||
Materials 6.3% | ||||||||
Chemicals 0.9% | ||||||||
Huntsman Corp. | 155,993 | 2,018,549 | ||||||
Containers & Packaging 2.2% | ||||||||
Owens-Illinois, Inc.* | 112,300 | 2,152,791 | ||||||
Rock-Tenn Co. "A" | 55,325 | 3,017,979 | ||||||
5,170,770 | ||||||||
Shares | Value ($) | |||||||
Metals & Mining 3.2% | ||||||||
Coeur d'Alene Mines Corp.* | 119,950 | 2,106,322 | ||||||
IAMGOLD Corp. (a) | 163,375 | 1,927,825 | ||||||
Reliance Steel & Aluminum Co. (a) | 70,925 | 3,581,713 | ||||||
7,615,860 | ||||||||
Utilities 4.0% | ||||||||
Electric Utilities 1.4% | ||||||||
Portland General Electric Co. | 126,650 | 3,376,489 | ||||||
Gas Utilities 1.3% | ||||||||
AGL Resources, Inc. (a) | 75,100 | 2,910,125 | ||||||
Multi-Utilities 1.3% | ||||||||
Ameren Corp. | 90,975 | 3,051,301 | ||||||
Total Common Stocks (Cost $205,057,792) | 230,933,759 | |||||||
Securities Lending Collateral 30.3% | ||||||||
Daily Assets Fund Institutional, 0.24% (b) (c) (Cost $71,020,986) | 71,020,986 | 71,020,986 | ||||||
Cash Equivalents 1.5% | ||||||||
Central Cash Management Fund, 0.14% (b) (Cost $3,459,783) | 3,459,783 | 3,459,783 |
% of Net Assets | Value ($) | |||||||
Total Investment Portfolio (Cost $279,538,561)+ | 130.4 | 305,414,528 | ||||||
Other Assets and Liabilities, Net | (30.4 | ) | (71,147,499 | ) | ||||
Net Assets | 100.0 | 234,267,029 |
* Non-income producing security.
+ The cost for federal income tax purposes was $280,116,649. At June 30, 2012, net unrealized appreciation for all securities based on tax cost was $25,297,879. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $47,450,792 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $22,152,913.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at June 30, 2012 amounted to $71,276,920, which is 30.4% 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.
REIT: Real Estate Investment Trust
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 June 30, 2012 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) | $ | 230,933,759 | $ | — | $ | — | $ | 230,933,759 | ||||||||
Short-Term Investments (d) | 74,480,769 | — | — | 74,480,769 | ||||||||||||
Total | $ | 305,414,528 | $ | — | $ | — | $ | 305,414,528 |
There have been no transfers between Level 1 and Level 2 fair value measurements during the period ended June 30, 2012.
(d) See Investment Portfolio for additional detailed categorizations.
The accompanying notes are an integral part of the financial statements.
as of June 30, 2012 (Unaudited) | ||||
Assets | ||||
Investments: Investments in non-affiliated securities, at value (cost $205,057,792) — including $71,276,920 of securities loaned | $ | 230,933,759 | ||
Investment in Daily Assets Fund Institutional (cost $71,020,986)* | 71,020,986 | |||
Investment in Central Cash Management Fund (cost $3,459,783) | 3,459,783 | |||
Total investments in securities, at value (cost $279,538,561) | 305,414,528 | |||
Receivable for Fund shares sold | 35,951 | |||
Dividends receivable | 271,920 | |||
Interest receivable | 25,108 | |||
Other assets | 42 | |||
Total assets | 305,747,549 | |||
Liabilities | ||||
Payable upon return of securities loaned | 71,020,986 | |||
Payable for Fund shares redeemed | 245,735 | |||
Accrued management fee | 120,414 | |||
Acrued Trustees' fees | 80 | |||
Accrued expenses and payables | 93,305 | |||
Total liabilities | 71,480,520 | |||
Net assets, at value | $ | 234,267,029 | ||
Net Assets Consist of: | ||||
Undistributed net investment income | 1,344,333 | |||
Net unrealized appreciation (depreciation) on investments | 25,875,967 | |||
Accumulated net realized gain (loss) | (78,716,973 | ) | ||
Paid-in capital | 285,763,702 | |||
Net assets, at value | $ | 234,267,029 | ||
Class A Net Asset Value, offering and redemption price per share ($214,066,410 ÷ 18,182,159 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | $ | 11.77 | ||
Class B Net Asset Value, offering and redemption price per share ($20,200,619 ÷ 1,713,801 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | $ | 11.79 |
* Represents collateral on securities loaned.
The accompanying notes are an integral part of the financial statements.
Statement of Operations
for the six months ended June 30, 2012 (Unaudited) | ||||
Investment Income | ||||
Income: Dividends (net of foreign taxes withheld of $310) | $ | 2,233,523 | ||
Interest | 15,785 | |||
Income distributions — Central Cash Management Fund | 2,900 | |||
Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates | 124,497 | |||
Total income | 2,376,705 | |||
Expenses: Management fee | 794,033 | |||
Administration fee | 122,233 | |||
Services to shareholders | 4,514 | |||
Distribution service fee (Class B) | 26,398 | |||
Record keeping fees (Class B) | 9,753 | |||
Custodian fee | 5,616 | |||
Professional fees | 32,676 | |||
Reports to shareholders | 35,306 | |||
Trustees' fees and expenses | 5,372 | |||
Other | 6,611 | |||
Total expenses | 1,042,512 | |||
Net investment income (loss) | 1,334,193 | |||
Realized and Unrealized Gain (Loss) | ||||
Net realized gain (loss) from investments | 6,804,529 | |||
Change in net unrealized appreciation (depreciation) on investments | 3,322,862 | |||
Net gain (loss) | 10,127,391 | |||
Net increase (decrease) in net assets resulting from operations | $ | 11,461,584 |
The accompanying notes are an integral part of the financial statements.
Increase (Decrease) in Net Assets | Six Months Ended June 30, 2012 (Unaudited) | Year Ended December 31, 2011 | ||||||
Operations: Net investment income (loss) | $ | 1,334,193 | $ | 2,755,641 | ||||
Net realized gain (loss) | 6,804,529 | 18,942,284 | ||||||
Change in net unrealized appreciation (depreciation) | 3,322,862 | (38,142,173 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 11,461,584 | (16,444,248 | ) | |||||
Distributions to shareholders from: Net investment income: Class A | (2,544,018 | ) | (2,506,080 | ) | ||||
Class B | (170,068 | ) | (161,946 | ) | ||||
Total distributions | (2,714,086 | ) | (2,668,026 | ) | ||||
Fund share transactions: Class A Proceeds from shares sold | 10,005,463 | 34,090,411 | ||||||
Reinvestment of distributions | 2,544,018 | 2,506,080 | ||||||
Payments for shares redeemed | (21,995,322 | ) | (51,431,426 | ) | ||||
Net increase (decrease) in net assets from Class A share transactions | (9,445,841 | ) | (14,834,935 | ) | ||||
Class B Proceeds from shares sold | 1,745,194 | 3,518,495 | ||||||
Reinvestment of distributions | 170,068 | 161,946 | ||||||
Payments for shares redeemed | (2,872,009 | ) | (7,516,325 | ) | ||||
Net increase (decrease) in net assets from Class B share transactions | (956,747 | ) | (3,835,884 | ) | ||||
Increase (decrease) in net assets | (1,655,090 | ) | (37,783,093 | ) | ||||
Net assets at beginning of period | 235,922,119 | 273,705,212 | ||||||
Net assets at end of period (including undistributed net investment income of $1,344,333 and $2,724,226, respectively) | $ | 234,267,029 | $ | 235,922,119 | ||||
Other Information | ||||||||
Class A Shares outstanding at beginning of period | 18,969,648 | 20,271,172 | ||||||
Shares sold | 824,072 | 2,809,599 | ||||||
Shares issued to shareholders in reinvestment of distributions | 207,168 | 187,020 | ||||||
Shares redeemed | (1,818,729 | ) | (4,298,143 | ) | ||||
Net increase (decrease) in Class A shares | (787,489 | ) | (1,301,524 | ) | ||||
Shares outstanding at end of period | 18,182,159 | 18,969,648 | ||||||
Class B Shares outstanding at beginning of period | 1,796,701 | 2,147,844 | ||||||
Shares sold | 140,986 | 291,322 | ||||||
Shares issued to shareholders in reinvestment of distributions | 13,826 | 12,068 | ||||||
Shares redeemed | (237,712 | ) | (654,533 | ) | ||||
Net increase (decrease) in Class B shares | (82,900 | ) | (351,143 | ) | ||||
Shares outstanding at end of period | 1,713,801 | 1,796,701 |
The accompanying notes are an integral part of the financial statements.
Years Ended December 31, | ||||||||||||||||||||||||
Class A | Six Months Ended 6/30/12 (Unaudited) | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Selected Per Share Data | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.36 | $ | 12.21 | $ | 10.04 | $ | 7.93 | $ | 20.12 | $ | 22.93 | ||||||||||||
Income (loss) from investment operations: Net investment incomea | .07 | .13 | .12 | .16 | .13 | .18 | ||||||||||||||||||
Net realized and unrealized gain (loss) | .48 | (.85 | ) | 2.19 | 2.11 | (4.92 | ) | .54 | ||||||||||||||||
Total from investment operations | .55 | (.72 | ) | 2.31 | 2.27 | (4.79 | ) | .72 | ||||||||||||||||
Less distributions from: Net investment income | (.14 | ) | (.13 | ) | (.14 | ) | (.16 | ) | (.29 | ) | (.23 | ) | ||||||||||||
Net realized gains | — | — | — | — | (7.11 | ) | (3.30 | ) | ||||||||||||||||
Total distributions | (.14 | ) | (.13 | ) | (.14 | ) | (.16 | ) | (7.40 | ) | (3.53 | ) | ||||||||||||
Net asset value, end of period | $ | 11.77 | $ | 11.36 | $ | 12.21 | $ | 10.04 | $ | 7.93 | $ | 20.12 | ||||||||||||
Total Return (%) | 4.77 | ** | (6.08 | ) | 23.07 | 29.70 | (33.42 | )b | 3.06 | |||||||||||||||
Ratios to Average Net Assets and Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period ($ millions) | 214 | 216 | 247 | 235 | 223 | 468 | ||||||||||||||||||
Ratio of expenses before expense reductions (%) | .82 | * | .81 | .82 | .79 | .83 | .78 | |||||||||||||||||
Ratio of expenses after expense reductions (%) | .82 | * | .81 | .82 | .79 | .82 | .78 | |||||||||||||||||
Ratio of net investment income (%) | 1.12 | * | 1.08 | 1.14 | 1.92 | 1.13 | .85 | |||||||||||||||||
Portfolio turnover rate (%) | 5 | ** | 36 | 38 | 72 | 49 | 110 | |||||||||||||||||
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. * Annualized ** Not annualized |
Years Ended December 31, | ||||||||||||||||||||||||
Class B | Six Months Ended 6/30/12 (Unaudited) | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Selected Per Share Data | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.36 | $ | 12.20 | $ | 10.03 | $ | 7.92 | $ | 20.08 | $ | 22.88 | ||||||||||||
Income (loss) from investment operations: Net investment incomea | .05 | .09 | .08 | .13 | .09 | .10 | ||||||||||||||||||
Net realized and unrealized gain (loss) | .48 | (.85 | ) | 2.19 | 2.12 | (4.92 | ) | .54 | ||||||||||||||||
Total from investment operations | .53 | (.76 | ) | 2.27 | 2.25 | (4.83 | ) | .64 | ||||||||||||||||
Less distributions from: Net investment income | (.10 | ) | (.08 | ) | (.10 | ) | (.14 | ) | (.22 | ) | (.14 | ) | ||||||||||||
Net realized gains | — | — | — | — | (7.11 | ) | (3.30 | ) | ||||||||||||||||
Total distributions | (.10 | ) | (.08 | ) | (.10 | ) | (.14 | ) | (7.33 | ) | (3.44 | ) | ||||||||||||
Net asset value, end of period | $ | 11.79 | $ | 11.36 | $ | 12.20 | $ | 10.03 | $ | 7.92 | $ | 20.08 | ||||||||||||
Total Return (%) | 4.60 | ** | (6.33 | ) | 22.66 | 29.28 | (33.67 | )b | 2.67 | |||||||||||||||
Ratios to Average Net Assets and Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period ($ millions) | 20 | 20 | 26 | 23 | 24 | 34 | ||||||||||||||||||
Ratio of expenses before expense reductions (%) | 1.17 | * | 1.15 | 1.17 | 1.14 | 1.18 | 1.16 | |||||||||||||||||
Ratio of expenses after expense reductions (%) | 1.17 | * | 1.15 | 1.17 | 1.14 | 1.17 | 1.16 | |||||||||||||||||
Ratio of net investment income (%) | .78 | * | .74 | .79 | 1.57 | .78 | .47 | |||||||||||||||||
Portfolio turnover rate (%) | 5 | ** | 36 | 38 | 72 | 49 | 110 | |||||||||||||||||
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. * Annualized ** Not annualized |
A. Organization and Significant Accounting Policies
DWS Dreman Small Mid Cap Value VIP (the "Fund") is a diversified series of DWS Variable Series II (the "Trust"), which 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.
Multiple Classes of Shares of Beneficial Interest. The Fund offers two classes of shares (Class A shares and Class B shares). Sales of Class B shares are subject to recordkeeping 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 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 recordkeeping 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 Fund'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 Fund 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 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.
Equity securities are valued at the most recent sale price or official closing price reported on the exchange (U.S. or foreign) or over-the-counter market on which they trade and are categorized as Level 1 securities. Securities 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.
Investments in open-end investment companies are valued at their net asset value each business day 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 the 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 Fund's Investment Portfolio.
Foreign Currency Translations. The books and records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing exchange rates at period end. Purchases and sales of investment securities, income and expenses are translated into U.S. 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 acquisition and disposition of foreign currencies, and the difference between the amount of net investment income accrued and the U.S. 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.
Securities Lending. The Fund 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 under 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.
Taxes. The 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.
Under the Regulated Investment Company Modernization Act of 2010, net capital losses may be carried forward indefinitely, and their character is retained as short-term and/or long-term. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
At December 31, 2011, the Fund had a net tax basis capital loss carryforward of approximately $84,943,000 of pre-enactment losses, which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until December 31, 2017, the expiration date, whichever occurs first.
The Fund has reviewed the tax positions for the open tax years as of December 31, 2011 and has determined that no provision for income tax is required in the Fund's financial statements. The Fund's federal tax returns for the prior three fiscal years remain open subject to examination by the Internal Revenue Service.
Distribution of Income and Gains. Net investment income of the Fund, if any, is declared and distributed to shareholders annually. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed and, therefore, will be distributed to shareholders at least annually. The Fund may also make additional distributions for tax purposes if necessary.
The timing and characterization of certain income and capital gain 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 income received from 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, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.
The tax character of current year distributions will be determined at the end of the current fiscal year.
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, the Fund may enter into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet been made. However, based on experience, the Fund expects the risk of loss to be remote.
Real Estate Investment Trusts. The Fund periodically recharacterizes 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 between 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. Realized gains and losses from investment transactions are recorded on an identified cost basis and may include proceeds from litigation.
B. Purchases and Sales of Securities
During the six months ended June 30, 2012, purchases and sales of investment transactions (excluding short-term investments) aggregated $11,036,762 and $24,652,852, respectively.
C. 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 the 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 the Fund or delegates such responsibility to the Fund's subadvisor.
Dreman Value Management, L.L.C. ("DVM") serves as subadvisor. As a subadvisor to the Fund, DVM makes investment decisions and buys and sells securities for the Fund. DVM is paid by the Advisor for the services DVM provides to the Fund.
Pursuant to the Investment Management Agreement with the Advisor, the Fund pays a monthly management fee based on the Fund's average daily net assets, computed and accrued daily and payable monthly, at the following annual rates:
First $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 | % |
Accordingly, for the six months ended June 30, 2012, the fee pursuant to the Investment Management Agreement was equivalent to an annualized effective rate of 0.65% of the Fund's average daily net assets.
Administration Fee. Pursuant to an Administrative Services Agreement, DIMA provides most administrative services to the Fund. For all services provided under the Administrative Services Agreement, the Fund pays DIMA an annual fee ("Administration Fee") of 0.10% of the Fund's average daily net assets, computed and accrued daily and payable monthly. For the six months ended June 30, 2012, the Administration Fee was $122,233, of which $18,525 is unpaid.
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 the 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 the Fund. For the six months ended June 30, 2012, the amounts charged to the Fund by DISC were as follows:
Service to Shareholders | Total Aggregated | Unpaid at June 30, 2012 | ||||||
Class A | $ | 278 | $ | 87 | ||||
Class B | 200 | 54 | ||||||
$ | 478 | $ | 141 |
Distribution Service Agreement. Under the Fund's 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 six months ended June 30, 2012, the Distribution Service Fee aggregated $26,398, of which $3,993 is unpaid.
Typesetting and Filing Service Fees. Under an agreement with DIMA, DIMA is compensated for providing typesetting and certain regulatory filing services to the Fund. For the six months ended June 30, 2012, the amount charged to the Fund by DIMA included in the Statement of Operations under "reports to shareholders" aggregated $12,790, of which $4,133 is unpaid.
Trustees' Fees and Expenses. The Fund paid retainer fees to each Trustee not affiliated with the Advisor, plus specified amounts to the Board Chairperson and to each committee Chairperson.
Affiliated Cash Management Vehicle. The Fund may invest uninvested cash balances in Central Cash Management Fund, which is managed by the Advisor. The Fund indirectly bears its proportionate share of the expenses of Central Cash Management Fund. 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.
D. Ownership of the Fund
At June 30, 2012, three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 37%, 23% and 13%. Three participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Fund, each owning 39%, 12% and 12%.
E. Line of Credit
The Fund and other affiliated funds (the "Participants") share in a $375 million revolving credit facility provided by a syndication of banks. The Fund 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 Fund may borrow up to a maximum of 33 percent of its net assets under the agreement. The Fund had no outstanding loans at June 30, 2012.
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 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 (January 1, 2012 to June 30, 2012).
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 June 30, 2012 | ||||||||
Actual Fund Return | Class A | Class B | ||||||
Beginning Account Value 1/1/12 | $ | 1,000.00 | $ | 1,000.00 | ||||
Ending Account Value 6/30/12 | $ | 1,047.70 | $ | 1,046.00 | ||||
Expenses Paid per $1,000* | $ | 4.17 | $ | 5.95 | ||||
Hypothetical 5% Fund Return | Class A | Class B | ||||||
Beginning Account Value 1/1/12 | $ | 1,000.00 | $ | 1,000.00 | ||||
Ending Account Value 6/30/12 | $ | 1,020.79 | $ | 1,019.05 | ||||
Expenses Paid per $1,000* | $ | 4.12 | $ | 5.87 |
* 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 182 (the number of days in the most recent six-month period), then divided by 366.
Annualized Expense Ratios | Class A | Class B | ||
DWS Variable Series II — DWS Dreman Small Mid Cap Value VIP | .82% | 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.
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.
September 26, 2011
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 report summarizes my evaluation for 2011, 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, 2009 and 2010.
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 109 mutual 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
President, Thomas H. Mack & Co., Inc.
DWS Investments Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606
(800) 621-1148
VS2DSMC-3 (R-028381-1 8/12)
JUNE 30, 2012
SEMIANNUAL REPORT
DWS VARIABLE SERIES II
DWS Government & Agency Securities VIP
Contents
3 Performance Summary 4 Portfolio Summary 4 Portfolio Management Team 5 Investment Portfolio 8 Statement of Assets and Liabilities 9 Statement of Operations 10 Statement of Changes in Net Assets 12 Financial Highlights 14 Notes to Financial Statements 20 Information About Your Fund's Expenses 20 Proxy Voting 22 Summary of Management Fee Evaluation by Independent Fee Consultant |
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.
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 increase volatility. In the current market environment, mortgage-backed securities are experiencing increased volatility. The Fund may lend securities to approved institutions. The "full faith and credit" guarantee of the U.S. government applies to the timely repayment of interest, and does not eliminate market risk. Because of the rising U.S. government debt burden, it is possible that the U.S. government may not be able to meet its financial obligations or that securities issued by the U.S. government may experience credit downgrades. See the prospectus for details.
DWS Investments is part of Deutsche Bank's Asset Management division and, within the U.S., represents the retail asset management activities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company.
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
Fund 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 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, 2012 are 0.67% and 1.01% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Growth of an Assumed $10,000 Investment in DWS Government & Agency Securities VIP | ||
The Barclays 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 do not reflect any fees or expenses and it is not possible to invest directly into an index. | ||
Yearly periods ended June 30 |
Comparative Results | |||||||||||||||||||||
DWS Government & Agency Securities VIP | 6-Month‡ | 1-Year | 3-Year | 5-Year | 10-Year | ||||||||||||||||
Class A | Growth of $10,000 | $ | 10,155 | $ | 10,482 | $ | 12,059 | $ | 13,890 | $ | 16,476 | ||||||||||
Average annual total return | 1.55 | % | 4.82 | % | 6.44 | % | 6.79 | % | 5.12 | % | |||||||||||
Barclays GNMA Index | Growth of $10,000 | $ | 10,163 | $ | 10,593 | $ | 12,033 | $ | 14,101 | $ | 17,168 | ||||||||||
Average annual total return | 1.63 | % | 5.93 | % | 6.36 | % | 7.11 | % | 5.55 | % | |||||||||||
DWS Government & Agency Securities VIP | 6-Month‡ | 1-Year | 3-Year | 5-Year | 10-Year | ||||||||||||||||
Class B | Growth of $10,000 | $ | 10,135 | $ | 10,446 | $ | 11,930 | $ | 13,638 | $ | 15,867 | ||||||||||
Average annual total return | 1.35 | % | 4.46 | % | 6.06 | % | 6.40 | % | 4.73 | % | |||||||||||
Barclays GNMA Index | Growth of $10,000 | $ | 10,163 | $ | 10,593 | $ | 12,033 | $ | 14,101 | $ | 17,168 | ||||||||||
Average annual total return | 1.63 | % | 5.93 | % | 6.36 | % | 7.11 | % | 5.55 | % |
The growth of $10,000 is cumulative.
‡ Total returns shown for periods less than one year are not annualized.
Asset Allocation (As a % of Investment Portfolio) | 6/30/12 | 12/31/11 |
Mortgage-Backed Securities Pass-Throughs | 68% | 64% |
Government & Agency Obligations | 15% | 22% |
Collateralized Mortgage Obligations | 14% | 14% |
Cash Equivalents | 3% | — |
100% | 100% |
Coupons* | 6/30/12 | 12/31/11 |
Less than 4.5% | 66% | 43% |
4.5%-5.49% | 16% | 39% |
5.5%-6.49% | 11% | 13% |
6.5%-7.49% | 6% | 4% |
7.5% and Greater | 1% | 1% |
100% | 100% |
Interest Rate Sensitivity | 6/30/12 | 12/31/11 |
Effective Maturity | 4.8 years | 5.0 years |
Effective Duration | 3.8 years | 4.4 years |
* Excludes Cash Equivalents, U.S. Treasury Bills and Options Purchased.
Effective maturity is the weighted average of the maturity date of bonds held by the Fund taking into consideration any available maturity shortening features.
Effective duration is an approximate measure of the Fund's sensitivity to interest rate changes taking into consideration any maturity shortening features.
Portfolio holdings and characteristics are subject to change.
For more complete details about the Fund's investment portfolio, see page 5.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
William Chepolis, CFA
Ohn Choe, CFA
John D. Ryan
Portfolio Managers
Principal Amount ($) | Value ($) | |||||||
Mortgage-Backed Securities Pass-Throughs 76.5% | ||||||||
Federal Home Loan Mortgage Corp.: | ||||||||
4.0%, 5/1/2040 (a) | 14,000,000 | 14,857,500 | ||||||
7.0%, 6/1/2032 | 736 | 836 | ||||||
Federal National Mortgage Association: | ||||||||
4.0%, 6/1/2040 (a) | 4,000,000 | 4,257,188 | ||||||
4.5%, 6/1/2039 (a) | 14,000,000 | 15,018,282 | ||||||
5.0%, 10/1/2033 | 274,606 | 298,195 | ||||||
Government National Mortgage Association: | ||||||||
3.0%, 2/1/2042 (a) | 4,000,000 | 4,143,125 | ||||||
4.0%, with various maturities from 8/1/2040 until 6/15/2042 (a) | 11,125,840 | 12,139,494 | ||||||
4.5%, with various maturities from 6/20/2033 until 12/20/2041 (a) | 3,136,060 | 3,648,731 | ||||||
4.55%, 1/15/2041 | 621,186 | 689,179 | ||||||
4.625%, 5/15/2041 | 201,127 | 223,280 | ||||||
5.0%, with various maturities from 11/20/2032 until 4/15/2042 (a) | 9,068,372 | 10,134,514 | ||||||
5.5%, with various maturities from 3/15/2029 until 7/20/2040 (a) | 22,402,378 | 24,846,656 | ||||||
6.0%, with various maturities from 7/15/2014 until 5/15/2040 (a) | 8,312,046 | 9,352,592 | ||||||
6.5%, with various maturities from 4/15/2031 until 2/15/2039 | 3,443,318 | 3,925,864 | ||||||
7.0%, with various maturities from 2/20/2027 until 11/15/2038 | 651,575 | 748,493 | ||||||
7.5%, 10/20/2031 | 9,661 | 11,308 | ||||||
Total Mortgage-Backed Securities Pass-Throughs (Cost $99,917,518) | 104,295,237 | |||||||
Collateralized Mortgage Obligations 16.1% | ||||||||
Fannie Mae Benchmark Remic, "ZA", Series 2007-B2, 5.5%, 6/25/2037 | 1,850,428 | 2,142,371 | ||||||
Federal Home Loan Mortgage Corp.: | ||||||||
"OA", Series 3179, Principal Only, Zero Coupon, 7/15/2036 | 594,680 | 579,712 | ||||||
"YI", Series 3936, Interest Only, 3.0%, 6/15/2025 | 269,739 | 21,711 | ||||||
"AI", Series 4016, Interest Only, 3.0%, 9/15/2025 | 1,947,689 | 183,967 | ||||||
"WI", Series 3939, Interest Only, 3.0%, 10/15/2025 | 1,141,333 | 86,073 | ||||||
"EI", Series 3953, Interest Only, 3.0%, 11/15/2025 | 1,507,419 | 126,075 | ||||||
"IO", Series 3974, Interest Only, 3.0%, 12/15/2025 | 317,750 | 27,278 | ||||||
"DI", Series 4010, Interest Only, 3.0%, 2/15/2027 | 322,430 | 32,032 | ||||||
"AI", Series 3900, Interest Only, 3.5%, 7/15/2013 | 5,423,376 | 183,510 | ||||||
"IA", Series 3800, Interest Only, 3.5%, 12/15/2022 | 2,408,735 | 82,985 | ||||||
"IK", Series 3754, Interest Only, 3.5%, 6/15/2025 | 2,101,704 | 164,579 | ||||||
Principal Amount ($) | Value ($) | |||||||
"NI", Series 3657, Interest Only, 4.5%, 8/15/2027 | 1,433,578 | 93,526 | ||||||
"ZK", Series 3382, 5.0%, 7/15/2037 | 1,256,953 | 1,440,358 | ||||||
"22", Series 243, Interest Only, 5.008%*, 6/15/2021 | 1,342,825 | 126,388 | ||||||
"SC", Series 3326, Interest Only, 5.798%*, 6/15/2037 | 646,166 | 80,115 | ||||||
"PI", Series 2535, Interest Only, 6.0%, 9/15/2032 | 569,733 | 33,170 | ||||||
"MI", Series 3871, Interest Only, 6.0%, 4/15/2040 | 301,059 | 45,830 | ||||||
"WS", Series 2877, Interest Only, 6.358%*, 10/15/2034 | 592,804 | 50,978 | ||||||
"A", Series 172, Interest Only, 6.5%, 1/1/2024 | 34,962 | 5,323 | ||||||
"S", Series 2416, Interest Only, 7.858%*, 2/15/2032 | 457,230 | 90,275 | ||||||
"ST", Series 2411, Interest Only, 8.508%*, 6/15/2021 | 1,597,220 | 242,220 | ||||||
"KS", Series 2064, Interest Only, 9.9%*, 5/15/2022 | 435,912 | 88,274 | ||||||
Federal National Mortgage Association: | ||||||||
"DI", Series 2011-136, Interest Only, 3.0%, 1/25/2026 | 317,024 | 29,216 | ||||||
"HI", Series 2010-123, Interest Only, 3.5%, 3/25/2024 | 752,197 | 58,418 | ||||||
"KI", Series 2011-72, Interest Only, 3.5%, 3/25/2025 | 2,782,555 | 172,105 | ||||||
"25", Series 351, Interest Only, 4.5%, 5/1/2019 | 312,389 | 31,520 | ||||||
"HI", Series 2009-77, Interest Only, 4.5%, 9/25/2027 | 939,197 | 78,342 | ||||||
"21", Series 334, Interest Only, 5.0%, 3/1/2018 | 150,043 | 11,688 | ||||||
"20", Series 334, Interest Only, 5.0%, 3/1/2018 | 226,140 | 18,193 | ||||||
''23", Series 339, Interest Only, 5.0%, 7/1/2018 | 320,442 | 28,648 | ||||||
"26", Series 381, Interest Only, 5.0%, 12/25/2020 | 102,832 | 9,032 | ||||||
"ZA", Series 2008-24, 5.0%, 4/25/2038 | 649,022 | 748,001 | ||||||
"30", Series 381, Interest Only, 5.5%, 11/25/2019 | 513,815 | 55,968 | ||||||
"PI", Series 2009-14, Interest Only, 5.5%, 3/25/2024 | 1,037,123 | 112,515 | ||||||
"WI", Series 2011-59, Interest Only, 6.0%, 5/25/2040 | 720,852 | 80,561 | ||||||
"101", Series 383, Interest Only, 6.5%, 9/1/2022 | 1,705,265 | 289,959 | ||||||
"ZQ", Series G93-39, 6.5%, 12/25/2023 | 335,308 | 378,922 | ||||||
"SA", Series 2005-42, Interest Only, 6.555%*, 5/25/2035 | 958,969 | 113,787 | ||||||
"ES", Series 2003-17, Interest Only, 6.805%*, 9/25/2022 | 3,371,610 | 188,507 | ||||||
"SA", Series G92-57, IOette, 82.6%*, 10/25/2022 | 52,650 | 128,980 | ||||||
Government National Mortgage Association: | ||||||||
"IE", Series 2011-128, Interest Only, 3.5%, 9/20/2026 | 1,517,276 | 176,227 | ||||||
"JY", Series 2010-20, 4.0%, 12/20/2033 | 1,896,752 | 2,088,173 | ||||||
"LI", Series 2009-104, Interest Only, 4.5%, 12/16/2018 | 390,822 | 32,740 | ||||||
Principal Amount ($) | Value ($) | |||||||
"NI", Series 2010-44, Interest Only, 4.5%, 10/20/2037 | 811,290 | 117,451 | ||||||
"CI", Series 2010-87, Interest Only, 4.5%, 11/20/2038 | 1,251,588 | 363,049 | ||||||
"MI", Series 2010-169, Interest Only, 4.5%, 8/20/2040 | 1,065,521 | 175,812 | ||||||
"AI", Series 2012-15, Interest Only, 4.5%, 9/20/2040 | 805,814 | 150,093 | ||||||
"VB", Series 2010-26, 5.0%, 1/20/2024 | 600,000 | 710,870 | ||||||
"ZM", Series 2004-24, 5.0%, 4/20/2034 | 2,254,549 | 2,593,850 | ||||||
"Z", Series 2004-61, 5.0%, 8/16/2034 | 1,108,681 | 1,295,592 | ||||||
"ZB", Series 2005-15, 5.0%, 2/16/2035 | 1,586,000 | 1,830,941 | ||||||
"GZ", Series 2005-24, 5.0%, 3/20/2035 | 481,005 | 572,469 | ||||||
"ZA", Series 2005-75, 5.0%, 10/16/2035 | 541,123 | 647,321 | ||||||
"MZ", Series 2009-98, 5.0%, 10/16/2039 | 970,967 | 1,238,764 | ||||||
"AI", Series 2008-51, Interest Only, 5.5%, 5/16/2023 | 773,665 | 81,952 | ||||||
"AI", Series 2008-46, Interest Only, 5.5%, 5/16/2023 | 385,776 | 42,913 | ||||||
"GI", Series 2003-19, Interest Only, 5.5%, 3/16/2033 | 1,090,909 | 262,099 | ||||||
"IB", Series 2010-130, Interest Only, 5.5%, 2/20/2038 | 309,091 | 22,922 | ||||||
"BS", Series 2011-93, Interest Only, 5.857%*, 7/16/2041 | 1,868,860 | 285,181 | ||||||
"DI", Series 2009-10, Interest Only, 6.0%, 4/16/2038 | 452,783 | 73,967 | ||||||
"QA", Series 2007-57, Interest Only, 6.256%*, 10/20/2037 | 569,136 | 87,181 | ||||||
"IP", Series 2009-118, Interest Only, 6.5%, 12/16/2039 | 173,914 | 30,716 | ||||||
"SA", Series 2006-69, Interest Only, 6.556%*, 12/20/2036 | 1,059,447 | 153,017 | ||||||
"PS", Series 2004-34, Interest Only, 6.907%*, 4/16/2034 | 245,409 | 46,870 | ||||||
"SK", Series 2003-11, Interest Only, 7.457%*, 2/16/2033 | 693,997 | 140,756 | ||||||
"IC", Series 1997-4, Interest Only, 7.5%, 3/16/2027 | 766,049 | 174,529 | ||||||
Total Collateralized Mortgage Obligations (Cost $18,685,276) | 21,856,567 | |||||||
Government & Agency Obligations 17.1% | ||||||||
U.S. Government Sponsored Agency 12.4% | ||||||||
Federal Home Loan Bank, 5.0%, 11/17/2017 | 14,000,000 | 16,908,630 | ||||||
U.S. Treasury Obligations 4.7% | ||||||||
U.S. Treasury Bill, 0.13%**, 9/6/2012 (b) | 1,045,000 | 1,044,871 | ||||||
U.S. Treasury Note, 2.125%, 2/29/2016 | 5,000,000 | 5,287,890 | ||||||
6,332,761 | ||||||||
Total Government & Agency Obligations (Cost $23,242,538) | 23,241,391 |
Contracts | Value ($) | |||||||
Call Options Purchased 0.3% | ||||||||
Options on Exchange-Traded Futures Contracts 0.0% | ||||||||
10 Year U.S. Treasury Note Future, Option Expiration Date 8/24/2012, Strike Price $134.0 | 20 | 14,375 |
Contract Amount | Value ($) | |||||||
Options on Interest Rate Swap Contracts 0.3% | ||||||||
Fixed Rate — 3.583% - Floating — LIBOR, Swap Expiration Date 5/11/2026, Option Expiration Date 5/9/2016 | 2,700,000 | 96,071 | ||||||
Fixed Rate — 3.635% - Floating — LIBOR, Swap Expiration Date 4/27/2026, Option Expiration Date 4/25/2016 | 2,600,000 | 88,507 | ||||||
Fixed Rate — 3.72% - Floating — LIBOR, Swap Expiration Date 4/22/2026, Option Expiration Date 4/20/2016 | 2,600,000 | 83,617 | ||||||
Fixed Rate — 4.32% - Floating — LIBOR, Swap Expiration Date 2/3/2027, Option Expiration Date 2/1/2017 | 6,000,000 | 168,724 | ||||||
436,919 | ||||||||
Total Call Options Purchased (Cost $667,662) | 451,294 |
Contracts | Value ($) | |||||||
Put Options Purchased 0.2% | ||||||||
Options on Exchange-Traded Futures Contracts 0.0% | ||||||||
10 Year U.S. Treasury Note Future, Option Expiration Date 8/24/2012, Strike Price $133.0 | 35 | 29,531 |
Contract Amount | Value ($) | |||||||
Options on Interest Rate Swap Contracts 0.2% | ||||||||
Fixed Rate — 2.32% - Floating — LIBOR, Swap Expiration Date 2/3/2027, Option Expiration Date 2/1/2017 | 6,000,000 | 242,374 | ||||||
Total Put Options Purchased (Cost $236,773) | 271,905 |
Shares | Value ($) | |||||||
Cash Equivalents 3.5% | ||||||||
Central Cash Management Fund, 0.14% (c) (Cost $4,788,725) | 4,788,725 | 4,788,725 |
% of Net Assets | Value ($) | |||||||
Total Investment Portfolio (Cost $147,538,492)+ | 113.7 | 154,905,119 | ||||||
Other Assets and Liabilities, Net | (13.7 | ) | (18,639,266 | ) | ||||
Net Assets | 100.0 | 136,265,853 |
* These securities are shown at their current rate as of June 30, 2012.
** Annualized yield at time of purchase; not a coupon rate.
+ The cost for federal income tax purposes was $147,541,856. At June 30, 2012, net unrealized appreciation for all securities based on tax cost was $7,363,263. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $8,287,899 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $924,636.
(a) When-issued or delayed delivery securities included.
(b) At June 30, 2012, this security has been pledged, in whole or in part, to cover initial margin requirements for open futures contracts.
(c) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
Interest Only: Interest Only (IO) bonds represent the "interest only" portion of payments on a pool of underlying mortgages or mortgage-backed securities. IO securities are subject to prepayment risk of the pool of underlying mortgages.
IOettes: These securities represent the right to receive interest payments on an underlying pool of mortgages with similar features as those associated with IO securities. Unlike IO's, a nominal amount of principal is assigned to an IOette which is small in relation to the interest flow that constitutes almost all of the IOette cash flow. The effective yield of this security is lower than the stated interest rate.
LIBOR: London Interbank Offered Rate
Principal Only: Principal Only (PO) bonds represent the "principal only" portion of payments on a pool of underlying mortgages or mortgage-backed securities.
Included in the portfolio are investments in mortgage- or asset-backed securities which are interests in separate pools of mortgages or assets. Effective maturities of these investments may be shorter than stated maturities due to prepayments. Some separate investments in the Government National Mortgage Association issues which have similar coupon rates have been aggregated for presentation purposes in this investment portfolio.
At June 30, 2012, open futures contracts sold were as follows:
Futures | Currency | Expiration Date | Contracts | Notional Value ($) | Unrealized Appreciation ($) | |||||||||
10 Year U.S. Treasury Note | USD | 9/19/2012 | 50 | 6,668,750 | 10,625 |
Currency Abbreviation |
USD United States Dollar |
Options on Exchange-Traded Futures Contracts | Contracts | Expiration Date | Strike Price ($) | Premiums Received ($) | Value ($) (d) | ||||||||||||
Call Options 10 Year U.S. Treasury Note Future | 20 | 8/24/2012 | 134.0 | 2,456 | (3,750 | ) | |||||||||||
Put Options 10 Year U.S. Treasury Note Future | 35 | 8/24/2012 | 133.0 | 29,378 | (19,688 | ) | |||||||||||
Total | 31,834 | (23,438 | ) |
(d) Unrealized appreciation on written options on exchange-traded futures contracts at June 30, 2012 was $8,396.
Options on Interest Rate Swap Contracts | Swap Effective/ Expiration Date | Contract Amount | Option Expiration Date | Premiums Received ($) | Value ($) (e) | |||||||||
Call Options Fixed — 3.32% - Floating — LIBOR | 2/3/2017 2/3/2027 | 3,000,000 | 2/1/2017 | 216,990 | (148,340 | ) | ||||||||
Fixed — 4.083% - Floating — LIBOR | 5/11/2016 5/11/2026 | 2,700,000 | 5/9/2016 | 91,800 | (70,715 | ) | ||||||||
Fixed — 4.135% - Floating — LIBOR | 4/27/2016 4/27/2026 | 2,600,000 | 4/25/2016 | 96,200 | (65,090 | ) | ||||||||
Fixed — 4.22% - Floating — LIBOR | 4/22/2016 4/22/2026 | 2,600,000 | 4/20/2016 | 92,690 | (61,579 | ) | ||||||||
Total Call Options | 497,680 | (345,724 | ) | |||||||||||
Put Options Fixed — 1.9% - Floating — LIBOR | 4/24/2013 4/24/2023 | 2,600,000 | 4/22/2013 | 35,620 | (59,167 | ) | ||||||||
Fixed — 2.07% - Floating — LIBOR | 5/10/2013 5/10/2043 | 2,700,000 | 5/8/2013 | 43,200 | (70,253 | ) | ||||||||
Fixed — 2.09% - Floating — LIBOR | 4/25/2013 4/25/2043 | 2,600,000 | 4/23/2013 | 48,880 | (67,694 | ) | ||||||||
Fixed — 3.32% - Floating — LIBOR | 2/3/2017 2/3/2027 | 3,000,000 | 2/1/2017 | 216,990 | (258,733 | ) | ||||||||
Total Put Options | 344,690 | (455,847 | ) | |||||||||||
Total | 842,370 | (801,571 | ) |
(e) Unrealized appreciation on written options on interest rate swap contracts at June 30, 2012 was $40,799.
For information on the Fund's policy and additional disclosures regarding futures contracts, purchased and written options 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.
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 June 30, 2012 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 (f) | ||||||||||||||||
Mortgage-Backed Securities Pass-Throughs | $ | — | $ | 104,295,237 | $ | — | $ | 104,295,237 | ||||||||
Collateralized Mortgage Obligations | — | 21,856,567 | — | 21,856,567 | ||||||||||||
Government & Agency Obligations | — | 23,241,391 | — | 23,241,391 | ||||||||||||
Short-Term Investments | 4,788,725 | — | — | 4,788,725 | ||||||||||||
Derivatives (g) | 54,531 | 679,293 | — | 733,824 | ||||||||||||
Total | $ | 4,843,256 | $ | 150,072,488 | $ | — | $ | 154,915,744 | ||||||||
Liabilities | ||||||||||||||||
Derivatives (g) | $ | (23,438 | ) | $ | (801,571 | ) | $ | — | $ | (825,009 | ) | |||||
Total | $ | (23,438 | ) | $ | (801,571 | ) | $ | — | $ | (825,009 | ) |
There have been no transfers between Level 1 and Level 2 fair value measurements during the period ended June 30, 2012.
(f) See Investment Portfolio for additional detailed categorizations.
(g) Derivatives include value of purchased options, unrealized appreciation (depreciation) on open futures contracts and written options, at value.
The accompanying notes are an integral part of the financial statements.
as of June 30, 2012 (Unaudited) | ||||
Assets | ||||
Investments Investments in non-affiliated securities, at value (cost $142,749,767) | $ | 150,116,394 | ||
Investment in Central Cash Managment Fund (cost $4,788,725) | 4,788,725 | |||
Total investments in securities, at value (cost $147,538,492) | 154,905,119 | |||
Receivable for investments sold | 1,544,684 | |||
Receivable for investments sold — when-issued/delayed delivery securities | 104,843,726 | |||
Receivable for Fund shares sold | 292,259 | |||
Interest receivable | 740,372 | |||
Receivable for variation margin on futures contracts | 47,439 | |||
Other assets | 173 | |||
Total assets | 262,373,772 | |||
Liabilities | ||||
Payable for investments purchased | 24,662,265 | |||
Payable for investments purchased — when-issued/delayed delivery securities | 100,424,661 | |||
Payable for Fund shares redeemed | 84,684 | |||
Options written, at value (premium received $874,204) | 825,009 | |||
Accrued management fee | 60,943 | |||
Other accrued expenses and payables | 50,357 | |||
Total liabilities | 126,107,919 | |||
Net assets, at value | $ | 136,265,853 | ||
Net Assets Consist of | ||||
Undistributed net investment income | 2,098,713 | |||
Net unrealized appreciation (depreciation) on: Investments | 7,366,627 | |||
Futures | 10,625 | |||
Written options | 49,195 | |||
Accumulated net realized gain (loss) | 2,865,944 | |||
Paid-in capital | 123,874,749 | |||
Net assets, at value | $ | 136,265,853 | ||
Class A Net Asset Value, offering and redemption price per share ($130,397,023 ÷ 10,410,789 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | $ | 12.53 | ||
Class B Net Asset Value, offering and redemption price per share ($5,868,830 ÷ 468,527 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | $ | 12.53 |
The accompanying notes are an integral part of the financial statements.
Statement of Operations
for the six months ended June 30, 2012 (Unaudited) | ||||
Investment Income | ||||
Income: Interest | $ | 2,573,430 | ||
Income distributions — Central Cash Management Fund | 2,377 | |||
Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates | 772 | |||
Total income | 2,576,579 | |||
Expenses: Management fee | 316,494 | |||
Administration fee | 70,031 | |||
Services to shareholders | 1,100 | |||
Distribution service fee (Class B) | 7,370 | |||
Record keeping fees (Class B) | 2,878 | |||
Custodian fee | 21,360 | |||
Audit and tax fees | 31,486 | |||
Legal fees | 5,066 | |||
Reports to shareholders | 22,558 | |||
Trustees' fees and expenses | 3,458 | |||
Other | 12,776 | |||
Total expenses before expense reductions | 494,577 | |||
Expense reductions | (20,534 | ) | ||
Total expenses after expense reductions | 474,043 | |||
Net investment income | 2,102,536 | |||
Realized and Unrealized Gain (Loss) | ||||
Net realized gain (loss) from: Investments | 3,382,533 | |||
Swap contracts | (1,010,173 | ) | ||
Futures | 527,129 | |||
Written options | 15,188 | |||
2,914,677 | ||||
Change in net unrealized appreciation (depreciation) on: Investments | (2,976,078 | ) | ||
Swap contracts | 156,684 | |||
Futures | (7,125 | ) | ||
Written options | 40,530 | |||
(2,785,989 | ) | |||
Net gain (loss) | 128,688 | |||
Net increase (decrease) in net assets resulting from operations | $ | 2,231,224 |
The accompanying notes are an integral part of the financial statements.
Increase (Decrease) in Net Assets | Six Months Ended June 30, 2012 (Unaudited) | Year Ended December 31, 2011 | ||||||
Operations: Net investment income | $ | 2,102,536 | $ | 5,666,902 | ||||
Operations: Net investment income | $ | 2,102,536 | $ | 5,666,902 | ||||
Net realized gain (loss) | 2,914,677 | 2,942,171 | ||||||
Change in net unrealized appreciation (depreciation) | (2,785,989 | ) | 2,382,498 | |||||
Net increase (decrease) in net assets resulting from operations | 2,231,224 | 10,991,571 | ||||||
Distributions to shareholders from: Net investment income: Class A | (5,435,920 | ) | (6,311,902 | ) | ||||
Class B | (209,154 | ) | (230,895 | ) | ||||
Net realized gain: Class A | (2,952,755 | ) | (2,391,762 | ) | ||||
Class B | (124,749 | ) | (95,528 | ) | ||||
Total distributions | (8,722,578 | ) | (9,030,087 | ) | ||||
Fund share transactions: Class A Proceeds from shares sold | 14,011,134 | 31,578,112 | ||||||
Reinvestment of distributions | 8,388,675 | 8,703,664 | ||||||
Payments for shares redeemed | (31,975,494 | ) | (53,221,292 | ) | ||||
Net increase (decrease) in net assets from Class A share transactions | (9,575,685 | ) | (12,939,516 | ) | ||||
Class B Proceeds from shares sold | 504,040 | 1,566,129 | ||||||
Reinvestment of distributions | 333,903 | 326,423 | ||||||
Payments for shares redeemed | (1,413,393 | ) | (1,133,228 | ) | ||||
Net increase (decrease) in net assets from Class B share transactions | (575,450 | ) | 759,324 | |||||
Increase (decrease) in net assets | (16,642,489 | ) | (10,218,708 | ) | ||||
Net assets at beginning of period | 152,908,342 | 163,127,050 | ||||||
Net assets at end of period (including undistributed net investment income of $2,098,713 and $5,641,251, respectively) | $ | 136,265,853 | $ | 152,908,342 | ||||
Other Information | ||||||||
Class A Shares outstanding at beginning of period | 11,145,622 | 12,120,178 | ||||||
Shares sold | 1,069,339 | 2,446,836 | ||||||
Shares issued to shareholders in reinvestment of distributions | 672,170 | 700,214 | ||||||
Shares redeemed | (2,476,342 | ) | (4,121,606 | ) | ||||
Net increase (decrease) in Class A shares | (734,833 | ) | (974,556 | ) | ||||
Shares outstanding at end of period | 10,410,789 | 11,145,622 | ||||||
Class B Shares outstanding at beginning of period | 511,071 | 452,192 | ||||||
Shares sold | 39,373 | 120,662 | ||||||
Shares issued to shareholders in reinvestment of distributions | 26,755 | 26,240 | ||||||
Shares redeemed | (108,672 | ) | (88,023 | ) | ||||
Net increase (decrease) in Class B shares | (42,544 | ) | 58,879 | |||||
Shares outstanding at end of period | 468,527 | 511,071 |
The accompanying notes are an integral part of the financial statements.
Years Ended December 31, | ||||||||||||||||||||||||
Class A | Six Months Ended 6/30/12 (Unaudited) | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Selected Per Share Data | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 13.12 | $ | 12.98 | $ | 12.78 | $ | 12.40 | $ | 12.38 | $ | 12.28 | ||||||||||||
Income (loss) from investment operations: Net investment incomea | .19 | .48 | .50 | .52 | .56 | .58 | ||||||||||||||||||
Net realized and unrealized gain (loss) | .02 | .45 | .32 | .45 | .04 | .12 | ||||||||||||||||||
Total from investment operations | .21 | .93 | .82 | .97 | .60 | .70 | ||||||||||||||||||
Less distributions from: Net investment income | (.52 | ) | (.57 | ) | (.62 | ) | (.59 | ) | (.58 | ) | (.60 | ) | ||||||||||||
Net realized gains | (.28 | ) | (.22 | ) | — | — | — | — | ||||||||||||||||
Total distributions | (.80 | ) | (.79 | ) | (.62 | ) | (.59 | ) | (.58 | ) | (.60 | ) | ||||||||||||
Net asset value, end of period | $ | 12.53 | $ | 13.12 | $ | 12.98 | $ | 12.78 | $ | 12.40 | $ | 12.38 | ||||||||||||
Total Return (%) | 1.55 | b** | 7.46 | 6.61 | 8.08 | 4.93 | b | 5.95 | b | |||||||||||||||
Ratios to Average Net Assets and Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period ($ millions) | 130 | 146 | 157 | 169 | 211 | 199 | ||||||||||||||||||
Ratio of expenses before expense reductions (%) | .69 | * | .67 | .64 | .58 | .66 | .66 | |||||||||||||||||
Ratio of expenses after expense reductions (%) | .66 | * | .67 | .64 | .58 | .65 | .63 | |||||||||||||||||
Ratio of net investment income (%) | 3.02 | * | 3.68 | 3.86 | 4.16 | 4.58 | 4.77 | |||||||||||||||||
Portfolio turnover rate (%) | 454 | ** | 673 | 423 | 390 | 543 | 465 | |||||||||||||||||
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. * Annualized ** Not annualized |
Years Ended December 31, | ||||||||||||||||||||||||
Class B | Six Months Ended 6/30/12 (Unaudited) | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Selected Per Share Data | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 13.10 | $ | 12.95 | $ | 12.75 | $ | 12.37 | $ | 12.35 | $ | 12.25 | ||||||||||||
Income (loss) from investment operations: Net investment incomea | .17 | .43 | .46 | .48 | .52 | .53 | ||||||||||||||||||
Net realized and unrealized gain (loss) | .01 | .46 | .31 | .45 | .03 | .12 | ||||||||||||||||||
Total from investment operations | .18 | .89 | .77 | .93 | .55 | .65 | ||||||||||||||||||
Less distributions from: Net investment income | (.47 | ) | (.52 | ) | (.57 | ) | (.55 | ) | (.53 | ) | (.55 | ) | ||||||||||||
Net realized gains | (.28 | ) | (.22 | ) | — | — | — | — | ||||||||||||||||
Total distributions | (.75 | ) | (.74 | ) | (.57 | ) | (.55 | ) | (.53 | ) | (.55 | ) | ||||||||||||
Net asset value, end of period | $ | 12.53 | $ | 13.10 | $ | 12.95 | $ | 12.75 | $ | 12.37 | $ | 12.35 | ||||||||||||
Total Return (%) | 1.35 | b** | 7.15 | 6.24 | 7.70 | 4.60 | b | 5.43 | b | |||||||||||||||
Ratios to Average Net Assets and Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period ($ millions) | 6 | 7 | 6 | 7 | 8 | 5 | ||||||||||||||||||
Ratio of expenses before expense reductions (%) | 1.04 | * | 1.01 | .99 | .92 | 1.00 | 1.04 | |||||||||||||||||
Ratio of expenses after expense reductions (%) | 1.01 | * | 1.01 | .99 | .92 | 1.00 | 1.01 | |||||||||||||||||
Ratio of net investment income (%) | 2.67 | * | 3.34 | 3.51 | 3.81 | 4.24 | 4.39 | |||||||||||||||||
Portfolio turnover rate (%) | 454 | ** | 673 | 423 | 390 | 543 | 465 | |||||||||||||||||
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. * Annualized ** Not annualized |
A. Organization and Significant Accounting Policies
DWS Government & Agency Securities VIP (the "Fund") is a diversified series of DWS Variable Series II (the "Trust"), which 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.
Multiple Classes of Shares of Beneficial Interest. The Fund offers two classes of shares (Class A shares and Class B shares). Sales of Class B shares are subject to recordkeeping 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 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 recordkeeping 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 Fund'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 Fund 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 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.
Debt securities are valued at prices supplied by independent pricing services approved by the Fund's 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.
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.
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.
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 at the price provided by the broker-dealer with which the option was traded and are generally categorized as Level 2.
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 the 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 Fund's Investment Portfolio.
Securities Lending. The Fund may lend 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 under 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. The Fund had no securities on loan at June 30, 2012.
Mortgage Dollar Rolls. The Fund 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. The Fund may purchase or sell 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 or sell a security, the transaction is recorded and the value of the transaction 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. At the time the Fund enters into a purchase 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 transactions 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.
Federal Income Taxes. The 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.
Under the Regulated Investment Company Modernization Act of 2010, net capital losses may be carried forward indefinitely, and their character is retained as short-term and/or long-term. Previously, net capital losses were carried forward for eight years and treated as short-term losses.
The Fund has reviewed the tax positions for the open tax years as of December 31, 2011 and has determined that no provision for income tax is required in the Fund's financial statements. The Fund's federal tax returns for the prior three fiscal years remain open subject to examination by the Internal Revenue Service.
Distribution of Income and Gains. Distributions of net investment income of the Fund, if any, are made annually. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed and, therefore, will be distributed to shareholders at least annually. The Fund may also make additional distributions for tax purposes if necessary.
The timing and characterization of certain income and capital gain 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 investments in futures contracts, investments in swap contracts 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, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.
The tax character of current year distributions will be determined at the end of the current fiscal year.
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, the Fund may enter into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet been made. However, based on experience, the Fund expects the risk of loss to be remote.
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. Realized gains and losses from investment transactions are recorded on an identified cost basis and may include proceeds from litigation. All discounts and premiums are accreted/amortized for both tax and financial reporting purposes for the Fund.
B. Derivative Instruments
Interest Rate Swap Contracts. For the six months ended June 30, 2012, the Fund entered into interest rate swap transactions to gain exposure to different parts of the yield curve while managing overall duration and to enhance potential gains. 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. In addition, both the Fund and counterparty may agree to exchange variable rate payments based on different indices. 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, if any, made by the Fund is recorded as an asset in the Statement of Assets and Liabilities. An upfront payment, if any, 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.
There are no open interest rate swap contracts as of June 30, 2012. For the six months ended June 30, 2012, the investment in interest rate swap contracts had a total notional amount generally indicative of a range from $0 to $27,930,000.
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 six months ended June 30, 2012, the Fund entered into total return swap transactions to enhance potential gains. 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 or 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, if any, made by the Fund is recorded as an asset in the Statement of Assets and Liabilities. An upfront payment, if any, 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.
There are no open total return swap contracts as of June 30, 2012. For the six months ended June 30, 2012, the investment in total return swap contracts had a total notional amount generally indicative of a range from $0 to $6,900,000.
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 exercised. For the six months ended June 30, 2012, the Fund entered into options on interest rate futures and on interest rate swap contracts in order to hedge portfolio assets against potential adverse interest rate movements of portfolio assets.
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. For exchange-traded contracts, the counterparty risk is minimized as the exchange's clearinghouse acts as the counterparty, and guarantees the futures against default. 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 purchased option contracts as of June 30, 2012 is included in the Fund's Investment Portfolio. A summary of open written option contracts is included in a table following the Fund's Investment Portfolio. For the six months ended June 30, 2012, the investment in written option contracts had a total value generally indicative of a range from approximately $16,000 to $825,000, and purchased option contracts had a total value generally indicative of a range from $30,000 to approximately $723,000.
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 six months ended June 30, 2012, the Fund entered into interest rate futures to gain exposure to different parts of the yield curve while managing overall duration.
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 the risk that the futures contract is not well correlated with the security, index or currency to which it relates. Risk of loss may exceed amounts disclosed in the Statement of Assets and Liabilities.
A summary of the open futures contracts as of June 30, 2012, is included in a table following the Fund's Investment Portfolio. For the period ended June 30, 2012, the investment in futures contracts purchased had a total notional value generally indicative of a range from $0 to approximately $13,959,000, and the investment in futures contracts sold had a total notional value generally indicative of a range from $0 to approximately $6,669,000.
The following tables summarize the value of the Fund's derivative instruments held as of June 30, 2012 and the related location in the accompanying Statement of Assets and Liabilities, presented by primary underlying risk exposure:
Asset Derivatives | Purchased Options | Futures Contracts | Total | |||||||||
Interest Rate Contracts (a) (b) | $ | 723,199 | $ | 10,625 | $ | 733,824 |
Each of the above derivatives is located in the following Statement of Assets and Liabilities accounts:
(a) Investment in non-affiliated securities, at value (includes purchased options)
(b) Includes cumulative appreciation of futures contracts as disclosed in the Investment Portfolio. Unsettled variation margin is disclosed separately within the Statement of Assets and Liabilities.
Liability Derivative | Written Options | |||
Interest Rate Contracts (a) | $ | (825,009 | ) |
The above derivative is located in the following Statement of Assets and Liabilities account:
(a) Options written, at value
Additionally, the amount of unrealized and realized gains and losses on derivative instruments recognized in Fund earnings during the six months ended June 30, 2012 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) | $ | (6,997 | ) | $ | 15,188 | $ | (1,010,173 | ) | $ | 527,129 | $ | (474,853 | ) |
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) | Purchased Options | Written Options | Swap Contracts | Futures Contracts | Total | |||||||||||||||
Interest Rate Contracts (a) | $ | (166,151 | ) | $ | 40,530 | $ | 156,684 | $ | (7,125 | ) | $ | 23,938 |
Each of the above derivatives is located in the following Statement of Operations accounts:
(a) Change in net unrealized appreciation (depreciation) from investments (includes purchased options), written options, swap contracts and futures, respectively
C. Purchases and Sales of Securities
During the six months ended June 30, 2012, purchases and sales of investment securities (excluding short-term investments and U.S. Treasury securities) aggregated $720,755,135 and $745,208,225, respectively. Purchases and sales of U.S. Treasury securities aggregated $15,362,126 and $25,254,813, respectively.
For the six months ended June 30, 2012, transactions for written options on futures and interest rate swap contracts were as follows:
Contracts/ Contract Amount | Premiums | |||||||
Outstanding, beginning of period | 200 | $ | 24,915 | |||||
Options written | 21,800,135 | 880,278 | ||||||
Options closed | (80 | ) | (6,074 | ) | ||||
Options expired | (200 | ) | (24,915 | ) | ||||
Outstanding, end of period | 21,800,055 | $ | 874,204 |
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 the 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 the Fund.
Pursuant to the Investment Management Agreement with the Advisor, the Fund pays a monthly management fee based on the Fund's average daily net assets, computed and accrued daily and payable monthly, at the following annual rates:
First $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 | % |
For the period from January 1, 2012 through April 30, 2013, the Advisor has contractually agreed to waive its fees 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 Class A at 0.66%.
Accordingly, for the six months ended June 30, 2012, the Advisor waived a portion of its management fee pursuant to the Investment Management Agreement aggregating $20,401, and the amount charged aggregated $296,093, which was equivalent to an annualized effective rate of 0.42% of the Fund's average daily net assets.
Administration Fee. Pursuant to an Administrative Services Agreement, DIMA provides most administrative services to the Fund. For all services provided under the Administrative Services Agreement, the Fund pays DIMA an annual fee ("Administration Fee") of 0.10% of the Fund's average daily net assets, computed and accrued daily and payable monthly. For the six months ended June 30, 2012, the Administration Fee was $70,031, of which $11,176 is unpaid.
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 the 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 the Fund. For the six months ended June 30, 2012, the amounts charged to the Fund by DISC were as follows:
Total Aggregated | Amount Waived | Unpaid at June 30, 2012 | ||||||||||
Class A | $ | 133 | $ | 133 | $ | — | ||||||
Class B | 24 | — | 2 | |||||||||
$ | 157 | $ | 133 | $ | 2 |
Distribution Service Agreement. Under the Fund's 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 six months ended June 30, 2012, the Distribution Service Fee aggregated $7,370, of which $1,206 is unpaid.
Typesetting and Filing Service Fees. Under an agreement with DIMA, DIMA is compensated for providing typesetting and certain regulatory filing services to the Fund. For the six months ended June 30, 2012, the amount charged to the Fund by DIMA included in the Statement of Operations under "reports to shareholders" aggregated $13,880, of which $3,769 is unpaid.
Trustees' Fees and Expenses. The Fund paid retainer fees to each Trustee not affiliated with the Advisor, plus specified amounts to the Board Chairperson and to each committee Chairperson.
Affiliated Cash Management Vehicle. The Fund may invest uninvested cash balances in Central Cash Management Fund, which is managed by the Advisor. The Fund indirectly bears its proportionate share of the expenses of Central Cash Management Fund. 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. Ownership of the Fund
At June 30, 2012, three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 41%, 35% and 17%. One Participating Insurance Company was the owner of record of 10% or more of the total outstanding Class B shares of the Fund, owning 95%.
F. Line of Credit
The Fund and other affiliated funds (the "Participants") share in a $375 million revolving credit facility provided by a syndication of banks. The Fund 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 Fund may borrow up to a maximum of 33 percent of its net assets under the agreement. The Fund had no outstanding loans at June 30, 2012.
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 (January 1, 2012 to June 30, 2012).
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 June 30, 2012 | ||||||||
Actual Fund Return | Class A | Class B | ||||||
Beginning Account Value 1/1/12 | $ | 1,000.00 | $ | 1,000.00 | ||||
Ending Account Value 6/30/12 | $ | 1,015.50 | $ | 1,013.50 | ||||
Expenses Paid per $1,000* | $ | 3.31 | $ | 5.06 | ||||
Hypothetical 5% Fund Return | Class A | Class B | ||||||
Beginning Account Value 1/1/12 | $ | 1,000.00 | $ | 1,000.00 | ||||
Ending Account Value 6/30/12 | $ | 1,021.58 | $ | 1,019.84 | ||||
Expenses Paid per $1,000* | $ | 3.32 | $ | 5.07 |
* 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 182 (the number of days in the most recent six-month period), then divided by 366.
Annualized Expense Ratios | Class A | Class B | ||
DWS Variable Series II — DWS Government & Agency Securities VIP | .66% | 1.01% |
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 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.
September 26, 2011
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 report summarizes my evaluation for 2011, 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, 2009 and 2010.
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 109 mutual 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
President, Thomas H. Mack & Co., Inc.
DWS Investments Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606
(800) 621-1148
VS2GAS-3 (R-028384-1 8/12)
JUNE 30, 2012
SEMIANNUAL REPORT
DWS VARIABLE SERIES II
DWS Global Income Builder VIP
(formerly DWS Balanced VIP)
Contents
3 Performance Summary 4 Portfolio Summary 6 Portfolio Management Team 7 Investment Portfolio 21 Statement of Assets and Liabilities 22 Statement of Operations 23 Statement of Changes in Net Assets 24 Financial Highlights 25 Notes to Financial Statements 32 Information About Your Fund's Expenses 33 Proxy Voting 34 Summary of Management Fee Evaluation by Independent Fee Consultant |
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.
Although allocation among different asset categories generally limits risk, fund management 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. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. Dividends are not guaranteed. If the dividend-paying stocks held by the Fund reduce or stop paying dividends, the Fund's ability to generate income may be adversely affected. Because ETFs trade on a securities exchange, their shares may trade at a premium or discount to their net asset value. ETFs also incur fees and expenses so they may not fully match the performance of the indexes they are designed to track. Investing in foreign securities, particularly those of emerging markets, presents certain risks, such as currency fluctuations, political and economic changes, and market risks. The Fund may lend securities to approved institutions. Stocks may decline in value. See the prospectus for details.
DWS Investments is part of Deutsche Bank's Asset Management division and, within the U.S., represents the retail asset management activities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company.
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
Fund 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, 2012 is 0.62% for Class A shares and may differ from the expense ratio disclosed in the Financial Highlights table in this report.
Growth of an Assumed $10,000 Investment in DWS Global Income Builder VIP | ||
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 Barclays U.S. Aggregate Bond Index is an unmanaged, market-value-weighted measure of Treasury issues, agency issues, corporate bond issues and mortgage securities. The S&P® Target Risk Moderate Index is designed to measure the performance of S&P's proprietary moderate target risk allocation model. The S&P® Target Risk Moderate Index seeks to provide significant exposure to fixed income, while also allocating a smaller portion of exposure to equities in order to seek current income, some capital preservation, and an opportunity for moderate to low capital appreciation. Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index. | ||
Yearly periods ended June 30 |
Comparative Results | |||||||||||||||||||||
DWS Global Income Builder VIP | 6-Month‡ | 1-Year | 3-Year | 5-Year | 10-Year | ||||||||||||||||
Class A | Growth of $10,000 | $ | 10,589 | $ | 10,073 | $ | 13,369 | $ | 10,451 | $ | 14,960 | ||||||||||
Average annual total return | 5.89 | % | 0.73 | % | 10.16 | % | 0.89 | % | 4.11 | % | |||||||||||
Russell 1000® Index | Growth of $10,000 | $ | 10,938 | $ | 10,437 | $ | 15,869 | $ | 10,195 | $ | 17,434 | ||||||||||
Average annual total return | 9.38 | % | 4.37 | % | 16.64 | % | 0.39 | % | 5.72 | % | |||||||||||
Barclays U.S. Aggregate Bond Index | Growth of $10,000 | $ | 10,237 | $ | 10,747 | $ | 12,227 | $ | 13,890 | $ | 17,296 | ||||||||||
Average annual total return | 2.37 | % | 7.47 | % | 6.93 | % | 6.79 | % | 5.63 | % | |||||||||||
S&P® Target Risk Moderate Index | Growth of $10,000 | $ | 10,384 | $ | 10,253 | $ | 12,802 | $ | 11,007 | $ | 16,569 | ||||||||||
Average annual total return | 3.84 | % | 2.53 | % | 8.58 | % | 1.94 | % | 5.18 | % |
The growth of $10,000 is cumulative.
‡ Total returns shown for periods less than one year are not annualized.
Effective May 1, 2012, the Fund's name, investment objective and certain investment strategies changed. The Fund's past performance may have been different if the Fund was managed using the current objective and investment strategies.
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | 6/30/12 | 12/31/11 |
Common Stocks | 51% | 53% |
Exchange-Traded Funds — Equity | — | 5% |
Total Equity | 51% | 58% |
Exchange-Traded Funds — Fixed income | — | 11% |
Corporate Bonds | 19% | 7% |
Government & Agency Obligations | 11% | 10% |
Collaterized Mortgage Obligations | 2% | — |
Mortgage-Backed Securities Pass-Throughs | 1% | 7% |
Loan Participations and Assignments | 1% | — |
Municipal Bonds and Notes | 0% | 1% |
Commercial Mortgage-Backed Securities | 0% | 1% |
Asset-Backed | 0% | 1% |
Total Fixed Income | 34% | 38% |
Cash Equivalents | 15% | 4% |
100% | 100% |
Sector Diversification (As a % of Equities, Corporate Bonds, Loan Participations and Assignments, Preferred Securities, and Other Investments) | 6/30/12 | 12/31/11 |
Financials | 15% | 15% |
Consumer Staples | 14% | 10% |
Energy | 14% | 12% |
Telecommunication Services | 12% | 4% |
Information Technology | 8% | 15% |
Health Care | 8% | 12% |
Materials | 8% | 6% |
Consumer Discretionary | 8% | 10% |
Industrials | 7% | 10% |
Utilities | 6% | 6% |
100% | 100% |
Portfolio holdings and characteristics are subject to change.
For more complete details about the Fund's investment portfolio, see page 7.
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.
William Chepolis, CFA
Thomas Schuessler, PhD.
John D. Ryan
Fabian Degen
Portfolio Managers
Shares | Value ($) | |||||||
Common Stocks 51.8% | ||||||||
Consumer Discretionary 3.0% | ||||||||
Distributors 0.6% | ||||||||
Genuine Parts Co. | 26,226 | 1,580,117 | ||||||
Hotels, Restaurants & Leisure 0.0% | ||||||||
Trump Entertainment Resorts, Inc.* | 2 | 0 | ||||||
Media 1.7% | ||||||||
Pearson PLC | 137,000 | 2,720,974 | ||||||
Postmedia Network Canada Corp.* | 623 | 483 | ||||||
Vertis Holdings, Inc.* | 111 | 1 | ||||||
Wolters Kluwer NV | 110,531 | 1,759,603 | ||||||
4,481,061 | ||||||||
Textiles, Apparel & Luxury Goods 0.7% | ||||||||
VF Corp. | 12,600 | 1,681,470 | ||||||
Consumer Staples 9.3% | ||||||||
Beverages 1.8% | ||||||||
PepsiCo, Inc. | 65,968 | 4,661,299 | ||||||
Food & Staples Retailing 0.9% | ||||||||
Metcash Ltd. (a) | 654,000 | 2,263,762 | ||||||
Food Products 1.7% | ||||||||
Nestle SA (Registered) | 36,300 | 2,165,347 | ||||||
Unilever NV (CVA) (a) | 66,100 | 2,212,393 | ||||||
4,377,740 | ||||||||
Household Products 1.6% | ||||||||
Procter & Gamble Co. | 69,619 | 4,264,164 | ||||||
Tobacco 3.3% | ||||||||
Altria Group, Inc. | 86,670 | 2,994,448 | ||||||
British American Tobacco PLC | 70,600 | 3,593,422 | ||||||
Imperial Tobacco Group PLC | 54,100 | 2,081,610 | ||||||
8,669,480 | ||||||||
Energy 7.7% | ||||||||
Energy Equipment & Services 2.0% | ||||||||
Transocean Ltd. | 70,528 | 3,154,717 | ||||||
WorleyParsons Ltd. | 74,592 | 1,937,489 | ||||||
5,092,206 | ||||||||
Oil, Gas & Consumable Fuels 5.7% | ||||||||
Canadian Natural Resources Ltd. (b) | 60,600 | 1,625,563 | ||||||
Canadian Natural Resources Ltd. (b) | 19,470 | 522,770 | ||||||
ConocoPhillips | 53,641 | 2,997,459 | ||||||
Enbridge, Inc. | 59,000 | 2,356,291 | ||||||
EOG Resources, Inc. | 18,486 | 1,665,773 | ||||||
Phillips 66* | 46,069 | 1,531,334 | ||||||
TransCanada Corp. (a) | 59,200 | 2,481,155 | ||||||
Woodside Petroleum Ltd. | 54,700 | 1,751,737 | ||||||
14,932,082 | ||||||||
Financials 5.0% | ||||||||
Commercial Banks 1.5% | ||||||||
Bank of Nova Scotia (a) | 39,700 | 2,056,554 | ||||||
Toronto-Dominion Bank | 24,600 | 1,925,281 | ||||||
3,981,835 | ||||||||
Shares | Value ($) | |||||||
Insurance 3.5% | ||||||||
Old Mutual PLC | 124,572 | 296,475 | ||||||
PartnerRe Ltd. | 60,150 | 4,551,550 | ||||||
Powszechny Zaklad Ubezpieczen SA | 18,700 | 1,879,274 | ||||||
Sampo Oyj "A" | 92,000 | 2,391,506 | ||||||
9,118,805 | ||||||||
Real Estate Investment Trusts 0.0% | ||||||||
Corio NV (REIT) | 81 | 3,568 | ||||||
Health Care 4.9% | ||||||||
Health Care Providers & Services 1.9% | ||||||||
Rhoen-Klinikum AG (a) | 205,300 | 4,906,652 | ||||||
Pharmaceuticals 3.0% | ||||||||
Novartis AG (Registered) | 37,653 | 2,100,282 | ||||||
Roche Holding AG (Genusschein) | 16,200 | 2,796,564 | ||||||
Sanofi | 40,368 | 3,061,148 | ||||||
7,957,994 | ||||||||
Industrials 4.3% | ||||||||
Aerospace & Defense 0.5% | ||||||||
BAE Systems PLC | 314,200 | 1,421,875 | ||||||
Air Freight & Logistics 0.5% | ||||||||
Singapore Post Ltd. | 1,590,000 | 1,327,058 | ||||||
Building Products 0.0% | ||||||||
Congoleum Corp.* | 3,800 | 0 | ||||||
Commercial Services & Supplies 0.0% | ||||||||
Quad Graphics, Inc. | 3 | 43 | ||||||
Industrial Conglomerates 2.4% | ||||||||
Koninklijke Philips Electronics NV | 125,450 | 2,480,597 | ||||||
Smiths Group PLC | 233,300 | 3,713,429 | ||||||
6,194,026 | ||||||||
Road & Rail 0.9% | ||||||||
Canadian National Railway Co. | 26,100 | 2,207,259 | ||||||
Information Technology 4.8% | ||||||||
Computers & Peripherals 1.6% | ||||||||
Diebold, Inc. | 65,300 | 2,410,223 | ||||||
Wincor Nixdorf AG | 49,800 | 1,765,302 | ||||||
4,175,525 | ||||||||
IT Services 0.6% | ||||||||
Automatic Data Processing, Inc. | 27,800 | 1,547,348 | ||||||
Semiconductors & Semiconductor Equipment 2.6% | ||||||||
Intel Corp. | 160,766 | 4,284,414 | ||||||
Taiwan Semiconductor Manufacturing Co., Ltd. (ADR)* | 176,550 | 2,464,638 | ||||||
6,749,052 | ||||||||
Materials 3.9% | ||||||||
Chemicals 1.6% | ||||||||
Air Liquide SA | 19,030 | 2,177,234 | ||||||
Air Products & Chemicals, Inc. | 25,562 | 2,063,620 | ||||||
4,240,854 | ||||||||
Construction Materials 0.0% | ||||||||
Wolverine Tube, Inc.* | 366 | 8,963 | ||||||
Containers & Packaging 1.1% | ||||||||
Sealed Air Corp. | 98,350 | 1,518,524 | ||||||
Sonoco Products Co. | 42,183 | 1,271,818 | ||||||
2,790,342 | ||||||||
Shares | Value ($) | |||||||
Metals & Mining 1.2% | ||||||||
Franco-Nevada Corp. | 66,000 | 2,984,618 | ||||||
Telecommunication Services 5.4% | ||||||||
Diversified Telecommunication Services 3.2% | ||||||||
AT&T, Inc. (a) | 44,314 | 1,580,237 | ||||||
Belgacom SA | 68,193 | 1,937,485 | ||||||
Chunghwa Telecom Co., Ltd. (ADR) (a) | 42,200 | 1,326,346 | ||||||
Koninklijke (Royal) KPN NV | 86,900 | 832,103 | ||||||
Telus Corp. | 43,270 | 2,598,495 | ||||||
8,274,666 | ||||||||
Wireless Telecommunication Services 2.2% | ||||||||
NTT DoCoMo, Inc. | 1,711 | 2,847,408 | ||||||
SK Telecom Co., Ltd. (ADR) (a) | 111,000 | 1,343,100 | ||||||
Vodafone Group PLC | 607,300 | 1,706,292 | ||||||
5,896,800 | ||||||||
Utilities 3.5% | ||||||||
Electric Utilities 1.7% | ||||||||
Exelon Corp. | 36,922 | 1,389,006 | ||||||
FirstEnergy Corp. | 35,934 | 1,767,593 | ||||||
Fortum Oyj | 74,200 | 1,409,828 | ||||||
4,566,427 | ||||||||
Gas Utilities 1.0% | ||||||||
UGI Corp. | 86,842 | 2,555,760 | ||||||
Multi-Utilities 0.8% | ||||||||
National Grid PLC | 194,500 | 2,058,710 | ||||||
Total Common Stocks (Cost $134,075,497) | 134,971,561 | |||||||
Warrants 0.0% | ||||||||
Consumer Discretionary 0.0% | ||||||||
Reader's Digest Association, Inc., Expiration Date 2/19/2014* | 80 | 14 | ||||||
Materials 0.0% | ||||||||
Hercules Trust II, Expiration Date 3/31/2029* | 170 | 1,359 | ||||||
Total Warrants (Cost $30,283) | 1,373 |
Principal Amount ($)(c) | Value ($) | ||||||||
Corporate Bonds 19.5% | |||||||||
Consumer Discretionary 2.5% | |||||||||
AMC Entertainment, Inc., 8.75%, 6/1/2019 | 135,000 | 144,787 | |||||||
Asbury Automotive Group, Inc., 7.625%, 3/15/2017 | 35,000 | 36,225 | |||||||
Avis Budget Car Rental LLC, 8.25%, 1/15/2019 | 15,000 | 16,088 | |||||||
Block Communications, Inc., 144A, 7.25%, 2/1/2020 | 20,000 | 20,300 | |||||||
Cablevision Systems Corp., 8.625%, 9/15/2017 | 250,000 | 278,750 | |||||||
Caesar's Entertainment Operating Co., Inc.: | |||||||||
144A, 8.5%, 2/15/2020 | 500,000 | 503,750 | |||||||
11.25%, 6/1/2017 | 80,000 | 87,300 | |||||||
CBS Corp., 3.375%, 3/1/2022 | 125,000 | 124,537 | |||||||
CCO Holdings LLC: | |||||||||
6.5%, 4/30/2021 | 200,000 | 213,000 | |||||||
6.625%, 1/31/2022 | 705,000 | 754,350 | |||||||
7.375%, 6/1/2020 | 10,000 | 10,988 | |||||||
Principal Amount ($)(c) | Value ($) | ||||||||
Cequel Communications Holdings I LLC, 144A, 8.625%, 11/15/2017 | 645,000 | 694,987 | |||||||
Clear Channel Communications, Inc., 9.0%, 3/1/2021 | 85,000 | 73,950 | |||||||
Clear Channel Worldwide Holdings, Inc.: | |||||||||
144A, 7.625%, 3/15/2020 | 10,000 | 9,575 | |||||||
144A, 7.625%, 3/15/2020 | 225,000 | 219,937 | |||||||
Series B, 9.25%, 12/15/2017 | 50,000 | 54,500 | |||||||
Cumulus Media Holdings, Inc., 7.75%, 5/1/2019 (a) | 20,000 | 18,850 | |||||||
Desarrolladora Homex SAB de CV, 144A, 9.75%, 3/25/2020 (a) | 250,000 | 262,500 | |||||||
DIRECTV Holdings LLC, 6.35%, 3/15/2040 | 51,000 | 57,780 | |||||||
Discovery Communications LLC, 3.3%, 5/15/2022 | 80,000 | 80,738 | |||||||
DISH DBS Corp.: | |||||||||
6.625%, 10/1/2014 | 40,000 | 42,900 | |||||||
7.125%, 2/1/2016 | 35,000 | 38,412 | |||||||
7.875%, 9/1/2019 | 230,000 | 265,075 | |||||||
Fontainebleau Las Vegas Holdings LLC, 144A, 11.0%, 6/15/2015* | 25,000 | 16 | |||||||
Great Canadian Gaming Corp., 144A, 7.25%, 2/15/2015 | 30,000 | 30,413 | |||||||
Harron Communications LP, 144A, 9.125%, 4/1/2020 | 10,000 | 10,350 | |||||||
Hertz Corp.: | |||||||||
6.75%, 4/15/2019 (a) | 35,000 | 36,400 | |||||||
144A, 6.75%, 4/15/2019 | 10,000 | 10,400 | |||||||
Libbey Glass, Inc., 144A, 6.875%, 5/15/2020 | 30,000 | 30,825 | |||||||
Lowe's Companies, Inc., 1.625%, 4/15/2017 | 500,000 | 503,706 | |||||||
Mediacom Broadband LLC, 8.5%, 10/15/2015 (a) | 20,000 | 20,550 | |||||||
Mediacom LLC, 9.125%, 8/15/2019 | 270,000 | 296,325 | |||||||
MGM Resorts International, 144A, 8.625%, 2/1/2019 (a) | 45,000 | 48,150 | |||||||
National CineMedia LLC, 144A, 6.0%, 4/15/2022 | 10,000 | 10,175 | |||||||
NBCUniversal Media LLC, 5.95%, 4/1/2041 | 127,000 | 149,921 | |||||||
Sonic Automotive, Inc., 144A, 7.0%, 7/15/2022 (d) | 25,000 | 25,875 | |||||||
Time Warner Cable, Inc., 4.0%, 9/1/2021 (a) | 150,000 | 157,628 | |||||||
Time Warner, Inc.: | |||||||||
5.875%, 11/15/2016 | 147,000 | 172,141 | |||||||
7.625%, 4/15/2031 | 175,000 | 226,037 | |||||||
Travelport LLC, 5.092%**, 9/1/2014 | 20,000 | 12,750 | |||||||
Unitymedia Hessen GmbH & Co., KG, 144A, 8.125%, 12/1/2017 | 365,000 | 392,375 | |||||||
Univision Communications, Inc., 144A, 6.875%, 5/15/2019 | 25,000 | 25,750 | |||||||
Whirlpool Corp., 4.7%, 6/1/2022 | 90,000 | 90,992 | |||||||
Yum! Brands, Inc.: | |||||||||
3.875%, 11/1/2020 | 210,000 | 225,680 | |||||||
5.3%, 9/15/2019 | 65,000 | 74,697 | |||||||
6,560,435 | |||||||||
Consumer Staples 0.8% | |||||||||
Anheuser-Busch InBev Worldwide, Inc., 7.75%, 1/15/2019 | 500,000 | 660,377 | |||||||
Constellation Brands, Inc., 6.0%, 5/1/2022 | 5,000 | 5,375 | |||||||
Principal Amount ($)(c) | Value ($) | ||||||||
CVS Caremark Corp., 5.75%, 5/15/2041 | 65,000 | 77,377 | |||||||
Grupo Bimbo SAB de CV, 144A, 4.5%, 1/25/2022 | 250,000 | 265,949 | |||||||
JBS U.S.A. LLC, 144A, 8.25%, 2/1/2020 | 370,000 | 359,825 | |||||||
Kroger Co., 5.4%, 7/15/2040 | 110,000 | 115,619 | |||||||
Minerva Luxembourg SA, 144A, 12.25%, 2/10/2022 | 250,000 | 260,000 | |||||||
Pilgrim's Pride Corp., 7.875%, 12/15/2018 | 370,000 | 375,087 | |||||||
TreeHouse Foods, Inc., 7.75%, 3/1/2018 | 10,000 | 10,838 | |||||||
2,130,447 | |||||||||
Energy 2.1% | |||||||||
Arch Coal, Inc., 7.25%, 6/15/2021 (a) | 340,000 | 284,750 | |||||||
Chesapeake Energy Corp., 6.875%, 11/15/2020 (a) | 210,000 | 206,850 | |||||||
Chesapeake Midstream Partners LP, 6.125%, 7/15/2022 | 15,000 | 14,700 | |||||||
Cimarex Energy Co., 5.875%, 5/1/2022 | 10,000 | 10,387 | |||||||
CONSOL Energy, Inc., 8.0%, 4/1/2017 | 100,000 | 103,750 | |||||||
Crosstex Energy LP, 144A, 7.125%, 6/1/2022 | 25,000 | 24,625 | |||||||
DCP Midstream LLC, 144A, 9.75%, 3/15/2019 | 200,000 | 259,282 | |||||||
Devon Energy Corp., 3.25%, 5/15/2022 | 135,000 | 137,347 | |||||||
Eagle Rock Energy Partners LP, 8.375%, 6/1/2019 | 50,000 | 49,875 | |||||||
Encana Corp., 5.15%, 11/15/2041 | 55,000 | 52,539 | |||||||
Enterprise Products Operating LLC, 6.125%, 10/15/2039 | 230,000 | 260,549 | |||||||
EP Energy LLC, 144A, 6.875%, 5/1/2019 | 15,000 | 15,675 | |||||||
EV Energy Partners LP, 8.0%, 4/15/2019 | 35,000 | 34,737 | |||||||
Halcon Resources Corp., 144A, 9.75%, 7/15/2020 (d) | 50,000 | 49,323 | |||||||
Holly Energy Partners LP, 144A, 6.5%, 3/1/2020 | 10,000 | 10,075 | |||||||
IPIC GMTN Ltd., 144A, 6.875%, 11/1/2041 | 250,000 | 291,875 | |||||||
Kinder Morgan Energy Partners LP, 7.3%, 8/15/2033 | 360,000 | 431,821 | |||||||
Kodiak Oil & Gas Corp., 144A, 8.125%, 12/1/2019 | 10,000 | 10,300 | |||||||
Linn Energy LLC: | |||||||||
144A, 6.25%, 11/1/2019 | 495,000 | 485,100 | |||||||
144A, 6.5%, 5/15/2019 | 25,000 | 24,750 | |||||||
Northern Oil & Gas, Inc., 144A, 8.0%, 6/1/2020 | 125,000 | 124,375 | |||||||
Oasis Petroleum, Inc., 7.25%, 2/1/2019 | 60,000 | 61,500 | |||||||
OGX Austria GmbH, 144A, 8.375%, 4/1/2022 | 250,000 | 215,625 | |||||||
ONEOK Partners LP, 6.15%, 10/1/2016 | 201,000 | 233,656 | |||||||
Pertamina Persero PT, 144A, 4.875%, 5/3/2022 | 250,000 | 250,625 | |||||||
Principal Amount ($)(c) | Value ($) | ||||||||
Petroleos de Venezuela SA, 144A, 8.5%, 11/2/2017 | 250,000 | 203,125 | |||||||
Petroleos Mexicanos, 144A, 5.5%, 6/27/2044 (a) | 500,000 | 511,250 | |||||||
Plains Exploration & Production Co.: | |||||||||
6.125%, 6/15/2019 | 10,000 | 10,050 | |||||||
6.75%, 2/1/2022 | 40,000 | 40,800 | |||||||
Quicksilver Resources, Inc., 11.75%, 1/1/2016 | 245,000 | 238,569 | |||||||
Reliance Holdings U.S.A., Inc., 144A, 5.4%, 2/14/2022 | 250,000 | 249,985 | |||||||
SESI LLC, 144A, 7.125%, 12/15/2021 | 30,000 | 32,625 | |||||||
Stone Energy Corp., 8.625%, 2/1/2017 | 195,000 | 197,925 | |||||||
Swift Energy Co., 7.875%, 3/1/2022 | 20,000 | 20,100 | |||||||
Weatherford International Ltd., 5.125%, 9/15/2020 | 300,000 | 322,065 | |||||||
Williams Partners LP, 4.0%, 11/15/2021 | 56,000 | 58,171 | |||||||
5,528,756 | |||||||||
Financials 5.3% | |||||||||
African Development Bank, 5.75%, 1/25/2016 | AUD | 500,000 | 546,266 | ||||||
Ally Financial, Inc.: | |||||||||
5.5%, 2/15/2017 | 15,000 | 15,236 | |||||||
6.25%, 12/1/2017 | 260,000 | 273,861 | |||||||
ALROSA Finance SA, 144A, 7.75%, 11/3/2020 | 250,000 | 261,818 | |||||||
American International Group, Inc., 4.875%, 6/1/2022 | 200,000 | 204,644 | |||||||
AmeriGas Finance LLC: | |||||||||
6.75%, 5/20/2020 | 10,000 | 10,200 | |||||||
7.0%, 5/20/2022 | 10,000 | 10,300 | |||||||
Banco Bradesco SA, 144A**, 2.566%, 5/16/2014 | 250,000 | 249,670 | |||||||
Banco de Bogota SA, 144A, 5.0%, 1/15/2017 | 250,000 | 263,750 | |||||||
Banco Latinoamericano de Comercio Exterior SA, 144A, 3.75%, 4/4/2017 | 250,000 | 248,750 | |||||||
Bancolombia SA, 5.95%, 6/3/2021 | 250,000 | 266,875 | |||||||
Berkshire Hathaway, Inc., 1.9%, 1/31/2017 | 140,000 | 142,769 | |||||||
Braskem America Finance Co., 144A, 7.125%, 7/22/2041 (a) | 250,000 | 249,375 | |||||||
Bunge Ltd. Finance Corp., 4.1%, 3/15/2016 | 78,000 | 81,335 | |||||||
Calpine Construction Finance Co., LP, 144A, 8.0%, 6/1/2016 | 30,000 | 32,400 | |||||||
CIT Group, Inc.: | |||||||||
5.0%, 5/15/2017 | 935,000 | 963,050 | |||||||
5.25%, 3/15/2018 | 10,000 | 10,325 | |||||||
144A, 7.0%, 5/2/2017 | 30,713 | 30,770 | |||||||
Citigroup, Inc., 4.5%, 1/14/2022 | 120,000 | 123,942 | |||||||
CNA Financial Corp., 5.75%, 8/15/2021 | 265,000 | 291,185 | |||||||
CNOOC Finance 2012 Ltd., 144A, 3.875%, 5/2/2022 (a) | 250,000 | 258,570 | |||||||
Principal Amount ($)(c) | Value ($) | ||||||||
Codere Finance Luxembourg SA, 144A, 9.25%, 2/15/2019 | 5,000 | 3,525 | |||||||
E*TRADE Financial Corp., 6.75%, 6/1/2016 | 615,000 | 625,762 | |||||||
Export Credit Bank of Turkey, 144A, 5.375%, 11/4/2016 | 250,000 | 258,125 | |||||||
Fibria Overseas Finance Ltd., 144A, 6.75%, 3/3/2021 (a) | 150,000 | 149,700 | |||||||
Ford Motor Credit Co., LLC: | |||||||||
3.0%, 6/12/2017 | 200,000 | 198,898 | |||||||
5.875%, 8/2/2021 | 260,000 | 289,252 | |||||||
Fresenius Medical Care U.S. Finance II, Inc.: | |||||||||
144A, 5.625%, 7/31/2019 | 10,000 | 10,425 | |||||||
144A, 5.875%, 1/31/2022 | 10,000 | 10,413 | |||||||
Fresenius Medical Care U.S. Finance, Inc., 144A, 6.5%, 9/15/2018 | 10,000 | 10,875 | |||||||
General Electric Capital Corp., 2.9%, 1/9/2017 | 500,000 | 516,453 | |||||||
Hexion U.S. Finance Corp.: | |||||||||
6.625%, 4/15/2020 | 305,000 | 312,625 | |||||||
8.875%, 2/1/2018 | 465,000 | 474,300 | |||||||
International Lease Finance Corp.: | |||||||||
6.25%, 5/15/2019 | 395,000 | 402,406 | |||||||
8.625%, 1/15/2022 | 10,000 | 11,581 | |||||||
Itau Unibanco Holding SA, 144A, 5.65%, 3/19/2022 | 250,000 | 250,950 | |||||||
JPMorgan Chase & Co., 2.6%, 1/15/2016 | 700,000 | 706,576 | |||||||
Level 3 Financing, Inc., 8.625%, 7/15/2020 | 450,000 | 472,500 | |||||||
Lukoil International Finance BV, 144A, 7.25%, 11/5/2019 | 250,000 | 281,250 | |||||||
MPT Operating Partnership LP, (REIT), 6.375%, 2/15/2022 | 10,000 | 10,025 | |||||||
Nationwide Financial Services, Inc., 144A, 5.375%, 3/25/2021 | 119,000 | 122,878 | |||||||
Neuberger Berman Group LLC: | |||||||||
144A, 5.625%, 3/15/2020 | 10,000 | 10,425 | |||||||
144A, 5.875%, 3/15/2022 | 10,000 | 10,450 | |||||||
Odebrecht Finance Ltd., 144A, 5.125%, 6/26/2022 | 250,000 | 247,575 | |||||||
Petrobras International Finance Co., 5.75%, 1/20/2020 | 250,000 | 273,470 | |||||||
PNC Bank NA, 6.875%, 4/1/2018 | 300,000 | 357,867 | |||||||
Prudential Financial, Inc., 7.375%, 6/15/2019 | 30,000 | 36,614 | |||||||
Reynolds Group Issuer, Inc., 144A, 7.125%, 4/15/2019 | 885,000 | 927,037 | |||||||
Santander U.S. Debt SA Unipersonal, 144A, 2.991%, 10/7/2013 | 500,000 | 480,781 | |||||||
SunTrust Banks, Inc., 3.6%, 4/15/2016 | 98,000 | 101,761 | |||||||
The Goldman Sachs Group, Inc., 6.15%, 4/1/2018 | 260,000 | 281,861 | |||||||
Toyota Motor Credit Corp., 2.0%, 9/15/2016 | 500,000 | 508,057 | |||||||
UPCB Finance III Ltd., 144A, 6.625%, 7/1/2020 | 150,000 | 152,250 | |||||||
Principal Amount ($)(c) | Value ($) | ||||||||
UR Merger Sub Corp.: | |||||||||
144A, 5.75%, 7/15/2018 | 15,000 | 15,600 | |||||||
144A, 7.375%, 5/15/2020 | 25,000 | 26,125 | |||||||
144A, 7.625%, 4/15/2022 | 230,000 | 240,925 | |||||||
10.875%, 6/15/2016 | 20,000 | 22,475 | |||||||
Vale Overseas Ltd., 8.25%, 1/17/2034 | 250,000 | 319,035 | |||||||
Virgin Media Finance PLC, Series 1, 9.5%, 8/15/2016 | 89,000 | 99,235 | |||||||
13,765,153 | |||||||||
Health Care 1.1% | |||||||||
Amgen, Inc., 5.15%, 11/15/2041 | 150,000 | 156,587 | |||||||
Aviv Healthcare Properties LP, 7.75%, 2/15/2019 | 10,000 | 10,300 | |||||||
Express Scripts Holding Co.: | |||||||||
6.25%, 6/15/2014 | 250,000 | 273,348 | |||||||
7.25%, 6/15/2019 | 160,000 | 201,184 | |||||||
Gilead Sciences, Inc., 4.4%, 12/1/2021 (a) | 100,000 | 110,378 | |||||||
HCA Holdings, Inc., 7.75%, 5/15/2021 (a) | 240,000 | 257,400 | |||||||
HCA, Inc.: | |||||||||
5.875%, 3/15/2022 | 755,000 | 788,975 | |||||||
7.5%, 2/15/2022 | 400,000 | 436,000 | |||||||
8.5%, 4/15/2019 | 10,000 | 11,200 | |||||||
McKesson Corp., 4.75%, 3/1/2021 | 200,000 | 229,455 | |||||||
Physio-Control International, Inc., 144A, 9.875%, 1/15/2019 | 15,000 | 15,975 | |||||||
Tenet Healthcare Corp., 6.25%, 11/1/2018 | 245,000 | 259,088 | |||||||
2,749,890 | |||||||||
Industrials 1.0% | |||||||||
ADT Corp., 144A, 3.5%, 7/15/2022 (d) | 90,000 | 90,302 | |||||||
ARAMARK Corp., 8.5%, 2/1/2015 | 10,000 | 10,238 | |||||||
BE Aerospace, Inc.: | |||||||||
6.875%, 10/1/2020 | 130,000 | 143,650 | |||||||
8.5%, 7/1/2018 | 40,000 | 43,750 | |||||||
Belden, Inc., 7.0%, 3/15/2017 | 25,000 | 25,750 | |||||||
Bombardier, Inc., 144A, 5.75%, 3/15/2022 | 525,000 | 523,031 | |||||||
Burlington Northern Santa Fe LLC, 3.45%, 9/15/2021 | 43,000 | 44,990 | |||||||
CSX Corp., 6.15%, 5/1/2037 | 370,000 | 453,885 | |||||||
Huntington Ingalls Industries, Inc., 6.875%, 3/15/2018 | 10,000 | 10,425 | |||||||
JSC Georgian Railway, 144A, 7.75%, 7/11/2022 (d) | 250,000 | 249,502 | |||||||
Navios Maritime Holdings, Inc., 144A, 8.875%, 11/1/2017 (d) | 55,000 | 55,133 | |||||||
Nortek, Inc., 8.5%, 4/15/2021 | 255,000 | 249,263 | |||||||
Transnet SOC Ltd., 144A, 4.5%, 2/10/2016 | 250,000 | 260,635 | |||||||
Urbi, Desarrollos Urbanos SAB de CV, 144A, 9.75%, 2/3/2022 | 250,000 | 263,750 | |||||||
Votorantim Cimentos SA, 144A, 7.25%, 4/5/2041 | 250,000 | 250,000 | |||||||
2,674,304 | |||||||||
Principal Amount ($)(c) | Value ($) | ||||||||
Information Technology 1.3% | |||||||||
Applied Materials, Inc., 5.85%, 6/15/2041 | 130,000 | 156,871 | |||||||
Avaya, Inc., 144A, 7.0%, 4/1/2019 | 585,000 | 542,587 | |||||||
CDW LLC, 8.5%, 4/1/2019 | 530,000 | 564,450 | |||||||
Equinix, Inc., 7.0%, 7/15/2021 | 470,000 | 517,000 | |||||||
First Data Corp., 144A, 7.375%, 6/15/2019 | 640,000 | 652,800 | |||||||
Freescale Semiconductor, Inc., 144A, 9.25%, 4/15/2018 | 415,000 | 444,050 | |||||||
Hewlett-Packard Co., 3.3%, 12/9/2016 | 200,000 | 209,050 | |||||||
Hughes Satellite Systems Corp.: | |||||||||
6.5%, 6/15/2019 | 50,000 | 53,125 | |||||||
7.625%, 6/15/2021 | 165,000 | 179,438 | |||||||
MasTec, Inc., 7.625%, 2/1/2017 | 35,000 | 36,313 | |||||||
3,355,684 | |||||||||
Materials 1.9% | |||||||||
Appleton Papers, Inc., 11.25%, 12/15/2015 | 15,000 | 16,013 | |||||||
Celulosa Arauco y Constitucion SA, 144A, 4.75%, 1/11/2022 | 250,000 | 255,571 | |||||||
China Oriental Group Co., Ltd., 144A, 7.0%, 11/17/2017 | 250,000 | 190,625 | |||||||
Corp Nacional del Cobre de Chile, 144A, 3.875%, 11/3/2021 | 250,000 | 262,971 | |||||||
Crown Americas LLC, 7.625%, 5/15/2017 | 10,000 | 10,800 | |||||||
CSN Resources SA, 144A, 6.5%, 7/21/2020 | 250,000 | 270,825 | |||||||
Dow Chemical Co., 4.25%, 11/15/2020 | 185,000 | 200,700 | |||||||
Dow Chemical Co/the, 4.125%, 11/15/2021 | 30,000 | 32,178 | |||||||
FMG Resources (August 2006) Pty Ltd.: | |||||||||
144A, 6.0%, 4/1/2017 | 15,000 | 15,075 | |||||||
144A, 6.375%, 2/1/2016 (a) | 250,000 | 253,125 | |||||||
144A, 6.875%, 4/1/2022 (a) | 990,000 | 997,425 | |||||||
Freeport-McMoRan Copper & Gold, Inc., 3.55%, 3/1/2022 | 220,000 | 216,453 | |||||||
GEO Specialty Chemicals, Inc.: | |||||||||
7.5%, 3/31/2015 (PIK) | 209,283 | 193,566 | |||||||
10.0%, 3/31/2015 | 206,080 | 203,051 | |||||||
Graphic Packaging International, Inc., 9.5%, 6/15/2017 | 30,000 | 33,000 | |||||||
Kaiser Aluminum Corp., 144A, 8.25%, 6/1/2020 | 40,000 | 40,800 | |||||||
Kraton Polymers LLC, 6.75%, 3/1/2019 | 10,000 | 10,425 | |||||||
Molycorp, Inc., 144A, 10.0%, 6/1/2020 | 95,000 | 94,050 | |||||||
Novelis, Inc., 8.75%, 12/15/2020 | 855,000 | 921,262 | |||||||
Owens-Brockway Glass Container, Inc., 7.375%, 5/15/2016 | 10,000 | 11,150 | |||||||
Principal Amount ($)(c) | Value ($) | ||||||||
Sealed Air Corp.: | |||||||||
144A, 8.125%, 9/15/2019 | 10,000 | 11,150 | |||||||
144A, 8.375%, 9/15/2021 | 10,000 | 11,300 | |||||||
Southern Copper Corp., 6.75%, 4/16/2040 | 250,000 | 264,740 | |||||||
Teck Resources Ltd., 3.0%, 3/1/2019 | 110,000 | 109,275 | |||||||
Volcan Cia Minera SAA, 144A, 5.375%, 2/2/2022 | 250,000 | 260,000 | |||||||
Wolverine Tube, Inc., 6.0%, 6/28/2014 | 8,253 | 7,746 | |||||||
4,893,276 | |||||||||
Telecommunication Services 2.8% | |||||||||
AT&T, Inc., 3.875%, 8/15/2021 | 64,000 | 69,713 | |||||||
Cincinnati Bell, Inc.: | |||||||||
8.25%, 10/15/2017 | 100,000 | 104,000 | |||||||
8.375%, 10/15/2020 | 595,000 | 606,900 | |||||||
8.75%, 3/15/2018 | 310,000 | 298,375 | |||||||
Cricket Communications, Inc.: | |||||||||
7.75%, 10/15/2020 | 665,000 | 635,075 | |||||||
10.0%, 7/15/2015 | 50,000 | 51,500 | |||||||
Digicel Group Ltd., 144A, 10.5%, 4/15/2018 | 200,000 | 209,000 | |||||||
Digicel Ltd., 144A, 8.25%, 9/1/2017 | 650,000 | 661,375 | |||||||
ERC Ireland Preferred Equity Ltd., 144A, 7.69%**, 2/15/2017 (PIK)* | EUR | 120,439 | 46 | ||||||
Frontier Communications Corp.: | |||||||||
6.625%, 3/15/2015 | 250,000 | 265,000 | |||||||
8.5%, 4/15/2020 (a) | 675,000 | 715,500 | |||||||
Intelsat Jackson Holdings SA: | |||||||||
144A, 7.25%, 10/15/2020 | 690,000 | 724,500 | |||||||
7.5%, 4/1/2021 | 125,000 | 132,187 | |||||||
Intelsat Luxembourg SA, 11.25%, 2/4/2017 | 492,000 | 506,760 | |||||||
MetroPCS Wireless, Inc., 6.625%, 11/15/2020 | 250,000 | 246,250 | |||||||
Nextel Communications, Inc., Series D, 7.375%, 8/1/2015 | 260,000 | 260,325 | |||||||
Sprint Nextel Corp.: | |||||||||
6.0%, 12/1/2016 | 565,000 | 540,987 | |||||||
8.375%, 8/15/2017 | 120,000 | 123,000 | |||||||
144A, 9.125%, 3/1/2017 | 15,000 | 15,750 | |||||||
Telesat Canada, 144A, 6.0%, 5/15/2017 | 15,000 | 15,263 | |||||||
Windstream Corp.: | |||||||||
7.0%, 3/15/2019 | 25,000 | 25,625 | |||||||
7.75%, 10/15/2020 | 885,000 | 938,100 | |||||||
7.875%, 11/1/2017 | 130,000 | 141,700 | |||||||
Zayo Group LLC, 144A, 8.125%, 1/1/2020 | 25,000 | 26,125 | |||||||
7,313,056 | |||||||||
Utilities 0.7% | |||||||||
AES Corp.: | |||||||||
8.0%, 10/15/2017 | 35,000 | 39,812 | |||||||
8.0%, 6/1/2020 | 30,000 | 34,425 | |||||||
Calpine Corp., 144A, 7.5%, 2/15/2021 | 735,000 | 793,800 | |||||||
Centrais Eletricas Brasileiras SA, 144A, 5.75%, 10/27/2021 | 250,000 | 273,250 | |||||||
Principal Amount ($)(c) | Value ($) | ||||||||
DTE Energy Co., 7.625%, 5/15/2014 | 81,000 | 90,363 | |||||||
FirstEnergy Solutions Corp., 6.8%, 8/15/2039 | 234,000 | 245,735 | |||||||
Oncor Electric Delivery Co., LLC, 144A, 4.1%, 6/1/2022 | 120,000 | 122,346 | |||||||
Perusahaan Listrik Negara PT, 144A, 5.5%, 11/22/2021 | 250,000 | 261,250 | |||||||
1,860,981 | |||||||||
Total Corporate Bonds (Cost $50,038,613) | 50,831,982 | ||||||||
Asset-Backed 0.2% | |||||||||
Credit Card Receivables | |||||||||
Citibank Omni Master Trust, "A14", Series 2009-A14A, 144A, 2.992%**, 8/15/2018 (Cost $578,918) | 550,000 | 577,567 | |||||||
Mortgage-Backed Securities Pass-Throughs 1.3% | |||||||||
Federal Home Loan Mortgage Corp., 6.0%, 3/1/2038 | 23,078 | 25,237 | |||||||
Federal National Mortgage Association: | |||||||||
4.5%, 9/1/2035 | 41,768 | 44,779 | |||||||
6.0%, 1/1/2024 | 51,113 | 57,492 | |||||||
6.5%, with various maturities from 5/1/2017 until 1/1/2038 | 28,199 | 31,030 | |||||||
8.0%, 9/1/2015 | 28,089 | 29,821 | |||||||
Government National Mortgage Association: | |||||||||
3.0%, 1/1/2042 (d) | 1,000,000 | 1,034,844 | |||||||
4.0%, 7/1/2040 (d) | 2,000,000 | 2,184,531 | |||||||
Total Mortgage-Backed Securities Pass-Throughs (Cost $3,392,158) | 3,407,734 | ||||||||
Commercial Mortgage-Backed Securities 0.2% | |||||||||
Bear Stearns Commercial Mortgage Securities, Inc., "A4", Series 2007-PW16, 5.906%**, 6/11/2040 | 66,000 | 75,464 | |||||||
JPMorgan Chase Commercial Mortgage Securities Corp., "A4", Series 2007-C1, 5.716%, 2/15/2051 | 225,000 | 254,629 | |||||||
LB-UBS Commercial Mortgage Trust, "A4", Series 2007-C6, 5.858%, 7/15/2040 | 260,000 | 296,937 | |||||||
Total Commercial Mortgage-Backed Securities (Cost $591,258) | 627,030 | ||||||||
Collateralized Mortgage Obligations 1.9% | |||||||||
Federal Home Loan Mortgage Corp.: | |||||||||
"HI", Series 3979, Interest Only, 3.0%, 12/15/2026 | 1,140,424 | 112,992 | |||||||
"NI", Series 4020, Interest Only, 3.0%, 3/15/2027 | 1,191,495 | 136,967 | |||||||
"QB", Series 3736, 4.0%, 5/15/2037 | 1,000,000 | 1,088,629 | |||||||
"P", Series 3808, 4.0%, 11/15/2038 | 1,000,000 | 1,096,974 | |||||||
Principal Amount ($)(c) | Value ($) | ||||||||
"LI", Series 3720, Interest Only, 4.5%, 9/15/2025 | 2,330,785 | 324,106 | |||||||
"KI", Series 3843, Interest Only, 4.5%, 7/15/2036 | 827,229 | 58,318 | |||||||
"PI", Series 3843, Interest Only, 4.5%, 5/15/2038 | 922,907 | 130,187 | |||||||
"H", Series 2278, 6.5%, 1/15/2031 | 151 | 168 | |||||||
Federal National Mortgage Association, "I", Series 2003-84, Interest Only, 6.0%, 9/25/2033 | 458,175 | 91,603 | |||||||
Government National Mortgage Association: | |||||||||
"QI", Series 2011-112, Interest Only, 4.0%, 5/16/2026 | 1,564,215 | 174,899 | |||||||
"NI", Series 2011-80, Interest Only, 4.5%, 5/16/2038 | 1,924,531 | 235,504 | |||||||
"BI", Series 2010-30, Interest Only, 4.5%, 7/20/2039 | 202,621 | 31,562 | |||||||
"IQ", Series 2011-18, Interest Only, 5.5%, 1/16/2039 | 791,895 | 71,374 | |||||||
"IV", Series 2009-69, Interest Only, 5.5%, 8/20/2039 | 1,519,489 | 225,323 | |||||||
"IN", Series 2009-69, Interest Only, 5.5%, 8/20/2039 | 1,487,202 | 218,220 | |||||||
"IJ", Series 2009-75, Interest Only, 6.0%, 8/16/2039 | 933,199 | 148,714 | |||||||
Residential Funding Mortgage Securities I, Inc., "M1", Series 2003-S17, 5.5%, 9/25/2033 | 865,246 | 831,048 | |||||||
Total Collateralized Mortgage Obligations (Cost $4,915,300) | 4,976,588 | ||||||||
Government & Agency Obligations 10.9% | |||||||||
Sovereign Bonds 1.8% | |||||||||
Federal Republic of Brazil, 5.625%, 1/7/2041 | 250,000 | 306,625 | |||||||
Government of Canada, 0.75%, 5/1/2014 | CAD | 1,000,000 | 977,301 | ||||||
Republic of Colombia, 4.375%, 7/12/2021 | 250,000 | 280,750 | |||||||
Republic of Croatia, 144A, 6.25%, 4/27/2017 | 250,000 | 249,327 | |||||||
Republic of Hungary, 4.75%, 2/3/2015 | 250,000 | 240,000 | |||||||
Republic of Latvia, 144A, 5.25%, 2/22/2017 | 250,000 | 258,125 | |||||||
Republic of Lithuania, 144A, 6.125%, 3/9/2021 | 250,000 | 275,000 | |||||||
Republic of Peru, 5.625%, 11/18/2050 | 250,000 | 303,125 | |||||||
Republic of Poland, 5.0%, 3/23/2022 | 250,000 | 272,875 | |||||||
Republic of Serbia: | |||||||||
144A, 6.75%, 11/1/2024 | 208,333 | 200,000 | |||||||
REG S, 6.75%, 11/1/2024 | 208,333 | 200,000 | |||||||
Republic of South Africa, 4.665%, 1/17/2024 | 250,000 | 270,625 | |||||||
Republic of Turkey, 6.0%, 1/14/2041 | 250,000 | 263,125 | |||||||
Principal Amount ($)(c) | Value ($) | ||||||||
State of Qatar, 144A, 6.4%, 1/20/2040 | 100,000 | 127,250 | |||||||
United Mexican States, 4.75%, 3/8/2044 | 250,000 | 269,375 | |||||||
Vnesheconombank, 144A, 6.025%, 7/5/2022 (d) | 250,000 | 249,377 | |||||||
4,742,880 | |||||||||
U.S. Treasury Obligations 9.1% | |||||||||
U.S. Treasury Bills: | |||||||||
0.1%***, 9/6/2012 | 153,000 | 152,981 | |||||||
0.1%***, 9/6/2012 | 120,000 | 119,985 | |||||||
U.S. Treasury Bonds: | |||||||||
4.75%, 2/15/2037 | 2,300,000 | 3,205,984 | |||||||
5.375%, 2/15/2031 (a) | 1,000,000 | 1,457,188 | |||||||
U.S. Treasury Notes: | |||||||||
0.75%, 6/15/2014 | 5,000,000 | 5,041,419 | |||||||
1.0%, 1/15/2014 | 605,000 | 611,357 | |||||||
1.0%, 8/31/2016 | 3,350,000 | 3,402,605 | |||||||
1.75%, 1/31/2014 | 3,900,000 | 3,988,206 | |||||||
2.0%, 11/15/2021 | 3,800,000 | 3,939,829 | |||||||
4.5%, 11/15/2015 | 1,500,000 | 1,700,157 | |||||||
23,619,711 | |||||||||
Total Government & Agency Obligations (Cost $26,852,095) | 28,362,591 | ||||||||
Loan Participations and Assignments 0.6% | |||||||||
Sovereign Loans | |||||||||
Bank of Moscow, 144A, 6.699%, 3/11/2015 | 250,000 | 258,750 | |||||||
Gazprom OAO, 144A, 4.95%, 5/23/2016 | 250,000 | 258,873 | |||||||
OAO Novatek, 144A, 5.326%, 2/3/2016 | 250,000 | 260,030 | |||||||
Vimpel Communications, 144A, 7.748%, 2/2/2021 | 250,000 | 241,435 | |||||||
Vnesheconombank, 144A, 5.375%, 2/13/2017 | 250,000 | 258,710 | |||||||
VTB Bank OJSC, 144A, 6.0%, 4/12/2017 | 250,000 | 253,750 | |||||||
Total Loan Participations and Assignments (Cost $1,520,510) | 1,531,548 | ||||||||
Municipal Bonds and Notes 0.4% | |||||||||
California, University Revenues, Build America Bonds, 5.946%, 5/15/2045 | 125,000 | 155,910 | |||||||
Chicago, IL, Transit Authority, Sales Tax Receipts Revenue, Build America Bonds, Series B, 6.2%, 12/1/2040 | 185,000 | 204,353 | |||||||
Kentucky, Asset/Liability Commission, General Fund Revenue, 3.165%, 4/1/2018 | 500,000 | 515,350 | |||||||
Louisville & Jefferson County, KY, Metropolitan Sewer District & Drain System, Build America Bonds, 6.25%, 5/15/2043 | 150,000 | 192,661 | |||||||
Total Municipal Bonds and Notes (Cost $960,262) | 1,068,274 | ||||||||
Principal Amount ($)(c) | Value ($) | ||||||||
Preferred Securities 0.1% | |||||||||
Financials 0.1% | |||||||||
Farm Credit Bank of Texas, Series 1, 7.561%, 12/15/2013 (e) | 218,000 | 222,284 | |||||||
Materials 0.0% | |||||||||
Hercules, Inc., 6.5%, 6/30/2029 | 40,000 | 32,800 | |||||||
Total Preferred Securities (Cost $241,575) | 255,084 |
Units | Value ($) | |||||||
Other Investments 0.0% | ||||||||
Consumer Discretionary | ||||||||
AOT Bedding Super Holdings LLC* (f) (Cost $2,000) | 2 | 1,935 |
Contracts | Value ($) | |||||||
Call Options Purchased 0.0% | ||||||||
Options on Exchange-Traded Futures Contracts | ||||||||
10 Year U.S. Treasury Note Future, Expiration Date 8/24/2012, Strike Price $134.0 | 15 | 10,781 |
Contract Amount | Value ($) | |||||||
Options on Interest Rate Swap Contracts | ||||||||
Fixed Rate — 3.583% - Floating — LIBOR, Swap Expiration Date 5/11/2026, Option Expiration Date 5/9/2016 | 2,300,000 | 81,839 | ||||||
Total Call Options Purchased (Cost $124,535) | 92,620 |
Shares | Value ($) | |||||||
Put Options Purchased 0.0% | ||||||||
Options on Exchange-Traded Futures Contracts | ||||||||
10 Year U.S. Treasury Note Future Expiration Date 8/24/2012, Strike Price $133.0 (Cost $23,493) | 25 | 21,094 | ||||||
Securities Lending Collateral 9.2% | ||||||||
Daily Assets Fund Institutional, 0.24% (g) (h) (Cost $23,888,571) | 23,888,571 | 23,888,571 | ||||||
Cash Equivalents 15.0% | ||||||||
Central Cash Management Fund, 0.14% (g) (Cost $39,063,140) | 39,063,140 | 39,063,140 |
% of Net Assets | Value ($) | |||||||
Total Investment Portfolio (Cost $286,298,208)+ | 111.1 | 289,678,692 | ||||||
Other Assets and Liabilities, Net | (11.1 | ) | (28,950,873 | ) | ||||
Net Assets | 100.0 | 260,727,819 |
The following table represents bonds that are in default:
Security | Coupon | Maturity Date | Principal Amount ($) | Acquisition Cost ($) | Value ($) | |||||||||||||
ERC Ireland Preferred Equity Ltd.* | 7.69 | % | 2/15/2017 | 120,439 | EUR | 165,016 | 46 | |||||||||||
Fontainebleau Las Vegas Holdings LLC* | 11.0 | % | 6/15/2015 | 25,000 | USD | 25,000 | 16 | |||||||||||
190,016 | 62 |
* Non-income producing security.
** Floating rate securities' yields vary with a designated market index or market rate, such as the coupon-equivalent of the U.S. Treasury Bill rate. These securities are shown at their current rate as of June 30, 2012.
*** Annualized yield at time of purchase; not a coupon rate.
+ The cost for federal income tax purposes was $289,384,565. At June 30, 2012, net unrealized appreciation for all securities based on tax cost was $294,127. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $8,965,492 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $8,671,365.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at June 30, 2012 amounted to $23,793,142, which is 9.1% of net assets.
(b) Securities with the same description are the same corporate entity but trade on different stock exchanges.
(c) Principal amount stated in U.S. dollars unless otherwise noted.
(d) When-issued or delayed delivery security included.
(e) Date shown is call date; not a maturity date for the perpetual preferred securities.
(f) The Fund may purchase securities that are subject to legal or contractual restrictions on resale ("restricted securities"). Restricted securities are securities which have not been registered with the Securities and Exchange Commission under the Securities Act of 1933. The Fund may be unable to sell a restricted security and it may be more difficult to determine a market value for a restricted security. Moreover, if adverse market conditions were to develop during the period between the Fund's decision to sell a restricted security and the point at which the Fund is permitted or able to sell such security, the Fund might obtain a price less favorable than the price that prevailed when it decided to sell. This investment practice, therefore, could have the effect of increasing the level of illiquidity of the Fund. The future value of these securities is uncertain and there may be changes in the estimated value of these securities.
Schedule of Restricted Securities | Acquisition Date | Cost ($) | Value ($) | Value as % of Net Assets | |||||||||
AOT Bedding Super Holdings LLC* | June 2010 | 2,000 | 1,935 | 0.0 |
(g) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(h) Represents collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates.
144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
ADR: American Depositary Receipt
CVA: Certificaten Van Aandelen
Interest Only: Interest Only (IO) bonds represent the "interest only" portion of payments on a pool of underlying mortgages or mortgage-backed securities. IO securities are subject to prepayment risk of the pool of underlying mortgages.
LIBOR: London Interbank Offered Rate
PIK: Denotes that all or a portion of the income is paid in-kind in the form of additional principal.
REG S: Securities sold under Regulation S may not be offered, sold or delivered within the United States or to, or for the account or benefit of, U.S. persons, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933.
REIT: Real Estate Investment Trust
Included in the portfolio are investments in mortgage- or asset-backed securities which are interests in separate pools of mortgages or assets. Effective maturities of these investments may be shorter than stated maturities due to prepayments. Some separate investments in the Federal National Mortgage Association issues which have similar coupon rates have been aggregated for presentation purposes in this investment portfolio.
At June 30, 2012, open futures contracts purchased were as follows:
Futures | Currency | Expiration Date | Contracts | Notional Value ($) | Unrealized Appreciation/ (Depreciation) ($) | |||||||||
10 Year Canadian Government Bond | CAD | 9/19/2012 | 10 | 1,359,886 | 1,422 | |||||||||
10 Year U.S. Treasury Note | USD | 9/19/2012 | 34 | 4,534,750 | 4,175 | |||||||||
Federal Republic of Germany Euro-Bund | EUR | 9/6/2012 | 20 | 3,566,177 | (8,715 | ) | ||||||||
United Kingdom Long Gilt Bond | GBP | 9/26/2012 | 10 | 1,865,443 | (4,105 | ) | ||||||||
Total net unrealized depreciation | (7,223 | ) |
At June 30, 2012, open written options contracts were as follows:
Options on Exchange-Traded Futures Contracts | Contracts | Expiration Date | Strike Price ($) | Premiums Received ($) | Value ($) (i) | ||||||||||||
Call Options 10 Year U.S. Treasury Note | 15 | 8/24/2012 | 136.0 | 1,842 | (2,813 | ) | |||||||||||
Put Options 10 Year U.S. Treasury Note | 50 | 8/24/2012 | 131.0 | 20,984 | (14,062 | ) | |||||||||||
Total | 22,826 | (16,875 | ) |
(i) Unrealized appreciation on written options on exchange-traded futures contracts at June 30, 2012 was $5,951.
Options on Interest Rate Swap Contracts | Contract Amount | Swap Effective/ Expiration Date | Option Expiration Date | Premiums Received ($) | Value ($) (j) | |||||||||
Call Options Fixed — 4.083% - Floating — LIBOR | 2,300,000 | 5/11/2016 5/11/2026 | 5/9/2016 | 78,200 | (60,238 | ) | ||||||||
Put Options Fixed — 2.07% - Floating — LIBOR | 2,300,000 | 5/10/2013 5/10/2043 | 5/8/2013 | 36,800 | (59,845 | ) | ||||||||
Total | 115,000 | (120,083 | ) |
(j) Unrealized depreciation on written options on interest rate swap contracts at June 30, 2012 was $5,083.
As of June 30, 2012, open credit default swap contracts purchased were as follows:
Effective/ Expiration Date | Notional Amount ($) | Fixed Cash Flows Paid | Reference Entity | Value ($) | Upfront Payments (Received) ($) | Unrealized Appreciation ($) | |||||||||||||||
3/20/2012 6/20/2017 | 5,200,000 | 1 | 1.0 | % | Markit Dow Jones CDX North America Investment Grade Index | 29,725 | (23,396 | ) | 53,121 |
Counterparty:
1 Citigroup, Inc.
As of June 30, 2012, the Fund had the following open forward foreign currency exchange contracts:
Contracts to Deliver | In Exchange For | Settlement Date | Unrealized Appreciation ($) | Counterparty | |||||||||||
USD | 1,244,282 | EUR | 1,000,000 | 7/6/2012 | 22,547 | Bank of America | |||||||||
USD | 2,208,713 | NZD | 2,800,000 | 7/16/2012 | 36,627 | Bank of America | |||||||||
USD | 3,016,140 | EUR | 2,400,000 | 7/23/2012 | 24,658 | UBS AG | |||||||||
EUR | 2,400,000 | USD | 3,044,294 | 7/23/2012 | 3,496 | Bank of America | |||||||||
USD | 1,873,371 | EUR | 1,500,000 | 7/27/2012 | 27,188 | Bank of America | |||||||||
USD | 2,540,383 | BRL | 5,300,000 | 7/30/2012 | 82,297 | BNP Paribas | |||||||||
USD | 1,206,570 | TRY | 2,200,000 | 8/2/2012 | 1,896 | UBS AG | |||||||||
Total unrealized appreciation | 198,709 |
Contracts to Deliver | In Exchange For | Settlement Date | Unrealized Depreciation ($) | Counterparty | |||||||||||
EUR | 1,000,000 | USD | 1,253,825 | 7/6/2012 | (13,004 | ) | UBS AG | ||||||||
NZD | 2,800,000 | USD | 2,164,582 | 7/16/2012 | (80,758 | ) | BNP Paribas | ||||||||
BRL | 5,300,000 | USD | 2,524,411 | 7/30/2012 | (98,269 | ) | Nomura International PLC | ||||||||
EUR | 1,500,000 | USD | 1,898,994 | 8/2/2012 | (1,655 | ) | UBS AG | ||||||||
USD | 1,267,985 | MXN | 17,000,000 | 8/3/2012 | (4,345 | ) | Bank of America | ||||||||
Total unrealized depreciation | (198,031 | ) |
Currency Abbreviations |
AUD Australian Dollar BRL Brazilian Real CAD Canadian Dollar EUR Euro GBP British Pound MXN Mexican Peso NZD New Zealand Dollar TRL Turkish Lira USD United States Dollar |
For information on the Fund's policy and additional disclosures regarding options purchased, futures contracts, credit default swap contracts, forward foreign currency exchange contracts and written options 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 June 30, 2012 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 and/or Other Equity Investments (k) | ||||||||||||||||
Consumer Discretionary | $ | 3,262,070 | $ | 4,480,577 | $ | 15 | $ | 7,742,662 | ||||||||
Consumer Staples | 11,919,911 | 12,316,534 | — | 24,236,445 | ||||||||||||
Energy | 16,335,062 | 3,689,226 | — | 20,024,288 | ||||||||||||
Financials | 8,533,385 | 4,570,823 | — | 13,104,208 | ||||||||||||
Health Care | — | 12,864,646 | — | 12,864,646 | ||||||||||||
Industrials | 2,207,302 | 8,942,959 | 0 | 11,150,261 | ||||||||||||
Information Technology | 10,706,623 | 1,765,302 | — | 12,471,925 | ||||||||||||
Materials | 7,838,580 | 2,177,234 | 10,322 | 10,026,136 | ||||||||||||
Telecommunication Services | 6,848,178 | 7,323,288 | — | 14,171,466 | ||||||||||||
Utilities | 5,712,359 | 3,468,538 | — | 9,180,897 | ||||||||||||
Fixed Income Investments (k) | ||||||||||||||||
Corporate Bonds | — | 50,427,619 | 404,363 | 50,831,982 | ||||||||||||
Asset Backed | — | 577,567 | — | 577,567 | ||||||||||||
Mortgage-Backed Securities Pass-Throughs | — | 3,407,734 | — | 3,407,734 | ||||||||||||
Commercial Mortgage-Backed Securities | — | 627,030 | — | 627,030 | ||||||||||||
Collateralized Mortgage Obligations | — | 4,976,588 | — | 4,976,588 | ||||||||||||
Government & Agency Obligations | — | 28,362,591 | — | 28,362,591 | ||||||||||||
Loan Participations and Assignments | — | 1,531,548 | — | 1,531,548 | ||||||||||||
Municipal Bonds and Notes | — | 1,068,274 | — | 1,068,274 | ||||||||||||
Preferred Securities | — | 255,084 | — | 255,084 | ||||||||||||
Other Investments | — | — | 1,935 | 1,935 | ||||||||||||
Short-Term Investments (k) | 62,951,711 | — | — | 62,951,711 | ||||||||||||
Derivatives (l) | 37,472 | 333,669 | — | 371,141 | ||||||||||||
Total | $ | 136,352,653 | $ | 153,166,831 | $ | 416,635 | $ | 289,936,119 | ||||||||
Liabilities | ||||||||||||||||
Derivatives (l) | $ | (29,695 | ) | $ | (318,114 | ) | $ | — | $ | (347,809 | ) | |||||
Total | $ | (29,695 | ) | $ | (318,114 | ) | $ | — | $ | (347,809 | ) |
There have been no transfers between Level 1 and Level 2 fair value measurements during the period ended June 30, 2012.
(k) See Investment Portfolio for additional detailed categorizations.
(l) Derivatives include value of options purchased, unrealized appreciation (depreciation) on open futures contracts, credit default swap contracts, forward foreign currency exchange contracts and written options, at value.
The accompanying notes are an integral part of the financial statements.
as of June 30, 2012 (Unaudited) | ||||
Assets | ||||
Investments: Investments in non-affiliated securities, at value (cost $223,346,497) — including $23,793,142 of securities loaned | $ | 226,726,981 | ||
Investment in Daily Assets Fund Institutional (cost $23,888,571)* | 23,888,571 | |||
Investment in Central Cash Management Fund (cost $39,063,140) | 39,063,140 | |||
Total investments in securities, at value (cost $286,298,208) | 289,678,692 | |||
Cash | 31,305 | |||
Foreign currency, at value (cost $165,003) | 166,445 | |||
Deposit with broker for futures contracts | 765 | |||
Receivable for investments sold | 1,118,711 | |||
Receivable for investments sold — when-issued/delayed delivery securities | 1,039,625 | |||
Receivable for Fund shares sold | 56,155 | |||
Dividends receivable | 311,541 | |||
Interest receivable | 1,151,034 | |||
Unrealized appreciation on swap contracts | 53,121 | |||
Unrealized appreciation on forward foreign currency exchange contracts | 198,709 | |||
Foreign taxes recoverable | 25,848 | |||
Other assets | 1,169 | |||
Total assets | 293,833,120 | |||
Liabilities | ||||
Payable upon return of securities loaned | 23,888,571 | |||
Payable for investments purchased | 3,570,827 | |||
Payable for investments purchased — when-issued/delayed delivery securities | 4,983,115 | |||
Payable for Fund shares redeemed | 95,232 | |||
Payable for variation margin on futures contracts | 19,879 | |||
Options written, at value (premium received $137,826) | 136,958 | |||
Unrealized depreciation on forward foreign currency exchange contracts | 198,031 | |||
Upfront payments received on swap contracts | 23,396 | |||
Accrued management fee | 78,100 | |||
Accrued Trustees' fees | 793 | |||
Other accrued expenses and payables | 110,399 | |||
Total liabilities | 33,105,301 | |||
Net assets, at value | $ | 260,727,819 | ||
Net Assets Consist of | ||||
Undistributed net investment income | 3,068,011 | |||
Net unrealized appreciation (depreciation) on: Investments | 3,380,484 | |||
Swap contracts | 53,121 | |||
Futures | (7,223 | ) | ||
Foreign currency | (8,015 | ) | ||
Written options | 868 | |||
Accumulated net realized gain (loss) | (10,659,018 | ) | ||
Paid-in capital | 264,899,591 | |||
Net assets, at value | $ | 260,727,819 | ||
Class A Net Asset Value, offering and redemption price per share ($260,727,819 ÷ 11,638,772 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | $ | 22.40 |
* Represents collateral on securities loaned.
The accompanying notes are an integral part of the financial statements.
Statement of Operations
for the six months ended June 30, 2012 (Unaudited) | ||||
Investment Income | ||||
Income: Dividends (net of foreign taxes withheld of $146,661) | $ | 2,396,842 | ||
Interest | 1,412,944 | |||
Income distributions — Central Cash Management Fund | 15,061 | |||
Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates | 74,203 | |||
Total income | 3,899,050 | |||
Expenses: Management fee | 491,941 | |||
Administration fee | 133,583 | |||
Services to shareholders | 536 | |||
Custodian fee | 68,282 | |||
Professional fees | 47,274 | |||
Reports to shareholders | 24,874 | |||
Trustees' fees and expenses | 6,860 | |||
Other | 46,310 | |||
Total expenses | 819,660 | |||
Net investment income | 3,079,390 | |||
Realized and Unrealized Gain (Loss) | ||||
Net realized gain (loss) from: Investments | 34,040,983 | |||
Swap contracts | (11,989 | ) | ||
Futures | 703,865 | |||
Foreign currency | (1,288,621 | ) | ||
33,444,238 | ||||
Change in net unrealized appreciation (depreciation) on: Investments | (20,801,774 | ) | ||
Swap contracts | 53,121 | |||
Futures | (296,509 | ) | ||
Written options | 868 | |||
Foreign currency | 31,165 | |||
(21,013,129 | ) | |||
Net gain (loss) | 12,431,109 | |||
Net increase (decrease) in net assets resulting from operations | $ | 15,510,499 |
The accompanying notes are an integral part of the financial statements.
Increase (Decrease) in Net Assets | Six Months Ended June 30, 2012 (Unaudited) | Year Ended December 31, 2011 | ||||||
Operations: Net investment income (loss) | $ | 3,079,390 | $ | 6,031,493 | ||||
Operations: Net investment income (loss) | $ | 3,079,390 | $ | 6,031,493 | ||||
Net realized gain (loss) | 33,444,238 | 8,487,703 | ||||||
Change in net unrealized appreciation (depreciation) | (21,013,129 | ) | (18,126,212 | ) | ||||
Net increase (decrease) in net assets resulting from operations | 15,510,499 | (3,607,016 | ) | |||||
Distributions to shareholders from: Net investment income: Class A | (4,191,340 | ) | (4,612,028 | ) | ||||
Total distributions | (4,191,340 | ) | (4,612,028 | ) | ||||
Fund share transactions: Class A Proceeds from shares sold | 2,618,583 | 6,208,413 | ||||||
Shares issued to shareholders in reinvestment of distributions | 4,191,340 | 4,612,028 | ||||||
Payments for shares redeemed | (21,460,683 | ) | (46,814,172 | ) | ||||
Net increase (decrease) in net assets from Class A share transactions | (14,650,760 | ) | (35,993,731 | ) | ||||
Increase (decrease) in net assets | (3,331,601 | ) | (44,212,775 | ) | ||||
Net assets at beginning of period | 264,059,420 | 308,272,195 | ||||||
Net assets at end of period (including undistributed net investment income of $3,068,011 and $4,179,961, respectively) | $ | 260,727,819 | $ | 264,059,420 | ||||
Other Information | ||||||||
Class A Shares outstanding at beginning of period | 12,288,136 | 13,930,205 | ||||||
Shares sold | 116,302 | 285,391 | ||||||
Shares issued to shareholders in reinvestment of distributions | 186,116 | 200,698 | ||||||
Shares redeemed | (951,782 | ) | (2,128,158 | ) | ||||
Net increase (decrease) in Class A shares | (649,364 | ) | (1,642,069 | ) | ||||
Shares outstanding at end of period | 11,638,772 | 12,288,136 |
The accompanying notes are an integral part of the financial statements.
Years Ended December 31, | ||||||||||||||||||||||||
Class A | Six Months Ended 6/30/12 (Unaudited) | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Selected Per Share Data | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 21.49 | $ | 22.13 | $ | 20.52 | $ | 17.35 | $ | 24.81 | $ | 24.46 | ||||||||||||
Income (loss) from investment operations: Net investment incomea | .26 | .46 | .39 | .44 | .61 | .74 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 1.01 | (.75 | ) | 1.88 | 3.43 | (7.20 | ) | .42 | ||||||||||||||||
Total from investment operations | 1.27 | (.29 | ) | 2.27 | 3.87 | (6.59 | ) | 1.16 | ||||||||||||||||
Less distributions from: Net investment income | (.36 | ) | (.35 | ) | (.66 | ) | (.70 | ) | (.87 | ) | (.81 | ) | ||||||||||||
Net asset value, end of period | $ | 22.40 | $ | 21.49 | $ | 22.13 | $ | 20.52 | $ | 17.35 | $ | 24.81 | ||||||||||||
Total Return (%) | 5.89 | ** | (1.42 | ) | 11.22 | 23.43 | (27.33 | )b | 4.84 | b | ||||||||||||||
Ratios to Average Net Assets and Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period ($ millions) | 261 | 264 | 308 | 319 | 307 | 528 | ||||||||||||||||||
Ratio of expenses before expense reductions (%) | .61 | * | .58 | .65 | .60 | .64 | .52 | |||||||||||||||||
Ratio of expenses after expense reductions (%) | .61 | * | .58 | .65 | .60 | .62 | .51 | |||||||||||||||||
Ratio of net investment income (%) | 2.31 | * | 2.09 | 1.89 | 2.40 | 2.83 | 3.00 | |||||||||||||||||
Portfolio turnover rate (%) | 111 | ** | 109 | 203 | 207 | 263 | 199 | |||||||||||||||||
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. * Annualized ** Not annualized |
A. Organization and Significant Accounting Policies
DWS Global Income Builder VIP (formerly DWS Balanced VIP) (the "Fund") is a diversified series of DWS Variable Series II (the "Trust"), which 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 Fund'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 Fund 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 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.
Equity securities and exchange-traded funds ("ETFs") are valued at the most recent sale price or official closing price reported on the exchange (U.S. 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 certain indices and these securities are categorized as Level 2.
Debt securities and Loan Participations and Assignments are valued at prices supplied by independent pricing services approved by the Fund's 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.
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.
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 at the price provided by the broker-dealer with which the option was traded and are generally categorized as Level 2.
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 the 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 Fund's Investment Portfolio.
Foreign Currency Translations. The books and records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing exchange rates at period end. Purchases and sales of investment securities, income and expenses are translated into U.S. 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 acquisition and disposition of foreign currencies, and the difference between the amount of net investment income accrued and the U.S. 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.
Securities Lending. The Fund 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 under 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.
Loan Participations and Assignments. Senior loans are portions of loans originated by banks and sold in pieces to investors. These U.S. 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 contractual relationship with the borrower, and the Fund may enforce compliance by the borrower with the terms of the loan agreement. Senior loans held by the Fund are generally in the form of Assignments, but the Fund may also invest in Participations. All Loan Participations and Assignments involve interest rate risk, liquidity risk and credit risk, including the potential default or insolvency of the borrower.
When-Issued/Delayed Delivery Securities. The Fund may purchase or sell 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 or sell a security, the transaction is recorded and the value of the transaction 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. At the time the Fund enters into a purchase 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 transactions 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. The 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 Fund's understanding of the tax rules and rates related to income, gains and transactions for the foreign jurisdictions in which it invests, the Fund will provide for foreign taxes and, where appropriate, deferred foreign taxes.
Under the Regulated Investment Company Modernization Act of 2010, net capital losses may be carried forward indefinitely, and their character is retained as short-term and/or long-term. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
At December 31, 2011, the Fund had a net tax basis capital loss carryforward of approximately $40,835,000 of pre-enactment losses, which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until December 31, 2017, the expiration date, whichever occurs first.
The Fund has reviewed the tax positions for the open tax years as of December 31, 2011 and has determined that no provision for income tax is required in the Fund's financial statements. The Fund's federal tax returns for the prior three fiscal years remain open subject to examination by the Internal Revenue Service.
Distribution of Income and Gains. Distributions of net investment income of the Fund, if any, are made annually. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed and, therefore, will be distributed to shareholders at least annually. The Fund may also make additional distributions for tax purposes if necessary.
The timing and characterization of certain income and capital gain 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 investments in foreign denominated investments, forward currency contracts, futures contracts 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, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.
The tax character of current year distributions will be determined at the end of the current fiscal year.
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, the Fund may enter into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet been made. However, based on experience, the Fund expects the risk of loss to be remote.
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 and may include proceeds from litigation. All discounts and premiums are accreted/amortized for both tax and financial reporting purposes, with the exception of securities in default of principal.
B. Derivative Instruments
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 six months ended June 30, 2012, the Fund bought credit default swap contracts to gain exposure to an underlying issuer's credit quality characteristics without directly investing in that issuer, or to economically 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 U.S. or foreign corporate issuer, on the reference entity, which 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, if any, made by the Fund is recorded as an asset in the Statement of Assets and Liabilities. An upfront payment, if any, 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 gains or losses in the Statement of Operations.
A summary of the open credit default swap contracts as of June 30, 2012 is included in a table following the Fund's Investment Portfolio. For the six months ended June 30, 2012, the investment in credit default swap contracts purchased had a total notional value generally indicative of a range from $0 to $5,200,000.
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 six months ended June 30, 2012, the Fund used futures contracts to gain exposure to different parts of the yield curve while managing overall duration, and to gain exposure to a particular asset class or to keep cash on hand to meet shareholder redemptions or other needs while maintaining exposure to the stock market. In addition, prior to May 1, 2012, the Fund sought to enhance returns by employing a global tactical asset allocation overlay strategy by entering into futures contracts on fixed-income securities, including on financial indices. For the six months ended June 30, 2012, as part of this strategy, the Fund used futures contracts to attempt to take advantage of inefficiencies within the global bond markets.
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 the risk that the futures contract is not well correlated with the security, index or currency to which it relates. Risk of loss may exceed amounts disclosed in the Statement of Assets and Liabilities.
A summary of the open futures contracts as of June 30, 2012 is included in a table following the Fund's Investment Portfolio. For the six months ended June 30, 2012, the investment in futures contracts purchased had a total notional value generally indicative of a range from approximately $11,326,000 to $44,167,000, and the investment in futures contracts sold had a total notional value generally indicative of a range from $0 to approximately $50,425,000.
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 exercised. For the six months ended June 30, 2012, the Fund entered into options on interest rate futures and on interest rate swaps in order to hedge against potential adverse interest rate movements of portfolio assets.
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. For exchange traded contracts, the counterparty risk is minimized as the exchange's clearinghouse acts as the counterparty, and guarantees the futures against default. 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 purchased option contracts as of June 30, 2012 is included in the Fund's Investment Portfolio. A summary of open written option contracts is included in a table following the Fund's Investment Portfolio. For the six months ended June 30, 2012, the investment in written option contracts had a total value generally indicative of a range from $0 to approximately $137,000, and purchased option contracts had a total value generally indicative of a range from $0 to approximately $114,000.
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 six months ended June 30, 2012, the Fund 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, to facilitate transactions in foreign currency denominated securities and to enhance total returns. Prior to May 1, 2012, the Fund also entered into forward currency contracts as part of its global tactical asset allocation overlay strategy.
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 June 30, 2012 is included in a table following the Fund's Investment Portfolio. For the six months ended June 30, 2012, the investment in forward currency contracts short vs. U.S. dollars had a total contract value generally indicative of a range from approximately $10,886,000 to $47,248,000, and the investment in forward currency contracts long vs. U.S. dollars had a total contract value generally indicative of a range from approximately $13,357,000 to $47,692,000.
The following tables summarize the value of the Fund's derivative instruments held as of June 30, 2012 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 | Futures Contracts | Total | |||||||||||||||
Interest Rate Contracts (a) (b) | $ | 113,714 | $ | — | $ | — | $ | 5,597 | $ | 119,311 | ||||||||||
Credit Contracts (a) | — | — | 53,121 | — | 53,121 | |||||||||||||||
Foreign Exchange Contracts (c) | — | 198,709 | — | — | 198,709 | |||||||||||||||
$ | 113,714 | $ | 198,709 | $ | 53,121 | $ | 5,597 | $ | 371,141 |
Each of the above derivatives is located in the following Statement of Assets and Liabilities accounts:
(a) Investment in securities, at value (includes purchased options) and unrealized appreciation on swap contracts
(b) Includes cumulative appreciation of futures contracts as disclosed in the Investment Portfolio. Unsettled variation margin is disclosed separately within the Statement of Assets and Liabilities.
(c) Unrealized appreciation on forward foreign currency exchange contracts
Liability Derivatives | Written Options | Forward Contracts | Futures Contracts | Total | ||||||||||||
Interest Rate Contracts (a) (b) | $ | (136,958 | ) | $ | — | $ | (12,820 | ) | $ | (149,778 | ) | |||||
Foreign Exchange Contracts (c) | — | (198,031 | ) | — | (198,031 | ) | ||||||||||
$ | (136,958 | ) | $ | (198,031 | ) | $ | (12,820 | ) | $ | (347,809 | ) |
Each of the above derivatives is located in the following Statement of Assets and Liabilities accounts:
(a) Options written, at value
(b) Includes cumulative depreciation of futures contracts as disclosed in the Investment Portfolio. Unsettled variation margin is disclosed separately within the Statement of Assets and Liabilities.
(c) Unrealized depreciation on forward foreign currency exchange contracts
Additionally, the amount of unrealized and realized gains and losses on derivative instruments recognized in Fund earnings during the six months ended June 30, 2012 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) | $ | — | $ | — | $ | — | $ | 140,809 | $ | 140,809 | ||||||||||
Interest Rate Contracts (a) | 12,387 | — | — | 563,056 | 575,443 | |||||||||||||||
Credit Contracts (a) | — | — | (11,989 | ) | — | (11,989 | ) | |||||||||||||
Foreign Exchange Contracts (b) | — | (1,149,150 | ) | — | — | (1,149,150 | ) | |||||||||||||
$ | 12,387 | $ | (1,149,150 | ) | $ | (11,989 | ) | $ | 703,865 | $ | (444,887 | ) |
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) | $ | — | $ | — | $ | — | $ | — | $ | (23,250 | ) | $ | (23,250 | ) | ||||||||||
Interest Rate Contracts (a) | (34,314 | ) | 868 | — | — | (273,259 | ) | (306,705 | ) | |||||||||||||||
Credit Contracts (a) | — | — | — | 53,121 | — | 53,121 | ||||||||||||||||||
Foreign Exchange Contracts (b) | — | — | 38,633 | — | — | 38,633 | ||||||||||||||||||
$ | (34,314 | ) | $ | 868 | $ | 38,633 | $ | 53,121 | $ | (296,509 | ) | $ | (238,201 | ) |
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 six months ended June 30, 2012, purchases and sales of investment transactions (excluding short-term investments and U.S. Treasury obligations) aggregated $256,501,801 and $306,486,572, respectively. Purchases and sales of U.S. Treasury obligations aggregated $13,564,169 and $8,574,007, respectively.
For the six months ended June 30, 2012, transactions for written options on interest rate swap contracts and futures contracts were as follows:
Contracts/ Contract Amount | Premium | |||||||
Outstanding, beginning of period | — | $ | — | |||||
Options written | 4,600,065 | 137,826 | ||||||
Options closed | — | — | ||||||
Outstanding, end of period | 4,600,065 | $ | 137,826 |
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 the 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 the Fund or delegates such responsibility to the Fund's subadvisor. In addition to portfolio management services, the Advisor provides certain administrative services in accordance with the Amended and Restated Management Agreement.
Prior to May 1, 2012, pursuant to an investment subadvisory agreement with the Advisor, QS Investors, LLC ("QS Investors") acted as an investment subadvisor to the Fund. QS Investors rendered strategic asset allocation services and managed the portion of assets allocated to the Fund's global tactical asset allocation overlay strategy. QS Investors was paid by the Advisor for the services QS Investors provided to the Fund. The Fund's board approved the termination of QS Investors as the Fund's subadvisor and effective May 1, 2012, the Advisor assumed all day-to-day advisory responsibilities for the Fund that were previously delegated to QS Investors (see Note G).
Under the Investment Management Agreement, the Fund pays a monthly management fee based on the Fund's average daily net assets, computed and accrued daily and payable monthly, at the following annual rates:
First $250 million | .370 | % | ||
Next $750 million | .345 | % | ||
Over $1 billion | .310 | % |
Accordingly, for the six months ended June 30, 2012, the fee pursuant to the Investment Management Agreement was equivalent to an annualized effective rate of 0.37% of the Fund's average daily net assets.
Administration Fee. Pursuant to an Administrative Services Agreement, DIMA provides most administrative services to the Fund. For all services provided under the Administrative Services Agreement, the Fund pays DIMA an annual fee ("Administration Fee") of 0.10% of the Fund's average daily net assets, computed and accrued daily and payable monthly. For the six months ended June 30, 2012, the Administration Fee was $133,583, of which $21,153 is unpaid.
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 the 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 the Fund. For the six months ended June 30, 2012, the amounts charged to the Fund by DISC aggregated $200, of which $64 is unpaid.
Typesetting and Filing Service Fees. Under an agreement with DIMA, DIMA is compensated for providing typesetting and certain regulatory filing services to the Fund. For the six months ended June 30, 2012, the amount charged to the Fund by DIMA included in the Statement of Operations under "reports to shareholders" aggregated $10,432, of which $2,200 is unpaid.
Trustees' Fees and Expenses. The Fund paid retainer fees to each Trustee not affiliated with the Advisor, plus specified amounts to the Board Chairperson and to each committee Chairperson.
Affiliated Cash Management Vehicle. The Fund may invest uninvested cash balances in Central Cash Management Fund, which is managed by the Advisor. The Fund indirectly bears its proportionate share of the expenses of Central Cash Management Fund. 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.
Securities Lending Agent Fees. Deutsche Bank AG serves as securities lending agent for the Fund. For the six months ended June 30, 2012, the Fund incurred securities lending agent fees to Deutsche Bank AG in the amount of $8,205.
E. Ownership of the Fund
At June 30, 2012, three Participating Insurance Companies were owners of record of 10% or more of the total outstanding shares of the Fund, each owning 45%, 21% and 15%.
F. Line of Credit
The Fund and other affiliated funds (the "Participants") share in a $375 million revolving credit facility provided by a syndication of banks. The Fund 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 Fund may borrow up to a maximum of 33 percent of its net assets under the agreement. The Fund had no outstanding loans at June 30, 2012.
G. Changes to Investment Strategies, Policies and Fund Name
Effective May 1, 2012, the Fund's investment objective changed from seeking the highest total return, a combination of income and capital appreciation, consistent with reasonable risk, to seeking to maximize income while maintaining prospects for capital appreciation. In connection with the implementation of the new objective, the Fund's name changed to DWS Global Income Builder VIP. For more information, please see the Fund's current prospectus.
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 (January 1, 2012 to June 30, 2012).
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 June 30, 2012 | ||||
Actual Fund Return | Class A | |||
Beginning Account Value 1/1/12 | $ | 1,000.00 | ||
Ending Account Value 6/30/12 | $ | 1,058.90 | ||
Expenses Paid per $1,000* | $ | 3.12 | ||
Hypothetical 5% Fund Return | Class A | |||
Beginning Account Value 1/1/12 | $ | 1,000.00 | ||
Ending Account Value 6/30/12 | $ | 1,021.83 | ||
Expenses Paid per $1,000* | $ | 3.07 |
* Expenses are equal to the Fund's annualized expense ratio, multiplied by the average account value over the period, multiplied by 182 (the number of days in the most recent six-month period), then divided by 366.
Annualized Expense Ratio | Class A | |
DWS Variable Series II — DWS Global Income Builder VIP | .61% |
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 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.
September 26, 2011
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 report summarizes my evaluation for 2011, 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, 2009 and 2010.
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 109 mutual 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
President, Thomas H. Mack & Co., Inc.
Notes
DWS Investments Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606
(800) 621-1148
VS2GIB-3 (R-028382-1 8/12)
JUNE 30, 2012
SEMIANNUAL REPORT
DWS VARIABLE SERIES II
DWS Global Thematic VIP
Contents
3 Performance Summary 4 Portfolio Summary 4 Portfolio Management 7 Investment Portfolio 12 Statement of Assets and Liabilities 13 Statement of Operations 14 Statement of Changes in Net Assets 15 Financial Highlights 17 Notes to Financial Statements 21 Information About Your Fund's Expenses 22 Proxy Voting 23 Summary of Management Fee Evaluation by Independent Fee Consultant |
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.
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. The Fund may lend securities to approved institutions. Stocks may decline in value. See the prospectus for details.
DWS Investments is part of Deutsche Bank's Asset Management division and, within the U.S., represents the retail asset management activities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company.
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
Fund 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 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, 2012 are 1.37% and 1.72% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Growth of an Assumed $10,000 Investment in DWS Global Thematic VIP | ||
The Morgan Stanley Capital International (MSCI) World Index is an unmanaged, capitalization-weighted measure of global stock markets including the U.S., Canada, Europe, Australia and the Far East. The index is calculated using closing local market prices and translates into U.S. dollars using the London close foreign exchange rates. Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index. | ||
Yearly periods ended June 30 |
Comparative Results | |||||||||||||||||||||
DWS Global Thematic VIP | 6-Month‡ | 1-Year | 3-Year | 5-Year | 10-Year | ||||||||||||||||
Class A | Growth of $10,000 | $ | 10,512 | $ | 8,668 | $ | 12,732 | $ | 7,340 | $ | 17,202 | ||||||||||
Average annual total return | 5.12 | % | -13.32 | % | 8.38 | % | -6.00 | % | 5.57 | % | |||||||||||
MSCI World Index | Growth of $10,000 | $ | 10,591 | $ | 9,502 | $ | 13,666 | $ | 8,607 | $ | 16,570 | ||||||||||
Average annual total return | 5.91 | % | -4.98 | % | 10.97 | % | -2.96 | % | 5.18 | % | |||||||||||
DWS Global Thematic VIP | 6-Month‡ | 1-Year | 3-Year | 5-Year | Life of Class* | ||||||||||||||||
Class B | Growth of $10,000 | $ | 10,487 | $ | 8,641 | $ | 12,592 | $ | 7,208 | $ | 16,833 | ||||||||||
Average annual total return | 4.87 | % | -13.59 | % | 7.98 | % | -6.34 | % | 5.35 | % | |||||||||||
MSCI World Index | Growth of $10,000 | $ | 10,591 | $ | 9,502 | $ | 13,666 | $ | 8,607 | $ | 16,570 | ||||||||||
Average annual total return | 5.91 | % | -4.98 | % | 10.97 | % | -2.96 | % | 5.18 | % |
The growth of $10,000 is cumulative.
‡ Total returns shown for periods less than one year are not annualized.
* The Fund commenced offering Class B shares on July 1, 2002. The performance shown for the index is for the time period of June 30, 2002 through June 30, 2012, which is based on the performance period of the life of the class.
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | 6/30/12 | 12/31/11 |
Common Stocks | 95% | 98% |
Cash Equivalents | 3% | — |
Preferred Stocks | 2% | 2% |
Participatory Notes | 0% | 0% |
100% | 100% |
Sector Diversification (As a % of Investment Portfolio excluding Cash Equivalents and Securities Lending Collateral) | 6/30/12 | 12/31/11 |
Materials | 17% | 9% |
Financials | 16% | 16% |
Information Technology | 14% | 16% |
Health Care | 12% | 15% |
Industrials | 10% | 10% |
Consumer Staples | 10% | 8% |
Energy | 8% | 13% |
Consumer Discretionary | 6% | 8% |
Telecommunication Services | 5% | 3% |
Utilities | 2% | 2% |
100% | 100% |
Geographical Diversification (As a % of Investment Portfolio excluding Cash Equivalents and Securities Lending Collateral) | 6/30/12 | 12/31/11 |
United States | 37% | 42% |
Continental Europe | 28% | 28% |
Asia (excluding Japan) | 10% | 11% |
Canada | 7% | 1% |
Latin America | 6% | 6% |
Africa | 4% | 2% |
Japan | 3% | 6% |
United Kingdom | 2% | 1% |
Middle East | 2% | 2% |
Bermuda | 1% | 1% |
100% | 100% |
Portfolio holdings and characteristics are subject to change.
For more complete details about the Fund's investment portfolio, see page 7.
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.
Oliver Kratz, PhD
Portfolio Manager, Global Thematic Partners, LLC, Subadvisor to the Fund
Shares | Value ($) | |||||||
Common Stocks 95.9% | ||||||||
Austria 0.6% | ||||||||
Erste Group Bank AG* (Cost $272,431) | 15,687 | 298,231 | ||||||
Bahrain 0.2% | ||||||||
Aluminium Bahrain (GDR) 144A (Cost $264,341) | 21,937 | 131,622 | ||||||
Belgium 0.5% | ||||||||
Belgacom SA (Cost $287,264) | 8,971 | 254,882 | ||||||
Bermuda 0.8% | ||||||||
Lazard Ltd. "A" (Cost $436,852) | 15,393 | 400,064 | ||||||
Brazil 4.3% | ||||||||
All America Latina Logistica | 52,867 | 223,207 | ||||||
Braskem SA (ADR) (a) | 25,801 | 343,411 | ||||||
Diagnosticos da America SA | 28,031 | 184,361 | ||||||
Gol Linhas Aereas Inteligentes SA (ADR)* (a) | 57,956 | 255,586 | ||||||
Itau Unibanco Holding SA (ADR) (Preferred) (a) | 45,154 | 628,544 | ||||||
SLC Agricola SA | 63,318 | 630,185 | ||||||
(Cost $2,878,421) | 2,265,294 | |||||||
Canada 6.3% | ||||||||
Barrick Gold Corp. | 13,028 | 489,462 | ||||||
Detour Gold Corp.* | 6,562 | 132,194 | ||||||
Goldcorp, Inc. | 8,426 | 316,649 | ||||||
Kinross Gold Corp. | 52,062 | 424,305 | ||||||
Potash Corp. of Saskatchewan, Inc. | 28,643 | 1,251,413 | ||||||
Talisman Energy, Inc. | 17,861 | 204,732 | ||||||
TransAlta Corp. (a) | 31,700 | 537,103 | ||||||
(Cost $3,872,537) | 3,355,858 | |||||||
China 2.9% | ||||||||
China Life Insurance Co., Ltd. "H" | 235,804 | 617,950 | ||||||
China Life Insurance Co., Ltd. (ADR) | 1,207 | 47,664 | ||||||
Home Inns & Hotels Management, Inc. (ADR)* (a) | 11,207 | 253,951 | ||||||
Li Ning Co., Ltd. | 137,785 | 77,609 | ||||||
Mindray Medical International Ltd. (ADR) | 13,145 | 398,162 | ||||||
Yanzhou Coal Mining Co., Ltd. "H"* | 106,800 | 163,913 | ||||||
(Cost $1,997,642) | 1,559,249 | |||||||
Denmark 0.7% | ||||||||
AP Moller-Maersk AS "B" | 38 | 250,073 | ||||||
Vestas Wind Systems AS* (a) | 21,995 | 121,633 | ||||||
(Cost $709,805) | 371,706 | |||||||
Egypt 0.5% | ||||||||
Orascom Telecom Holding SAE (GDR) REG S* (Cost $177,339) | 97,029 | 242,803 | ||||||
France 1.5% | ||||||||
LVMH Moet Hennessy Louis Vuitton SA | 3,139 | 478,441 | ||||||
Renault SA | 8,476 | 339,853 | ||||||
(Cost $825,960) | 818,294 | |||||||
Shares | Value ($) | |||||||
Germany 8.0% | ||||||||
Adidas AG | 4,755 | 341,042 | ||||||
Axel Springer AG | 13,332 | 573,285 | ||||||
Deutsche Lufthansa AG (Registered) | 36,885 | 426,952 | ||||||
Deutsche Post AG (Registered) | 61,926 | 1,096,778 | ||||||
Fraport AG | 8,964 | 482,635 | ||||||
Infineon Technologies AG | 111,707 | 757,424 | ||||||
Metro AG | 17,136 | 499,867 | ||||||
TAG Immobilien AG | 4,797 | 45,077 | ||||||
(Cost $4,407,693) | 4,223,060 | |||||||
India 2.8% | ||||||||
ICICI Bank Ltd. (ADR) (a) (Cost $1,500,706) | 46,648 | 1,511,862 | ||||||
Indonesia 0.2% | ||||||||
PT Semen Gresik (Persero) Tbk (Cost $77,178) | 99,766 | 120,492 | ||||||
Israel 1.2% | ||||||||
Teva Pharmaceutical Industries Ltd. (ADR) (Cost $773,826) | 16,272 | 641,768 | ||||||
Japan 3.0% | ||||||||
FANUC Corp. | 2,700 | 443,602 | ||||||
Hitachi Ltd. | 49,000 | 301,356 | ||||||
INPEX Corp. | 151 | 846,555 | ||||||
(Cost $1,275,475) | 1,591,513 | |||||||
Korea 2.1% | ||||||||
POSCO (ADR) | 1,992 | 160,237 | ||||||
Samsung Electronics Co., Ltd. | 898 | 952,080 | ||||||
(Cost $848,924) | 1,112,317 | |||||||
Malaysia 0.5% | ||||||||
CIMB Group Holdings Bhd. (Cost $260,003) | 108,300 | 259,176 | ||||||
Mexico 0.9% | ||||||||
Wal-Mart de Mexico SAB de CV "V" (Cost $562,578) | 186,111 | 497,935 | ||||||
Netherlands 6.7% | ||||||||
Koninklijke (Royal) KPN NV | 79,620 | 762,394 | ||||||
LyondellBasell Industries NV "A" (b) | 3,932 | 158,342 | ||||||
QIAGEN NV* | 31,281 | 522,342 | ||||||
Unilever NV (CVA) (a) | 56,706 | 1,897,973 | ||||||
VimpelCom Ltd. (ADR) | 26,927 | 218,378 | ||||||
(Cost $3,569,043) | 3,559,429 | |||||||
Panama 0.6% | ||||||||
Copa Holdings SA "A" (Cost $128,368) | 3,847 | 317,301 | ||||||
Russia 2.0% | ||||||||
Gazprom OAO (ADR)* | 31,362 | 296,876 | ||||||
Sberbank of Russia (ADR)* | 70,708 | 769,122 | ||||||
(Cost $1,188,045) | 1,065,998 | |||||||
South Africa 4.0% | ||||||||
MTN Group Ltd. | 59,796 | 1,033,619 | ||||||
Murray & Roberts Holdings Ltd.* | 44,049 | 133,171 | ||||||
Shoprite Holdings Ltd. | 15,496 | 286,320 | ||||||
Shares | Value ($) | |||||||
Standard Bank Group Ltd. | 34,914 | 473,651 | ||||||
Tiger Brands Ltd. | 5,866 | 176,203 | ||||||
(Cost $2,071,331) | 2,102,964 | |||||||
Sweden 2.5% | ||||||||
Telefonaktiebolaget LM Ericsson "B" (Cost $1,434,365) | 143,879 | 1,312,884 | ||||||
Switzerland 3.3% | ||||||||
Julius Baer Group Ltd.* | 23,848 | 863,448 | ||||||
Roche Holding AG (Genusschein) | 4,995 | 862,274 | ||||||
(Cost $1,644,333) | 1,725,722 | |||||||
Thailand 1.3% | ||||||||
Bangkok Bank PCL (Foreign Registered) | 25,500 | 166,815 | ||||||
Kasikornbank PCL (Foreign Registered) | 45,000 | 235,065 | ||||||
Seamico Securities PCL (Foreign Registered) | 1,748,260 | 77,615 | ||||||
Siam Cement Public Co., Ltd. | 18,649 | 186,101 | ||||||
(Cost $659,741) | 665,596 | |||||||
United Kingdom 2.2% | ||||||||
AstraZeneca PLC | 3,509 | 156,849 | ||||||
Rio Tinto PLC | 13,118 | 626,507 | ||||||
Standard Chartered PLC | 11,528 | 251,320 | ||||||
Tesco PLC | 32,344 | 157,219 | ||||||
(Cost $1,262,393) | 1,191,895 | |||||||
United States 36.3% | ||||||||
Abbott Laboratories (a) | 8,870 | 571,849 | ||||||
Adobe Systems, Inc.* (a) | 17,125 | 554,336 | ||||||
Advanced Micro Devices, Inc.* (a) | 50,876 | 291,520 | ||||||
AGCO Corp.* | 16,526 | 755,734 | ||||||
AllianceBernstein Holding LP | 17,656 | 224,055 | ||||||
Ashland, Inc. | 2,237 | 155,047 | ||||||
Bank of America Corp. | 122,762 | 1,004,193 | ||||||
Bunge Ltd. (a) | 4,212 | 264,261 | ||||||
Calpine Corp.* | 35,572 | 587,294 | ||||||
Chevron Corp. | 6,014 | 634,477 | ||||||
Cisco Systems, Inc. | 20,073 | 344,653 | ||||||
CSX Corp. (a) | 30,135 | 673,819 | ||||||
Dow Chemical Co. (a) | 27,790 | 875,385 | ||||||
Energy Transfer Equity LP | 7,129 | 292,432 | ||||||
Energy Transfer Partners LP (a) | 10,168 | 449,324 | ||||||
Frontier Communications Corp. (a) | 37,471 | 143,514 | ||||||
Global Payments, Inc. | 6,122 | 264,654 | ||||||
iRobot Corp.* (a) | 6,063 | 134,295 | ||||||
JPMorgan Chase & Co. | 3,203 | 114,443 | ||||||
Laboratory Corp. of America Holdings* (a) | 14,092 | 1,305,060 | ||||||
Life Technologies Corp.* (a) | 19,920 | 896,201 | ||||||
Monsanto Co. | 11,041 | 913,974 | ||||||
NCR Corp.* | 41,111 | 934,453 | ||||||
Shares | Value ($) | |||||||
NetApp, Inc.* (a) | 11,293 | 359,343 | ||||||
New York Times Co. "A"* (a) | 36,828 | 287,258 | ||||||
Newmont Mining Corp. | 15,617 | 757,581 | ||||||
Oracle Corp. | 13,392 | 397,742 | ||||||
PerkinElmer, Inc. (a) | 8,249 | 212,824 | ||||||
Quest Diagnostics, Inc. | 6,405 | 383,660 | ||||||
Quest Software, Inc.* | 6,725 | 187,291 | ||||||
Ralcorp Holdings, Inc.* | 7,731 | 515,967 | ||||||
Rock-Tenn Co. "A" | 5,048 | 275,368 | ||||||
Safeway, Inc. | 9,647 | 175,093 | ||||||
Schlumberger Ltd. (a) | 7,455 | 483,904 | ||||||
Symantec Corp.* | 30,899 | 451,434 | ||||||
The Mosaic Co. | 30,340 | 1,661,418 | ||||||
Williams Companies, Inc. | 24,195 | 697,300 | ||||||
(Cost $17,545,040) | 19,231,156 | |||||||
Total Common Stocks (Cost $50,931,634) | 50,829,071 | |||||||
Preferred Stock 1.7% | ||||||||
Germany | ||||||||
Volkswagen AG (Cost $892,098) | 5,638 | 893,891 | ||||||
Participatory Notes 0.2% | ||||||||
Nigeria | ||||||||
Bank of Nigeria (issuer HSBC Bank PLC), Expiration Date 11/5/2013 | 1,383,174 | 92,807 | ||||||
Guaranty Trust Bank PLC (issuer HSBC Bank PLC), Expiration Date 9/15/2014* | 228,273 | 21,039 | ||||||
Zenith Bank PLC (issuer HSBC Bank PLC), Expiration Date 2/2/2015* | 234,847 | 19,841 | ||||||
Total Participatory Notes (Cost $152,400) | 133,687 | |||||||
Securities Lending Collateral 17.8% | ||||||||
Daily Assets Fund Institutional, 0.24% (c) (d) (Cost $9,410,055) | 9,410,055 | 9,410,055 | ||||||
Cash Equivalents 2.5% | ||||||||
Central Cash Management Fund, 0.14% (c) (Cost $1,307,154) | 1,307,154 | 1,307,154 |
% of Net Assets | Value ($) | |||||||
Total Investment Portfolio (Cost $62,693,341)+ | 118.1 | 62,573,858 | ||||||
Other Assets and Liabilities, Net | (18.1 | ) | (9,586,755 | ) | ||||
Net Assets | 100.0 | 52,987,103 |
* Non-income producing security.
+ The cost for federal income tax purposes was $63,333,050. At June 30, 2012, net unrealized depreciation for all securities based on tax cost was $759,192. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $4,114,780 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $4,873,972.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at June 30, 2012 amounted to $9,503,930, which is 17.9% of net assets.
(b) Listed on the New York Stock Exchange.
(c) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(d) 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.
ADR: American Depositary Receipt
CVA: Certificaten Van Aandelen
GDR: Global Depositary Receipt
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, U.S. persons, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933.
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 June 30, 2012 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 & Preferred Stock (e) | ||||||||||||||||
Austria | $ | — | $ | 298,231 | $ | — | $ | 298,231 | ||||||||
Bahrain | — | 131,622 | — | 131,622 | ||||||||||||
Belgium | — | 254,882 | — | 254,882 | ||||||||||||
Bermuda | 400,064 | — | — | 400,064 | ||||||||||||
Brazil | 2,265,294 | — | — | 2,265,294 | ||||||||||||
Canada | 3,355,858 | — | — | 3,355,858 | ||||||||||||
China | 699,777 | 859,472 | — | 1,559,249 | ||||||||||||
Denmark | — | 371,706 | — | 371,706 | ||||||||||||
Egypt | — | 242,803 | — | 242,803 | ||||||||||||
France | — | 818,294 | — | 818,294 | ||||||||||||
Germany | — | 5,116,951 | — | 5,116,951 | ||||||||||||
India | 1,511,862 | — | — | 1,511,862 | ||||||||||||
Indonesia | — | 120,492 | — | 120,492 | ||||||||||||
Israel | 641,768 | — | — | 641,768 | ||||||||||||
Japan | — | 1,591,513 | — | 1,591,513 | ||||||||||||
Korea | 160,237 | 952,080 | — | 1,112,317 | ||||||||||||
Malaysia | — | 259,176 | — | 259,176 | ||||||||||||
Mexico | 497,935 | — | — | 497,935 | ||||||||||||
Netherlands | 376,720 | 3,182,709 | — | 3,559,429 | ||||||||||||
Panama | 317,301 | — | — | 317,301 | ||||||||||||
Russia | — | 1,065,998 | — | 1,065,998 | ||||||||||||
South Africa | — | 2,102,964 | — | 2,102,964 | ||||||||||||
Sweden | — | 1,312,884 | — | 1,312,884 | ||||||||||||
Switzerland | — | 1,725,722 | — | 1,725,722 | ||||||||||||
Thailand | — | 665,596 | — | 665,596 | ||||||||||||
United Kingdom | — | 1,191,895 | — | 1,191,895 | ||||||||||||
United States | 19,231,156 | — | — | 19,231,156 | ||||||||||||
Participatory Notes (e) | — | 133,687 | — | 133,687 | ||||||||||||
Short-Term Investments (e) | 10,717,209 | — | — | 10,717,209 | ||||||||||||
Total | $ | 40,175,181 | $ | 22,398,677 | — | $ | 62,573,858 |
There have been no transfers between Level 1 and Level 2 fair value measurements during the period ended June 30, 2012.
(e) See Investment Portfolio for additional detailed categorizations.
The accompanying notes are an integral part of the financial statements.
as of June 30, 2012 (Unaudited) | ||||
Assets | ||||
Investments: Investments in non-affiliated securities, at value (cost $51,976,132) — including $9,503,930 of securities loaned | $ | 51,856,649 | ||
Investment in Daily Assets Fund Institutional (cost $9,410,055)* | 9,410,055 | |||
Investment in Central Cash Management Fund (cost $1,307,154) | 1,307,154 | |||
Total investments in securities, at value (cost $62,693,341) | 62,573,858 | |||
Foreign currency, at value (cost $56,734) | 56,639 | |||
Receivable for investments sold | 212,261 | |||
Receivable for Fund shares sold | 512 | |||
Dividends receivable | 64,771 | |||
Interest receivable | 2,215 | |||
Foreign taxes recoverable | 19,748 | |||
Other assets | 289 | |||
Total assets | 62,930,293 | |||
Liabilities | ||||
Cash overdraft | 14 | |||
Payable upon return of securities loaned | 9,410,055 | |||
Payable for investments purchased | 367,923 | |||
Payable for Fund shares redeemed | 76,418 | |||
Accrued management fee | 16,531 | |||
Accrued Trustees' fees | 302 | |||
Other accrued expenses and payables | 71,947 | |||
Total liabilities | 9,943,190 | |||
Net assets, at value | $ | 52,987,103 | ||
Net Assets Consist of | ||||
Undistributed net investment income | 571,875 | |||
Net unrealized appreciation (depreciation) on: Investments | (119,483 | ) | ||
Foreign currency | (1,854 | ) | ||
Accumulated net realized gain (loss) | (54,476,150 | ) | ||
Paid-in capital | 107,012,715 | |||
Net assets, at value | $ | 52,987,103 | ||
Class A Net Asset Value, offering and redemption price per share ($50,282,141 ÷ 6,137,873 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | $ | 8.19 | ||
Class B Net Asset Value, offering and redemption price per share ($2,704,962 ÷ 329,263 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | $ | 8.22 |
* Represents collateral on securities loaned.
The accompanying notes are an integral part of the financial statements.
Statement of Operations
for the six months ended June 30, 2012 (Unaudited) | ||||
Investment Income | ||||
Income: Dividends (net of foreign taxes withheld of $69,956) | $ | 844,802 | ||
Income distributions — Central Cash Management Fund | 857 | |||
Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates | 45,562 | |||
Total income | 891,221 | |||
Expenses: Management fee | 253,342 | |||
Administration fee | 27,688 | |||
Services to shareholders | 159 | |||
Distribution service fee (Class B) | 3,846 | |||
Record keeping fees (Class B) | 1,477 | |||
Custodian fee | 53,641 | |||
Audit and tax fees | 30,758 | |||
Legal fees | 4,796 | |||
Reports to shareholders | 11,994 | |||
Trustees' fees and expenses | 2,366 | |||
Other | 15,931 | |||
Total expenses before expense reductions | 405,998 | |||
Expense reductions | (118,106 | ) | ||
Total expenses after expense reductions | 287,892 | |||
Net investment income (loss) | 603,329 | |||
Realized and Unrealized Gain (Loss) | ||||
Net realized gain (loss) from: Investments | (1,043,205 | ) | ||
Foreign currency | (21,058 | ) | ||
(1,064,263 | ) | |||
Change in net unrealized appreciation (depreciation) on: Investments | 3,152,727 | |||
Foreign currency | 749 | |||
3,153,476 | ||||
Net gain (loss) | 2,089,213 | |||
Net increase (decrease) in net assets resulting from operations | $ | 2,692,542 |
The accompanying notes are an integral part of the financial statements.
Increase (Decrease) in Net Assets | Six Months Ended June 30, 2012 (Unaudited) | Year Ended December 31, 2011 | ||||||
Operations: Net investment income (loss) | $ | 603,329 | $ | 781,153 | ||||
Operations: Net investment income (loss) | $ | 603,329 | $ | 781,153 | ||||
Net realized gain (loss) | (1,064,263 | ) | 41,917 | |||||
Change in net unrealized appreciation (depreciation) | 3,153,476 | (9,895,185 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 2,692,542 | (9,072,115 | ) | |||||
Distributions to shareholders from: Net investment income: Class A | (741,039 | ) | (391,766 | ) | ||||
Class B | (31,068 | ) | (9,700 | ) | ||||
Total distributions | (772,107 | ) | (401,466 | ) | ||||
Fund share transactions: Class A Proceeds from shares sold | 2,784,146 | 3,929,750 | ||||||
Reinvestment of distributions | 741,039 | 391,766 | ||||||
Payments for shares redeemed | (4,285,021 | ) | (13,903,803 | ) | ||||
Net increase (decrease) in net assets from Class A share transactions | (759,836 | ) | (9,582,287 | ) | ||||
Class B Proceeds from shares sold | 41,421 | 106,041 | ||||||
Reinvestment of distributions | 31,068 | 9,700 | ||||||
Payments for shares redeemed | (624,016 | ) | (1,299,469 | ) | ||||
Net increase (decrease) in net assets from Class B share transactions | (551,527 | ) | (1,183,728 | ) | ||||
Increase (decrease) in net assets | 609,072 | (20,239,596 | ) | |||||
Net assets at beginning of period | 52,378,031 | 72,617,627 | ||||||
Net assets at end of period (including undistributed net investment income of $571,875 and $740,653, respectively) | $ | 52,987,103 | $ | 52,378,031 | ||||
Other Information | ||||||||
Class A Shares outstanding at beginning of period | 6,234,878 | 7,301,949 | ||||||
Shares sold | 320,953 | 458,129 | ||||||
Shares issued to shareholders in reinvestment of distributions | 85,967 | 39,334 | ||||||
Shares redeemed | (503,925 | ) | (1,564,534 | ) | ||||
Net increase (decrease) in Class A shares | (97,005 | ) | (1,067,071 | ) | ||||
Shares outstanding at end of period | 6,137,873 | 6,234,878 | ||||||
Class B Shares outstanding at beginning of period | 393,322 | 519,624 | ||||||
Shares sold | 4,941 | 12,482 | ||||||
Shares issued to shareholders in reinvestment of distributions | 3,592 | 971 | ||||||
Shares redeemed | (72,592 | ) | (139,755 | ) | ||||
Net increase (decrease) in Class B shares | (64,059 | ) | (126,302 | ) | ||||
Shares outstanding at end of period | 329,263 | 393,322 |
The accompanying notes are an integral part of the financial statements.
Years Ended December 31, | ||||||||||||||||||||||||
Class A | Six Months Ended 6/30/12 (Unaudited) | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Selected Per Share Data | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.90 | $ | 9.28 | $ | 8.24 | $ | 5.84 | $ | 15.66 | $ | 17.39 | ||||||||||||
Income (loss) from investment operations: Net investment incomea | .09 | .11 | .06 | .08 | .11 | .14 | ||||||||||||||||||
Net realized and unrealized gain (loss) | .32 | (1.43 | ) | 1.06 | 2.42 | (5.83 | ) | .88 | ||||||||||||||||
Total from investment operations | .41 | (1.32 | ) | 1.12 | 2.50 | (5.72 | ) | 1.02 | ||||||||||||||||
Less distributions from: Net investment income | (.12 | ) | (.06 | ) | (.08 | ) | (.10 | ) | (.19 | ) | (.11 | ) | ||||||||||||
Net realized gains | — | — | — | — | (3.91 | ) | (2.64 | ) | ||||||||||||||||
Total distributions | (.12 | ) | (.06 | ) | (.08 | ) | (.10 | ) | (4.10 | ) | (2.75 | ) | ||||||||||||
Net asset value, end of period | $ | 8.19 | $ | 7.90 | $ | 9.28 | $ | 8.24 | $ | 5.84 | $ | 15.66 | ||||||||||||
Total Return (%)b | 5.12 | ** | (14.39 | ) | 13.65 | 43.82 | (47.75 | ) | 6.29 | |||||||||||||||
Ratios to Average Net Assets and Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period ($ millions) | 50 | 49 | 68 | 66 | 59 | 151 | ||||||||||||||||||
Ratio of expenses before expense reductions (%) | 1.45 | * | 1.37 | 1.41 | 1.38 | 1.47 | 1.44 | |||||||||||||||||
Ratio of expenses after expense reductions (%) | 1.02 | * | 1.03 | 1.05 | 1.04 | 1.09 | 1.11 | |||||||||||||||||
Ratio of net investment income (%) | 1.10 | *** | 1.24 | .77 | 1.23 | 1.09 | .82 | |||||||||||||||||
Portfolio turnover rate (%) | 56 | ** | 127 | 165 | 190 | 229 | 191 | |||||||||||||||||
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. * Annualized ** Not annualized *** Not annualized. The ratio for the six months ended June 30, 2012 has not been annualized, since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the year. |
Years Ended December 31, | ||||||||||||||||||||||||
Class B | Six Months Ended 6/30/12 (Unaudited) | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Selected Per Share Data | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.91 | $ | 9.29 | $ | 8.25 | $ | 5.85 | $ | 15.66 | $ | 17.38 | ||||||||||||
Income (loss) from investment operations: Net investment incomea | .08 | .08 | .04 | .06 | .07 | .07 | ||||||||||||||||||
Net realized and unrealized gain (loss) | .32 | (1.44 | ) | 1.05 | 2.42 | (5.83 | ) | .90 | ||||||||||||||||
Total from investment operations | .40 | (1.36 | ) | 1.09 | 2.48 | (5.76 | ) | .97 | ||||||||||||||||
Less distributions from: Net investment income | (.09 | ) | (.02 | ) | (.05 | ) | (.08 | ) | (.14 | ) | (.05 | ) | ||||||||||||
Net realized gains | — | — | — | — | (3.91 | ) | (2.64 | ) | ||||||||||||||||
Total distributions | (.09 | ) | (.02 | ) | (.05 | ) | (.08 | ) | (4.05 | ) | (2.69 | ) | ||||||||||||
Net asset value, end of period | $ | 8.22 | $ | 7.91 | $ | 9.29 | $ | 8.25 | $ | 5.85 | $ | 15.66 | ||||||||||||
Total Return (%)b | 4.87 | ** | (14.67 | ) | 13.24 | 43.23 | (47.87 | ) | 5.84 | |||||||||||||||
Ratios to Average Net Assets and Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period ($ millions) | 3 | 3 | 5 | 5 | 4 | 10 | ||||||||||||||||||
Ratio of expenses before expense reductions (%) | 1.79 | * | 1.72 | 1.76 | 1.73 | 1.82 | 1.81 | |||||||||||||||||
Ratio of expenses after expense reductions (%) | 1.36 | * | 1.38 | 1.40 | 1.39 | 1.45 | 1.47 | |||||||||||||||||
Ratio of net investment income (%) | .89 | *** | .88 | .42 | .88 | .73 | .46 | |||||||||||||||||
Portfolio turnover rate (%) | 56 | ** | 127 | 165 | 190 | 229 | 191 | |||||||||||||||||
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. * Annualized ** Not annualized *** Not annualized. The ratio for the six months ended June 30, 2012 has not been annualized, since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the year. |
A. Organization and Significant Accounting Policies
DWS Global Thematic VIP (the "Fund") is a diversified series of DWS Variable Series II (the "Trust"), which 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.
Multiple Classes of Shares of Beneficial Interest. The Fund offers two classes of shares (Class A shares and Class B shares). Sales of Class B shares are subject to recordkeeping 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 for Class B shares of the 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 recordkeeping 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 Fund'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 Fund 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 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.
Equity securities are valued at the most recent sale price or official closing price reported on the exchange (U.S. or foreign) or over-the-counter market on which they trade and are categorized as Level 1 securities. Securities 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 certain indices and these securities 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.
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 the 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 Fund's Investment Portfolio.
Foreign Currency Translations. The books and records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing exchange rates at period end. Purchases and sales of investment securities, income and expenses are translated into U.S. 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 acquisition and disposition of foreign currencies, and the difference between the amount of net investment income accrued and the U.S. 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.
Securities Lending. The Fund 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 under 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.
Participatory Notes. The Fund 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 agreement and potential delays or an inability to redeem before maturity under certain market conditions.
Taxes. The 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 Fund's understanding of the tax rules and rates related to income, gains and transactions for the foreign jurisdictions in which it invests, the Fund will provide for foreign taxes and, where appropriate, deferred foreign taxes.
Under the Regulated Investment Company Modernization Act of 2010, net capital losses may be carried forward indefinitely, and their character is retained as short-term and/or long-term. Previously, net capital losses were carried forward for eight years and treated as short-term. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
At December 31, 2011, the Fund had a net tax basis capital loss carryforward of approximately $51,528,000 of pre-enactment losses, which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until December 31, 2016 ($35,241,000) and December 31, 2017 ($16,287,000), the respective expiration dates, whichever occurs first.
From November 1, 2011 through December 31, 2011, the Fund elects to defer qualified late year losses of approximately $96,000 of net long-term realized capital losses and $1,494,000 of net short-term realized capital losses and treat them as arising in the fiscal year ending December 31, 2012.
The Fund has reviewed the tax positions for the open tax years as of December 31, 2011 and has determined that no provision for income tax is required in the Fund's financial statements. The Fund's federal tax returns for the prior three fiscal years remain open subject to examination by the Internal Revenue Service.
Distribution of Income and Gains. Distributions of net investment income of the Fund, if any, are made annually. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed and, therefore, will be distributed to shareholders at least annually. The Fund may also make additional distributions for tax purposes if necessary.
The timing and characterization of certain income and capital gain 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 investments in foreign denominated investments, income received from Passive Foreign Investment Companies 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, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.
The tax character of current year distributions will be determined at the end of the current fiscal year.
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, the Fund may enter into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet been made. However, based on experience, the Fund expects the risk of loss to be remote.
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 and may include proceeds from litigation.
B. Purchases and Sales of Securities
During the six months ended June 30, 2012, purchases and sales of investment transactions (excluding short-term investments) aggregated $30,203,556 and $32,997,764, respectively.
C. 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 the 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 the Fund or delegates such responsibility to the Fund's subadvisor.
Global Thematic Partners, LLC ("GTP") serves as subadvisor. As a subadvisor to the Fund, GTP makes investment decisions and buys and sells securities for the Fund. GTP is paid by the Advisor for the services GTP provides to the Fund.
Pursuant to the Investment Management Agreement with the Advisor, the Fund pays a monthly management fee based on the Fund's average daily net assets, computed and accrued daily and payable monthly, at the following annual rates:
First $250 million | .915 | % | ||
Next $500 million | .865 | % | ||
Next $750 million | .815 | % | ||
Next $1.5 billion | .765 | % | ||
Over $3 billion | .715 | % |
For the period from January 1, 2012 through April 30, 2013, 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:
Class A | 1.02% |
Class B | 1.37% |
Accordingly, for the six months ended June 30, 2012, the Advisor waived a portion of its management fee pursuant to the Investment Management Agreement aggregating $117,978, and the amount charged aggregated $135,364, which was equivalent to an annualized effective rate of 0.49% of the Fund's average daily net assets.
Administration Fee. Pursuant to an Administrative Services Agreement, DIMA provides most administrative services to the Fund. For all services provided under the Administrative Services Agreement, the Fund pays DIMA an annual fee ("Administration Fee") of 0.10% of the Fund's average daily net assets, computed and accrued daily and payable monthly. For the six months ended June 30, 2012, the Administration Fee was $27,688, of which $4,185 is unpaid.
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 the 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 the Fund. For the six months ended June 30, 2012, the amounts charged to the Fund by DISC were as follows:
Services to Shareholders | Total Aggregated | Waived | Unpaid at June 30, 2012 | |||||||||
Class A | $ | 128 | $ | 128 | $ | — | ||||||
Class B | 31 | — | 10 | |||||||||
$ | 159 | $ | 128 | $ | 10 |
Distribution Service Agreement. Under the Fund's 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 six months ended June 30, 2012, the Distribution Service Fee aggregated $3,846, of which $535 is unpaid.
Typesetting and Filing Service Fees. Under an agreement with DIMA, DIMA is compensated for providing typesetting and certain regulatory filing services to the Fund. For the six months ended June 30, 2012, the amount charged to the Fund by DIMA included in the Statement of Operations under "reports to shareholders" aggregated $10,766, of which $1,983 is unpaid.
Trustees' Fees and Expenses. The Fund paid retainer fees to each Trustee not affiliated with the Advisor, plus specified amounts to the Board Chairperson and to each committee Chairperson.
Affiliated Cash Management Vehicle. The Fund may invest uninvested cash balances in Central Cash Management Fund, which is managed by the Advisor. The Fund indirectly bears its proportionate share of the expenses of Central Cash Management Fund. 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.
D. 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.
E. Ownership of the Fund
At June 30, 2012, 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 30%. One Participating Insurance Company was the owner of record of 10% or more of the total outstanding Class B shares of the Fund, owning 97%.
F. Line of Credit
The Fund and other affiliated funds (the "Participants") share in a $375 million revolving credit facility provided by a syndication of banks. The Fund 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 Fund may borrow up to a maximum of 33 percent of its net assets under the agreement. The Fund had no outstanding loans at June 30, 2012.
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 (January 1, 2012 to June 30, 2012).
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 June 30, 2012 | ||||||||
Actual Fund Return | Class A | Class B | ||||||
Beginning Account Value 1/1/12 | $ | 1,000.00 | $ | 1,000.00 | ||||
Ending Account Value 6/30/12 | $ | 1,051.20 | $ | 1,048.70 | ||||
Expenses Paid per $1,000* | $ | 5.20 | $ | 6.93 | ||||
Hypothetical 5% Fund Return | Class A | Class B | ||||||
Beginning Account Value 1/1/12 | $ | 1,000.00 | $ | 1,000.00 | ||||
Ending Account Value 6/30/12 | $ | 1,019.79 | $ | 1,018.10 | ||||
Expenses Paid per $1,000* | $ | 5.12 | $ | 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 182 (the number of days in the most recent six-month period), then divided by 366.
Annualized Expense Ratios | Class A | Class B | ||
DWS Variable Series II — DWS Global Thematic VIP | 1.02% | 1.36% |
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 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.
September 26, 2011
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 report summarizes my evaluation for 2011, 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, 2009 and 2010.
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 109 mutual 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
President, Thomas H. Mack & Co., Inc.
Notes
DWS Investments Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606
(800) 621-1148
VS2GT-3 (R-028383-1 8/12)
JUNE 30, 2012
SEMIANNUAL REPORT
DWS VARIABLE SERIES II
DWS High Income VIP
Contents
3 Performance Summary 4 Portfolio Summary 6 Portfolio Management 7 Investment Portfolio 20 Statement of Assets and Liabilities 21 Statement of Operations 22 Statement of Changes in Net Assets 23 Financial Highlights 24 Notes to Financial Statements 30 Information About Your Fund's Expenses 31 Proxy Voting 32 Summary of Management Fee Evaluation by Independent Fee Consultant |
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.
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 ("junk bonds") and non-rated securities present greater risk of loss than investments in higher-quality securities. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. The Fund may lend securities to approved institutions. See the prospectus for details.
DWS Investments is part of Deutsche Bank's Asset Management division and, within the U.S., represents the retail asset management activities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company.
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
Fund 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 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, 2012 are 0.72% and 0.99% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Growth of an Assumed $10,000 Investment in DWS High Income VIP | ||
The Credit Suisse High Yield Index is an unmanaged, trader-priced portfolio constructed to mirror the global high-yield debt market. Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index. | ||
Yearly periods ended June 30 |
Comparative Results | |||||||||||||||||||||
DWS High Income VIP | 6-Month‡ | 1-Year | 3-Year | 5-Year | 10-Year | ||||||||||||||||
Class A | Growth of $10,000 | $ | 10,679 | $ | 10,663 | $ | 14,865 | $ | 13,189 | $ | 22,454 | ||||||||||
Average annual total return | 6.79 | % | 6.63 | % | 14.13 | % | 5.69 | % | 8.43 | % | |||||||||||
Credit Suisse High Yield Index | Growth of $10,000 | $ | 10,666 | $ | 10,730 | $ | 15,604 | $ | 14,510 | $ | 25,384 | ||||||||||
Average annual total return | 6.66 | % | 7.30 | % | 15.99 | % | 7.73 | % | 9.76 | % | |||||||||||
DWS High Income VIP | 6-Month‡ | 1-Year | 3-Year | 5-Year | Life of Class* | ||||||||||||||||
Class B | Growth of $10,000 | $ | 10,663 | $ | 10,631 | $ | 14,746 | $ | 13,014 | $ | 21,709 | ||||||||||
Average annual total return | 6.63 | % | 6.31 | % | 13.82 | % | 5.41 | % | 8.06 | % | |||||||||||
Credit Suisse High Yield Index | Growth of $10,000 | $ | 10,666 | $ | 10,730 | $ | 15,604 | $ | 14,510 | $ | 25,384 | ||||||||||
Average annual total return | 6.66 | % | 7.30 | % | 15.99 | % | 7.73 | % | 9.76 | % |
The growth of $10,000 is cumulative.
‡ Total returns shown for periods less than one year are not annualized.
* The Fund commenced offering Class B shares on July 1, 2002. The performance shown for the index is for the time period of June 30, 2002 through June 30, 2012, which is based on the performance period of the life of the class.
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | 6/30/12 | 12/31/11 |
Corporate Bonds | 95% | 90% |
Cash Equivalents | 3% | 8% |
Preferred Securities | 1% | 0% |
Loan Participations and Assignments | 1% | 1% |
Government & Agency Obligations | — | 1% |
100% | 100% |
Sector Diversification (As a % of Investment Portfolio excluding Government & Agency Obligations, Cash Equivalents and Securities Lending Collateral) | 6/30/12 | 12/31/11 |
Consumer Discretionary | 23% | 22% |
Financials | 16% | 15% |
Telecommunication Services | 13% | 14% |
Energy | 13% | 12% |
Materials | 12% | 12% |
Industrials | 8% | 10% |
Information Technology | 5% | 5% |
Health Care | 4% | 3% |
Consumer Staples | 3% | 4% |
Utilities | 3% | 3% |
100% | 100% |
Quality (As a % of Investment Portfolio excluding Cash Equivalents and Securities Lending Collateral) | 6/30/12 | 12/31/11 |
AAA | — | 1% |
BBB | 2% | 3% |
BB | 31% | 32% |
B | 54% | 52% |
CCC | 11% | 11% |
Not Rated | 2% | 1% |
100% | 100% |
The quality ratings represent the higher 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. Credit quality measures a bond issuer's ability to repay interest and principal in a timely manner. Ratings are relative and subjective and are not absolute standards of quality. Credit quality does not remove market risk and is subject to change.
Portfolio holdings and characteristics are subject to change.
For more complete details about the Fund's investment portfolio, see page 7.
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.
Gary Russell, CFA
Portfolio Manager
Principal Amount ($)(a) | Value ($) | ||||||||
Corporate Bonds 93.2% | |||||||||
Consumer Discretionary 20.9% | |||||||||
AMC Entertainment, Inc., 8.75%, 6/1/2019 | 765,000 | 820,462 | |||||||
AMC Networks, Inc., 144A, 7.75%, 7/15/2021 | 80,000 | 88,200 | |||||||
American Achievement Corp., 144A, 10.875%, 4/15/2016 | 260,000 | 189,150 | |||||||
Asbury Automotive Group, Inc.: | |||||||||
7.625%, 3/15/2017 | 590,000 | 610,650 | |||||||
8.375%, 11/15/2020 | 460,000 | 501,400 | |||||||
Avis Budget Car Rental LLC: | |||||||||
8.25%, 1/15/2019 (b) | 535,000 | 573,787 | |||||||
9.625%, 3/15/2018 | 260,000 | 284,700 | |||||||
Beazer Homes U.S.A., Inc., 9.125%, 6/15/2018 | 135,000 | 119,138 | |||||||
Block Communications, Inc., 144A, 7.25%, 2/1/2020 | 375,000 | 380,625 | |||||||
Cablevision Systems Corp.: | |||||||||
7.75%, 4/15/2018 | 65,000 | 69,225 | |||||||
8.0%, 4/15/2020 | 65,000 | 70,200 | |||||||
Caesar's Entertainment Operating Co., Inc.: | |||||||||
144A, 8.5%, 2/15/2020 | 760,000 | 765,700 | |||||||
10.0%, 12/15/2018 | 450,000 | 307,688 | |||||||
11.25%, 6/1/2017 | 715,000 | 780,244 | |||||||
Carlson Wagonlit BV, 144A, 6.875%, 6/15/2019 | 215,000 | 220,375 | |||||||
CCO Holdings LLC: | |||||||||
6.5%, 4/30/2021 | 1,155,000 | 1,230,075 | |||||||
6.625%, 1/31/2022 | 450,000 | 481,500 | |||||||
7.0%, 1/15/2019 | 120,000 | 129,600 | |||||||
7.25%, 10/30/2017 | 520,000 | 566,800 | |||||||
7.375%, 6/1/2020 | 50,000 | 54,938 | |||||||
7.875%, 4/30/2018 | 225,000 | 244,688 | |||||||
8.125%, 4/30/2020 | 150,000 | 167,250 | |||||||
Cequel Communications Holdings I LLC, 144A, 8.625%, 11/15/2017 | 1,725,000 | 1,858,687 | |||||||
Chester Downs & Marina LLC, 144A, 9.25%, 2/1/2020 | 145,000 | 151,163 | |||||||
Clear Channel Communications, Inc., 9.0%, 3/1/2021 | 140,000 | 121,800 | |||||||
Clear Channel Worldwide Holdings, Inc.: | |||||||||
144A, 7.625%, 3/15/2020 | 1,225,000 | 1,195,237 | |||||||
Series A, 9.25%, 12/15/2017 | 100,000 | 108,750 | |||||||
Series B, 9.25%, 12/15/2017 | 150,000 | 163,500 | |||||||
CSC Holdings LLC, 144A, 6.75%, 11/15/2021 | 1,400,000 | 1,491,000 | |||||||
Cumulus Media Holdings, Inc., 7.75%, 5/1/2019 (b) | 250,000 | 235,625 | |||||||
DineEquity, Inc., 9.5%, 10/30/2018 | 385,000 | 421,575 | |||||||
DISH DBS Corp.: | |||||||||
6.75%, 6/1/2021 | 50,000 | 54,000 | |||||||
7.125%, 2/1/2016 | 465,000 | 510,337 | |||||||
7.875%, 9/1/2019 | 270,000 | 311,175 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
Fontainebleau Las Vegas Holdings LLC, 144A, 11.0%, 6/15/2015* | 490,000 | 306 | |||||||
Great Canadian Gaming Corp., 144A, 7.25%, 2/15/2015 | 505,000 | 511,944 | |||||||
Harron Communications LP, 144A, 9.125%, 4/1/2020 | 270,000 | 279,450 | |||||||
Hertz Corp.: | |||||||||
144A, 6.75%, 4/15/2019 | 215,000 | 223,600 | |||||||
6.75%, 4/15/2019 (b) | 90,000 | 93,600 | |||||||
7.5%, 10/15/2018 | 905,000 | 970,612 | |||||||
Lear Corp., 8.125%, 3/15/2020 | 230,000 | 257,600 | |||||||
Libbey Glass, Inc., 144A, 6.875%, 5/15/2020 | 130,000 | 133,575 | |||||||
Lions Gate Entertainment, Inc., 144A, 10.25%, 11/1/2016 | 540,000 | 591,300 | |||||||
Mediacom Broadband LLC, 8.5%, 10/15/2015 (b) | 635,000 | 652,462 | |||||||
Mediacom LLC: | |||||||||
7.25%, 2/15/2022 | 110,000 | 111,925 | |||||||
9.125%, 8/15/2019 | 560,000 | 614,600 | |||||||
MGM Resorts International: | |||||||||
7.5%, 6/1/2016 | 205,000 | 212,175 | |||||||
7.625%, 1/15/2017 (b) | 560,000 | 578,200 | |||||||
144A, 8.625%, 2/1/2019 (b) | 840,000 | 898,800 | |||||||
9.0%, 3/15/2020 | 145,000 | 160,950 | |||||||
10.0%, 11/1/2016 (b) | 225,000 | 249,188 | |||||||
11.125%, 11/15/2017 | 235,000 | 263,788 | |||||||
Michaels Stores, Inc., 13.0%, 11/1/2016 (b) | 88,000 | 94,271 | |||||||
National CineMedia LLC, 144A, 6.0%, 4/15/2022 | 200,000 | 203,500 | |||||||
Norcraft Companies LP, 10.5%, 12/15/2015 (b) | 1,260,000 | 1,247,400 | |||||||
Palace Entertainment Holdings LLC, 144A, 8.875%, 4/15/2017 | 435,000 | 454,575 | |||||||
Penske Automotive Group, Inc., 7.75%, 12/15/2016 | 730,000 | 757,375 | |||||||
PETCO Animal Supplies, Inc., 144A, 9.25%, 12/1/2018 | 315,000 | 344,138 | |||||||
Regal Entertainment Group, 9.125%, 8/15/2018 (b) | 180,000 | 198,000 | |||||||
Sabre Holdings Corp., 8.35%, 3/15/2016 | 305,000 | 288,225 | |||||||
Seminole Indian Tribe of Florida: | |||||||||
144A, 7.75%, 10/1/2017 | 200,000 | 218,000 | |||||||
144A, 7.804%, 10/1/2020 | 415,000 | 411,518 | |||||||
Sonic Automotive, Inc.: | |||||||||
144A, 7.0%, 7/15/2022 (c) | 95,000 | 98,325 | |||||||
Series B, 9.0%, 3/15/2018 | 565,000 | 614,437 | |||||||
Toys "R" Us-Delaware, Inc., 144A, 7.375%, 9/1/2016 | 200,000 | 198,000 | |||||||
Travelport LLC: | |||||||||
5.092%**, 9/1/2014 | 390,000 | 248,625 | |||||||
9.0%, 3/1/2016 (b) | 75,000 | 52,500 | |||||||
UCI International, Inc., 8.625%, 2/15/2019 | 120,000 | 120,750 | |||||||
Unitymedia GmbH, 144A, 9.625%, 12/1/2019 | EUR | 550,000 | 756,927 | ||||||
Principal Amount ($)(a) | Value ($) | ||||||||
Unitymedia Hessen GmbH & Co., KG: | |||||||||
144A, 7.5%, 3/15/2019 | 435,000 | 461,100 | |||||||
144A, 8.125%, 12/1/2017 | 1,110,000 | 1,193,250 | |||||||
Univision Communications, Inc.: | |||||||||
144A, 6.875%, 5/15/2019 | 60,000 | 61,800 | |||||||
144A, 7.875%, 11/1/2020 | 140,000 | 149,800 | |||||||
UPC Holding BV: | |||||||||
144A, 8.375%, 8/15/2020 | EUR | 480,000 | 628,700 | ||||||
144A, 9.75%, 4/15/2018 | EUR | 425,000 | 576,830 | ||||||
Visant Corp., 10.0%, 10/1/2017 | 460,000 | 456,550 | |||||||
Visteon Corp., 6.75%, 4/15/2019 | 435,000 | 423,037 | |||||||
Yonkers Racing Corp., 144A, 11.375%, 7/15/2016 | 335,000 | 355,938 | |||||||
32,696,890 | |||||||||
Consumer Staples 3.3% | |||||||||
B&G Foods, Inc., 7.625%, 1/15/2018 | 230,000 | 247,250 | |||||||
Del Monte Corp., 7.625%, 2/15/2019 | 410,000 | 413,587 | |||||||
Dole Food Co., Inc., 144A, 8.0%, 10/1/2016 | 130,000 | 135,688 | |||||||
FAGE Dairy Industry SA, 144A, 9.875%, 2/1/2020 | 555,000 | 488,400 | |||||||
JBS U.S.A. LLC, 144A, 8.25%, 2/1/2020 | 160,000 | 155,600 | |||||||
NBTY, Inc., 9.0%, 10/1/2018 | 190,000 | 209,950 | |||||||
Pilgrim's Pride Corp., 7.875%, 12/15/2018 (b) | 290,000 | 293,987 | |||||||
Smithfield Foods, Inc., 7.75%, 7/1/2017 | 1,880,000 | 2,079,750 | |||||||
SUPERVALU, Inc., 8.0%, 5/1/2016 (b) | 210,000 | 212,625 | |||||||
Tops Holding Corp., 10.125%, 10/15/2015 | 330,000 | 350,625 | |||||||
TreeHouse Foods, Inc., 7.75%, 3/1/2018 | 125,000 | 135,469 | |||||||
U.S. Foods, Inc., 144A, 8.5%, 6/30/2019 | 400,000 | 406,000 | |||||||
5,128,931 | |||||||||
Energy 11.9% | |||||||||
Alpha Natural Resources, Inc., 6.0%, 6/1/2019 | 345,000 | 294,112 | |||||||
Arch Coal, Inc., 7.25%, 10/1/2020 (b) | 110,000 | 92,950 | |||||||
Berry Petroleum Co., 6.75%, 11/1/2020 | 335,000 | 350,075 | |||||||
BreitBurn Energy Partners LP, 8.625%, 10/15/2020 | 225,000 | 237,938 | |||||||
Chaparral Energy, Inc., 8.25%, 9/1/2021 | 410,000 | 433,575 | |||||||
Chesapeake Energy Corp.: | |||||||||
6.125%, 2/15/2021 (b) | 245,000 | 237,038 | |||||||
6.875%, 11/15/2020 (b) | 560,000 | 551,600 | |||||||
Chesapeake Midstream Partners LP, 6.125%, 7/15/2022 | 325,000 | 318,500 | |||||||
Chesapeake Oilfield Operating LLC, 144A, 6.625%, 11/15/2019 | 150,000 | 135,000 | |||||||
Cimarex Energy Co., 5.875%, 5/1/2022 | 205,000 | 212,944 | |||||||
Cloud Peak Energy Resources LLC: | |||||||||
8.25%, 12/15/2017 | 145,000 | 150,075 | |||||||
8.5%, 12/15/2019 (b) | 150,000 | 155,625 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
CONSOL Energy, Inc.: | |||||||||
6.375%, 3/1/2021 | 90,000 | 84,600 | |||||||
8.0%, 4/1/2017 | 295,000 | 306,062 | |||||||
8.25%, 4/1/2020 | 155,000 | 162,750 | |||||||
Continental Resources, Inc.: | |||||||||
7.125%, 4/1/2021 | 175,000 | 195,125 | |||||||
7.375%, 10/1/2020 | 195,000 | 217,425 | |||||||
8.25%, 10/1/2019 | 105,000 | 117,338 | |||||||
Crestwood Midstream Partners LP, 7.75%, 4/1/2019 | 920,000 | 913,100 | |||||||
Crosstex Energy LP: | |||||||||
144A, 7.125%, 6/1/2022 | 105,000 | 103,425 | |||||||
8.875%, 2/15/2018 | 365,000 | 385,531 | |||||||
Dresser-Rand Group, Inc., 6.5%, 5/1/2021 | 420,000 | 435,750 | |||||||
Eagle Rock Energy Partners LP, 8.375%, 6/1/2019 | 535,000 | 533,662 | |||||||
EP Energy LLC: | |||||||||
144A, 6.875%, 5/1/2019 | 330,000 | 344,850 | |||||||
144A, 9.375%, 5/1/2020 (b) | 150,000 | 155,438 | |||||||
EV Energy Partners LP, 8.0%, 4/15/2019 | 835,000 | 828,737 | |||||||
Forest Oil Corp., 7.25%, 6/15/2019 | 580,000 | 532,150 | |||||||
Frontier Oil Corp., 6.875%, 11/15/2018 | 315,000 | 327,600 | |||||||
Genesis Energy LP, 7.875%, 12/15/2018 | 150,000 | 153,750 | |||||||
Global Geophysical Services, Inc., 10.5%, 5/1/2017 | 775,000 | 738,187 | |||||||
Halcon Resources Corp., 144A, 9.75%, 7/15/2020 (c) | 280,000 | 284,900 | |||||||
Holly Energy Partners LP: | |||||||||
144A, 6.5%, 3/1/2020 | 105,000 | 105,788 | |||||||
8.25%, 3/15/2018 | 330,000 | 349,800 | |||||||
Kodiak Oil & Gas Corp., 144A, 8.125%, 12/1/2019 | 165,000 | 169,950 | |||||||
Linn Energy LLC: | |||||||||
144A, 6.25%, 11/1/2019 | 595,000 | 583,100 | |||||||
144A, 6.5%, 5/15/2019 | 115,000 | 113,850 | |||||||
Magnum Hunter Resources Corp., 144A, 9.75%, 5/15/2020 | 170,000 | 164,900 | |||||||
MEG Energy Corp., 144A, 6.5%, 3/15/2021 | 235,000 | 239,994 | |||||||
Murray Energy Corp., 144A, 10.25%, 10/15/2015 | 170,000 | 149,175 | |||||||
Newfield Exploration Co., 7.125%, 5/15/2018 | 270,000 | 285,862 | |||||||
Northern Oil & Gas, Inc., 144A, 8.0%, 6/1/2020 | 545,000 | 542,275 | |||||||
Oasis Petroleum, Inc.: | |||||||||
6.5%, 11/1/2021 | 175,000 | 173,250 | |||||||
7.25%, 2/1/2019 | 665,000 | 681,625 | |||||||
Offshore Group Investments Ltd.: | |||||||||
144A, 11.5%, 8/1/2015 | 45,000 | 48,825 | |||||||
11.5%, 8/1/2015 | 305,000 | 330,925 | |||||||
Peabody Energy Corp.: | |||||||||
144A, 6.0%, 11/15/2018 | 145,000 | 144,275 | |||||||
144A, 6.25%, 11/15/2021 | 165,000 | 163,350 | |||||||
Plains Exploration & Production Co.: | |||||||||
6.125%, 6/15/2019 | 215,000 | 216,075 | |||||||
6.75%, 2/1/2022 | 525,000 | 535,500 | |||||||
7.625%, 6/1/2018 | 320,000 | 340,000 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
Regency Energy Partners LP, 6.875%, 12/1/2018 | 205,000 | 215,763 | |||||||
SandRidge Energy, Inc., 7.5%, 3/15/2021 | 125,000 | 123,438 | |||||||
SESI LLC, 6.375%, 5/1/2019 | 235,000 | 246,162 | |||||||
Swift Energy Co., 7.875%, 3/1/2022 | 435,000 | 437,175 | |||||||
Venoco, Inc., 8.875%, 2/15/2019 | 590,000 | 536,900 | |||||||
WPX Energy, Inc.: | |||||||||
5.25%, 1/15/2017 | 960,000 | 972,000 | |||||||
6.0%, 1/15/2022 | 705,000 | 701,475 | |||||||
18,561,244 | |||||||||
Financials 14.6% | |||||||||
Abengoa Finance SAU, 144A, 8.875%, 11/1/2017 | 620,000 | 548,700 | |||||||
AerCap Aviation Solutions BV, 144A, 6.375%, 5/30/2017 | 470,000 | 472,350 | |||||||
Ally Financial, Inc.: | |||||||||
5.5%, 2/15/2017 | 385,000 | 391,060 | |||||||
8.0%, 3/15/2020 | 340,000 | 391,000 | |||||||
8.0%, 11/1/2031 | 340,000 | 398,650 | |||||||
AmeriGas Finance LLC: | |||||||||
6.75%, 5/20/2020 | 110,000 | 112,200 | |||||||
7.0%, 5/20/2022 | 110,000 | 113,300 | |||||||
Antero Resources Finance Corp.: | |||||||||
7.25%, 8/1/2019 | 285,000 | 294,975 | |||||||
9.375%, 12/1/2017 | 390,000 | 430,950 | |||||||
AWAS Aviation Capital Ltd., 144A, 7.0%, 10/17/2016 | 513,600 | 531,576 | |||||||
CIT Group, Inc.: | |||||||||
5.0%, 5/15/2017 | 385,000 | 396,550 | |||||||
5.25%, 3/15/2018 | 540,000 | 557,550 | |||||||
144A, 7.0%, 5/2/2017 | 685,281 | 686,566 | |||||||
Codere Finance Luxembourg SA, 144A, 9.25%, 2/15/2019 | 225,000 | 158,625 | |||||||
DuPont Fabros Technology LP, (REIT), 8.5%, 12/15/2017 | 435,000 | 478,500 | |||||||
E*TRADE Financial Corp., 6.75%, 6/1/2016 | 710,000 | 722,425 | |||||||
Fresenius Medical Care U.S. Finance II, Inc.: | |||||||||
144A, 5.625%, 7/31/2019 | 220,000 | 229,350 | |||||||
144A, 5.875%, 1/31/2022 | 195,000 | 203,044 | |||||||
Fresenius U.S. Finance II, Inc., 144A, 9.0%, 7/15/2015 | 420,000 | 482,475 | |||||||
Hellas Telecommunications Finance SCA, 144A, 8.985%**, 7/15/2015 (PIK)* | EUR | 322,107 | 245 | ||||||
Hexion U.S. Finance Corp.: | |||||||||
6.625%, 4/15/2020 | 95,000 | 97,375 | |||||||
8.875%, 2/1/2018 | 2,000,000 | 2,040,000 | |||||||
International Lease Finance Corp.: | |||||||||
Series R, 5.65%, 6/1/2014 | 340,000 | 348,500 | |||||||
5.75%, 5/15/2016 | 105,000 | 106,531 | |||||||
6.25%, 5/15/2019 | 270,000 | 275,063 | |||||||
8.625%, 9/15/2015 | 235,000 | 259,675 | |||||||
8.625%, 1/15/2022 | 310,000 | 359,002 | |||||||
8.75%, 3/15/2017 | 370,000 | 415,325 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
JBS Finance II Ltd., 144A, 8.25%, 1/29/2018 | 255,000 | 247,350 | |||||||
Level 3 Financing, Inc.: | |||||||||
8.125%, 7/1/2019 | 670,000 | 687,587 | |||||||
8.625%, 7/15/2020 (b) | 510,000 | 535,500 | |||||||
MPT Operating Partnership LP: | |||||||||
(REIT), 6.375%, 2/15/2022 | 185,000 | 185,463 | |||||||
(REIT), 6.875%, 5/1/2021 | 295,000 | 307,538 | |||||||
National Money Mart Co., 10.375%, 12/15/2016 | 790,000 | 870,975 | |||||||
Neuberger Berman Group LLC: | |||||||||
144A, 5.625%, 3/15/2020 | 160,000 | 166,800 | |||||||
144A, 5.875%, 3/15/2022 | 265,000 | 276,925 | |||||||
NII Capital Corp., 7.625%, 4/1/2021 | 395,000 | 338,712 | |||||||
Nuveen Investments, Inc., 10.5%, 11/15/2015 | 1,005,000 | 1,020,075 | |||||||
Pinnacle Foods Finance LLC: | |||||||||
8.25%, 9/1/2017 | 425,000 | 449,437 | |||||||
9.25%, 4/1/2015 | 345,000 | 354,487 | |||||||
Reynolds Group Issuer, Inc.: | |||||||||
144A, 6.875%, 2/15/2021 | 540,000 | 561,600 | |||||||
144A, 7.125%, 4/15/2019 | 415,000 | 434,712 | |||||||
144A, 8.25%, 2/15/2021 | 225,000 | 213,750 | |||||||
144A, 8.5%, 5/15/2018 (b) | 455,000 | 445,900 | |||||||
144A, 9.0%, 4/15/2019 | 275,000 | 274,313 | |||||||
144A, 9.875%, 8/15/2019 | 125,000 | 129,688 | |||||||
Schaeffler Finance BV: | |||||||||
144A, 7.75%, 2/15/2017 | 420,000 | 437,850 | |||||||
144A, 7.75%, 2/15/2017 | EUR | 210,000 | 277,076 | ||||||
144A, 8.5%, 2/15/2019 | 200,000 | 213,500 | |||||||
144A, 8.75%, 2/15/2019 | EUR | 100,000 | 134,143 | ||||||
UPCB Finance III Ltd., 144A, 6.625%, 7/1/2020 | 185,000 | 187,775 | |||||||
UPCB Finance V Ltd., 144A, 7.25%, 11/15/2021 | 230,000 | 240,350 | |||||||
UR Merger Sub Corp.: | |||||||||
144A, 5.75%, 7/15/2018 | 365,000 | 379,600 | |||||||
144A, 7.375%, 5/15/2020 | 595,000 | 621,775 | |||||||
144A, 7.625%, 4/15/2022 | 595,000 | 623,262 | |||||||
Wind Acquisition Finance SA: | |||||||||
144A, 7.25%, 2/15/2018 | 400,000 | 350,000 | |||||||
144A, 11.75%, 7/15/2017 | EUR | 370,000 | 374,588 | ||||||
22,842,293 | |||||||||
Health Care 3.6% | |||||||||
Aviv Healthcare Properties LP, 7.75%, 2/15/2019 | 500,000 | 515,000 | |||||||
HCA, Inc.: | |||||||||
5.875%, 3/15/2022 | 275,000 | 287,375 | |||||||
6.5%, 2/15/2020 | 890,000 | 964,537 | |||||||
7.5%, 2/15/2022 | 605,000 | 659,450 | |||||||
Mylan, Inc., 144A, 7.875%, 7/15/2020 | 95,000 | 106,519 | |||||||
Physio-Control International, Inc., 144A, 9.875%, 1/15/2019 | 315,000 | 335,475 | |||||||
STHI Holding Corp., 144A, 8.0%, 3/15/2018 | 345,000 | 364,838 | |||||||
Tenet Healthcare Corp., 6.25%, 11/1/2018 | 1,805,000 | 1,908,787 | |||||||
Warner Chilcott Co., LLC, 7.75%, 9/15/2018 | 420,000 | 450,450 | |||||||
5,592,431 | |||||||||
Principal Amount ($)(a) | Value ($) | ||||||||
Industrials 7.8% | |||||||||
Accuride Corp., 9.5%, 8/1/2018 (b) | 405,000 | 417,150 | |||||||
Aguila 3 SA, 144A, 7.875%, 1/31/2018 | 480,000 | 494,400 | |||||||
Air Lease Corp., 144A, 5.625%, 4/1/2017 | 445,000 | 438,325 | |||||||
Armored Autogroup, Inc., 144A, 9.5%, 11/1/2018 | 610,000 | 526,125 | |||||||
BakerCorp International, Inc., 144A, 8.25%, 6/1/2019 | 335,000 | 332,487 | |||||||
BE Aerospace, Inc., 6.875%, 10/1/2020 | 180,000 | 198,900 | |||||||
Belden, Inc., 7.0%, 3/15/2017 | 420,000 | 432,600 | |||||||
Bombardier, Inc., 144A, 5.75%, 3/15/2022 | 325,000 | 323,781 | |||||||
Briggs & Stratton Corp., 6.875%, 12/15/2020 | 195,000 | 208,650 | |||||||
Casella Waste Systems, Inc., 7.75%, 2/15/2019 | 415,000 | 408,775 | |||||||
Cenveo Corp., 8.875%, 2/1/2018 | 905,000 | 809,975 | |||||||
CHC Helicopter SA, 9.25%, 10/15/2020 | 540,000 | 527,850 | |||||||
Ducommun, Inc., 9.75%, 7/15/2018 | 305,000 | 321,013 | |||||||
DynCorp International, Inc., 10.375%, 7/1/2017 | 490,000 | 418,950 | |||||||
Florida East Coast Railway Corp., 8.125%, 2/1/2017 | 225,000 | 235,125 | |||||||
Garda World Security Corp., 144A, 9.75%, 3/15/2017 | 375,000 | 396,562 | |||||||
H&E Equipment Services, Inc., 8.375%, 7/15/2016 | 615,000 | 634,219 | |||||||
Huntington Ingalls Industries, Inc.: | |||||||||
6.875%, 3/15/2018 | 280,000 | 291,900 | |||||||
7.125%, 3/15/2021 | 60,000 | 62,700 | |||||||
Interline Brands, Inc., 7.0%, 11/15/2018 | 295,000 | 306,800 | |||||||
Meritor, Inc., 8.125%, 9/15/2015 (b) | 280,000 | 295,050 | |||||||
Navios Maritime Holdings, Inc.: | |||||||||
8.125%, 2/15/2019 | 760,000 | 649,800 | |||||||
144A, 8.875%, 11/1/2017 (c) | 210,000 | 210,508 | |||||||
Navios South American Logistics, Inc., 9.25%, 4/15/2019 | 295,000 | 271,400 | |||||||
Nortek, Inc., 8.5%, 4/15/2021 | 720,000 | 703,800 | |||||||
Ply Gem Industries, Inc., 13.125%, 7/15/2014 | 155,000 | 156,938 | |||||||
Sitel LLC, 11.5%, 4/1/2018 | 565,000 | 402,562 | |||||||
Spirit AeroSystems, Inc.: | |||||||||
6.75%, 12/15/2020 | 205,000 | 223,450 | |||||||
7.5%, 10/1/2017 | 215,000 | 233,813 | |||||||
Titan International, Inc., 7.875%, 10/1/2017 | 945,000 | 973,350 | |||||||
Welltec A/S, 144A, 8.0%, 2/1/2019 | 400,000 | 384,000 | |||||||
12,290,958 | |||||||||
Information Technology 4.6% | |||||||||
Aspect Software, Inc., 10.625%, 5/15/2017 | 350,000 | 371,000 | |||||||
Avaya, Inc., 144A, 7.0%, 4/1/2019 | 830,000 | 769,825 | |||||||
CDW LLC, 8.5%, 4/1/2019 | 1,180,000 | 1,256,700 | |||||||
CommScope, Inc., 144A, 8.25%, 1/15/2019 | 485,000 | 512,887 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
eAccess Ltd., 144A, 8.25%, 4/1/2018 | 335,000 | 304,850 | |||||||
Equinix, Inc.: | |||||||||
7.0%, 7/15/2021 | 215,000 | 236,500 | |||||||
8.125%, 3/1/2018 | 120,000 | 132,900 | |||||||
First Data Corp.: | |||||||||
144A, 7.375%, 6/15/2019 | 250,000 | 255,000 | |||||||
144A, 8.875%, 8/15/2020 | 495,000 | 535,837 | |||||||
Freescale Semiconductor, Inc., 144A, 9.25%, 4/15/2018 | 990,000 | 1,059,300 | |||||||
Hughes Satellite Systems Corp.: | |||||||||
6.5%, 6/15/2019 | 225,000 | 239,063 | |||||||
7.625%, 6/15/2021 (b) | 230,000 | 250,125 | |||||||
MasTec, Inc., 7.625%, 2/1/2017 | 610,000 | 632,875 | |||||||
Sanmina-SCI Corp., 144A, 7.0%, 5/15/2019 | 245,000 | 237,650 | |||||||
Sensata Technologies BV, 144A, 6.5%, 5/15/2019 | 290,000 | 299,425 | |||||||
ViaSat, Inc., 144A, 6.875%, 6/15/2020 | 50,000 | 50,500 | |||||||
7,144,437 | |||||||||
Materials 11.0% | |||||||||
Aleris International, Inc., 7.625%, 2/15/2018 | 220,000 | 223,300 | |||||||
APERAM: | |||||||||
144A, 7.375%, 4/1/2016 | 215,000 | 184,900 | |||||||
144A, 7.75%, 4/1/2018 | 260,000 | 221,000 | |||||||
Appleton Papers, Inc., 11.25%, 12/15/2015 | 237,000 | 252,997 | |||||||
Berry Plastics Corp.: | |||||||||
9.5%, 5/15/2018 | 390,000 | 415,350 | |||||||
9.75%, 1/15/2021 (b) | 460,000 | 500,250 | |||||||
Beverage Packaging Holdings Luxembourg II SA, 144A, 8.0%, 12/15/2016 | EUR | 630,000 | 749,429 | ||||||
BWAY Parent Co., Inc., 10.125%, 11/1/2015 (PIK) | 269,981 | 274,031 | |||||||
China Lumena New Materials Corp., 144A, 12.0%, 10/27/2014 | 1,120,000 | 968,800 | |||||||
Clearwater Paper Corp., 7.125%, 11/1/2018 | 390,000 | 411,450 | |||||||
Clondalkin Acquisition BV, 144A, 2.468%**, 12/15/2013 | 265,000 | 235,850 | |||||||
Crown Americas LLC, 6.25%, 2/1/2021 | 50,000 | 54,625 | |||||||
Essar Steel Algoma, Inc.: | |||||||||
144A, 9.375%, 3/15/2015 | 1,410,000 | 1,360,650 | |||||||
144A, 9.875%, 6/15/2015 | 450,000 | 381,375 | |||||||
Exopack Holding Corp., 10.0%, 6/1/2018 | 230,000 | 230,575 | |||||||
FMG Resources (August 2006) Pty Ltd.: | |||||||||
144A, 6.0%, 4/1/2017 (b) | 315,000 | 316,575 | |||||||
144A, 6.875%, 4/1/2022 (b) | 225,000 | 226,687 | |||||||
144A, 7.0%, 11/1/2015 (b) | 140,000 | 142,800 | |||||||
144A, 8.25%, 11/1/2019 | 545,000 | 577,700 | |||||||
GEO Specialty Chemicals, Inc.: | |||||||||
144A, 7.5%, 3/31/2015 (PIK) | 1,297,793 | 1,200,329 | |||||||
9.968%, 3/31/2015 | 1,277,440 | 1,258,662 | |||||||
Graphic Packaging International, Inc., 7.875%, 10/1/2018 | 70,000 | 77,000 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
Huntsman International LLC: | |||||||||
8.625%, 3/15/2020 | 330,000 | 370,425 | |||||||
8.625%, 3/15/2021 (b) | 335,000 | 377,712 | |||||||
Ineos Finance PLC, 144A, 7.5%, 5/1/2020 | 155,000 | 156,163 | |||||||
JMC Steel Group, 144A, 8.25%, 3/15/2018 | 350,000 | 347,375 | |||||||
Kaiser Aluminum Corp., 144A, 8.25%, 6/1/2020 | 260,000 | 265,200 | |||||||
Koppers, Inc., 7.875%, 12/1/2019 | 440,000 | 474,100 | |||||||
Kraton Polymers LLC, 6.75%, 3/1/2019 | 210,000 | 218,925 | |||||||
Longview Fibre Paper & Packaging, Inc., 144A, 8.0%, 6/1/2016 (b) | 335,000 | 335,000 | |||||||
LyondellBasell Industries NV, 144A, 5.0%, 4/15/2019 | 320,000 | 335,600 | |||||||
Molycorp, Inc., 144A, 10.0%, 6/1/2020 | 410,000 | 405,900 | |||||||
Momentive Performance Materials, Inc., 9.5%, 1/15/2021 | EUR | 385,000 | 341,052 | ||||||
Novelis, Inc., 8.375%, 12/15/2017 | 85,000 | 90,950 | |||||||
OI European Group BV, 144A, 6.75%, 9/15/2020 | EUR | 130,000 | 173,975 | ||||||
Packaging Dynamics Corp., 144A, 8.75%, 2/1/2016 | 535,000 | 561,750 | |||||||
Polymer Group, Inc., 7.75%, 2/1/2019 | 300,000 | 316,875 | |||||||
Rain CII Carbon LLC, 144A, 8.0%, 12/1/2018 | 270,000 | 272,700 | |||||||
Sealed Air Corp.: | |||||||||
144A, 8.125%, 9/15/2019 | 150,000 | 167,250 | |||||||
144A, 8.375%, 9/15/2021 | 150,000 | 169,500 | |||||||
United States Steel Corp., 7.375%, 4/1/2020 (b) | 480,000 | 463,200 | |||||||
Viskase Companies, Inc., 144A, 9.875%, 1/15/2018 | 940,000 | 977,600 | |||||||
Wolverine Tube, Inc., 6.0%, 6/28/2014 | 158,888 | 149,132 | |||||||
17,234,719 | |||||||||
Telecommunication Services 12.7% | |||||||||
Cincinnati Bell, Inc.: | |||||||||
8.25%, 10/15/2017 | 1,020,000 | 1,060,800 | |||||||
8.375%, 10/15/2020 | 1,030,000 | 1,050,600 | |||||||
8.75%, 3/15/2018 | 350,000 | 336,875 | |||||||
CPI International, Inc., 8.0%, 2/15/2018 | 260,000 | 234,325 | |||||||
Cricket Communications, Inc.: | |||||||||
7.75%, 10/15/2020 | 1,795,000 | 1,714,225 | |||||||
10.0%, 7/15/2015 | 380,000 | 391,400 | |||||||
Digicel Group Ltd.: | |||||||||
144A, 9.125%, 1/15/2015 | 195,000 | 196,950 | |||||||
144A, 10.5%, 4/15/2018 | 495,000 | 517,275 | |||||||
Digicel Ltd.: | |||||||||
144A, 7.0%, 2/15/2020 | 200,000 | 193,500 | |||||||
144A, 8.25%, 9/1/2017 | 1,090,000 | 1,109,075 | |||||||
ERC Ireland Preferred Equity Ltd., 144A, 7.69%**, 2/15/2017 (PIK)* | EUR | 709,137 | 269 | ||||||
Frontier Communications Corp.: | |||||||||
7.875%, 4/15/2015 | 43,000 | 47,300 | |||||||
8.25%, 4/15/2017 | 395,000 | 424,625 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
8.5%, 4/15/2020 | 490,000 | 519,400 | |||||||
8.75%, 4/15/2022 | 560,000 | 588,000 | |||||||
Intelsat Jackson Holdings SA: | |||||||||
7.25%, 10/15/2020 | 695,000 | 731,488 | |||||||
7.5%, 4/1/2021 | 855,000 | 904,163 | |||||||
8.5%, 11/1/2019 | 580,000 | 642,350 | |||||||
Intelsat Luxembourg SA: | |||||||||
11.25%, 2/4/2017 | 1,450,000 | 1,493,500 | |||||||
144A, 11.5%, 2/4/2017 (PIK) | 445,000 | 459,463 | |||||||
11.5%, 2/4/2017 (PIK) | 1,340,625 | 1,384,195 | |||||||
MetroPCS Wireless, Inc.: | |||||||||
6.625%, 11/15/2020 | 480,000 | 472,800 | |||||||
7.875%, 9/1/2018 (b) | 420,000 | 435,750 | |||||||
Nextel Communications, Inc., Series D, 7.375%, 8/1/2015 | 545,000 | 545,681 | |||||||
Pacnet Ltd., 144A, 9.25%, 11/9/2015 | 225,000 | 216,000 | |||||||
Sprint Nextel Corp.: | |||||||||
6.0%, 12/1/2016 | 1,515,000 | 1,450,612 | |||||||
144A, 9.125%, 3/1/2017 | 310,000 | 325,500 | |||||||
Syniverse Holdings, Inc., 9.125%, 1/15/2019 | 130,000 | 141,050 | |||||||
Telesat Canada, 144A, 6.0%, 5/15/2017 | 270,000 | 274,725 | |||||||
West Corp.: | |||||||||
7.875%, 1/15/2019 | 155,000 | 161,975 | |||||||
8.625%, 10/1/2018 | 75,000 | 79,500 | |||||||
Windstream Corp.: | |||||||||
7.0%, 3/15/2019 | 430,000 | 440,750 | |||||||
7.5%, 4/1/2023 | 335,000 | 343,375 | |||||||
7.75%, 10/15/2020 | 180,000 | 190,800 | |||||||
7.875%, 11/1/2017 | 495,000 | 539,550 | |||||||
8.125%, 9/1/2018 | 180,000 | 193,500 | |||||||
Zayo Group LLC, 144A, 8.125%, 1/1/2020 | 95,000 | 99,275 | |||||||
19,910,621 | |||||||||
Utilities 2.8% | |||||||||
AES Corp.: | |||||||||
8.0%, 10/15/2017 | 415,000 | 472,062 | |||||||
8.0%, 6/1/2020 | 525,000 | 602,437 | |||||||
Calpine Corp.: | |||||||||
144A, 7.5%, 2/15/2021 | 485,000 | 523,800 | |||||||
144A, 7.875%, 7/31/2020 | 340,000 | 374,850 | |||||||
Edison Mission Energy, 7.0%, 5/15/2017 | 1,570,000 | 879,200 | |||||||
Energy Future Holdings Corp., Series Q, 6.5%, 11/15/2024 | 1,110,000 | 530,025 | |||||||
Energy Future Intermediate Holding Co., LLC: | |||||||||
10.0%, 12/1/2020 | 125,000 | 135,938 | |||||||
144A, 11.75%, 3/1/2022 | 290,000 | 296,525 | |||||||
NRG Energy, Inc.: | |||||||||
7.625%, 1/15/2018 | 200,000 | 207,000 | |||||||
8.25%, 9/1/2020 | 65,000 | 67,275 | |||||||
Texas Competitive Electric Holdings Co., LLC: | |||||||||
Series A, 10.25%, 11/1/2015 | 275,000 | 70,813 | |||||||
144A, 11.5%, 10/1/2020 | 360,000 | 245,700 | |||||||
4,405,625 | |||||||||
Total Corporate Bonds (Cost $145,451,712) | 145,808,149 | ||||||||
Principal Amount ($)(a) | Value ($) | ||||||||
Loan Participations and Assignments 0.9% | |||||||||
Senior Loans** | |||||||||
Alliance Mortgage Cycle Loan, Term Loan A, 9.5%, 6/15/2010* | 700,000 | 0 | |||||||
Buffets, Inc., Letter of Credit, First Lien, LIBOR plus 9.25%, 4/22/2015* | 101,894 | 47,381 | |||||||
Caesars Entertainment Operating Co., Term Loan B6, 5.495%, 1/26/2018 | 234,000 | 208,991 | |||||||
Chesapeake Energy Corp., Term Loan, 8.5%, 12/1/2017 | 425,000 | 422,031 | |||||||
Tribune Co., Term Loan B, LIBOR plus 3.0%, 6/4/2014* | 1,009,426 | 672,535 | |||||||
Total Loan Participations and Assignments (Cost $2,368,202) | 1,350,938 | ||||||||
Convertible Bonds 0.5% | |||||||||
Consumer Discretionary | |||||||||
Group 1 Automotive, Inc., 3.0%, 3/15/2020 | 375,000 | 516,562 | |||||||
Sonic Automotive, Inc., 5.0%, 10/1/2029 | 155,000 | 201,888 | |||||||
Total Convertible Bonds (Cost $530,222) | 718,450 | ||||||||
Preferred Securities 0.6% | |||||||||
Materials 0.6% | |||||||||
Hercules, Inc., 6.5%, 6/30/2029 (Cost $746,721) | 1,135,000 | 930,700 |
Units | Value ($) | |||||||
Other Investments 0.0% | ||||||||
Consumer Discretionary | ||||||||
AOT Bedding Super Holdings LLC* (d) (Cost $31,000) | 31 | 29,995 |
Shares | Value ($) | |||||||
Common Stocks 0.1% | ||||||||
Consumer Discretionary 0.0% | ||||||||
Buffets Restaurants Holdings, Inc.* | 18,256 | 0 | ||||||
Postmedia Network Canada Corp.* | 8,495 | 6,592 | ||||||
Trump Entertainment Resorts, Inc.* | 45 | 0 | ||||||
Vertis Holdings, Inc.* | 676 | 7 | ||||||
6,599 | ||||||||
Shares | Value ($) | |||||||
Industrials 0.0% | ||||||||
Congoleum Corp.* | 24,000 | 0 | ||||||
Quad Graphics, Inc. | 56 | 805 | ||||||
805 | ||||||||
Materials 0.1% | ||||||||
GEO Specialty Chemicals, Inc.* | 24,225 | 0 | ||||||
GEO Specialty Chemicals, Inc. 144A* | 2,206 | 0 | ||||||
Wolverine Tube, Inc.* | 7,045 | 172,532 | ||||||
172,532 | ||||||||
Total Common Stocks (Cost $569,657) | 179,936 | |||||||
Preferred Stock 0.3% | ||||||||
Financials 0.3% | ||||||||
Ally Financial, Inc., 144A, 7.0%, (Cost $451,387) | 500 | 445,453 | ||||||
Warrants 0.0% | ||||||||
Consumer Discretionary 0.0% | ||||||||
Reader's Digest Association, Inc., Expiration Date 2/19/2014* | 1,115 | 190 | ||||||
Materials 0.0% | ||||||||
Hercules Trust II, Expiration Date 3/31/2029* | 1,100 | 8,796 | ||||||
Total Warrants (Cost $244,286) | 8,986 | |||||||
Securities Lending Collateral 5.3% | ||||||||
Daily Assets Fund Institutional, 0.24% (e) (f) (Cost $8,285,046) | 8,285,046 | 8,285,046 | ||||||
Cash Equivalents 2.5% | ||||||||
Central Cash Management Fund, 0.14% (e) (Cost $3,882,810) | 3,882,810 | 3,882,810 |
% of Net Assets | Value ($) | |||||||
Total Investment Portfolio (Cost $162,561,043)+ | 103.4 | 161,640,463 | ||||||
Other Assets and Liabilities, Net | (3.4 | ) | (5,277,546 | ) | ||||
Net Assets | 100.0 | 156,362,917 |
The following table represents bonds and senior loans that are in default:
Securities | Coupon | Maturity Date | Principal Amount | Acquisition Cost ($) | Value ($) | |||||||||||||
Alliance Mortgage Cycle Loan* | 9.5 | % | 6/15/2010 | 700,000 | USD | 700,000 | 0 | |||||||||||
Buffets, Inc.* | LIBOR plus 9.25 | % | 4/22/2015 | 101,894 | USD | 97,948 | 47,381 | |||||||||||
ERC Ireland Preferred Equity Ltd.* | 7.69 | % | 2/15/2017 | 709,137 | EUR | 965,173 | 269 | |||||||||||
Fontainebleau Las Vegas Holdings LLC* | �� | 11.0 | % | 6/15/2015 | 490,000 | USD | 495,963 | 306 | ||||||||||
Hellas Telecommunications Finance SCA* | 8.985 | % | 7/15/2015 | 322,107 | EUR | 92,199 | 245 | |||||||||||
Tribune Co.* | LIBOR plus 3.0 | % | 6/4/2014 | 1,009,426 | USD | 905,407 | 672,535 | |||||||||||
3,256,690 | 720,736 |
* Non-income producing security.
** Floating rate securities' yields vary with a designated market index or market rate, such as the coupon-equivalent of the U.S. Treasury Bill rate. These securities are shown at their current rate as of June 30, 2012.
+ The cost for federal income tax purposes was $165,863,117. At June 30, 2012, net unrealized depreciation for all securities based on tax cost was $4,222,654. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $5,703,866 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $9,926,520.
(a) Principal amount stated in U.S. 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 June 30, 2012 amounted to $7,984,244, which is 5.1% of net assets.
(c) When-issued security.
(d) The Fund may purchase securities that are subject to legal or contractual restrictions on resale ("restricted securities"). Restricted securities are securities which have not been registered with the Securities and Exchange Commission under the Securities Act of 1933. The Fund may be unable to sell a restricted security and it may be more difficult to determine a market value for a restricted security. Moreover, if adverse market conditions were to develop during the period between the Fund's decision to sell a restricted security and the point at which the Fund is permitted or able to sell such security, the Fund might obtain a price less favorable than the price that prevailed when it decided to sell. This investment practice, therefore, could have the effect of increasing the level of illiquidity of the Fund. The future value of these securities is uncertain and there may be changes in the estimated value of these securities.
Schedule of Restricted Securities | Acquisition Date | Cost ($) | Value ($) | Value as % of Net Assets | |||||||||
AOT Bedding Super Holdings LLC* | June 2010 | 31,000 | 29,995 | 0.02 |
(e) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(f) Represents collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates.
144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
LIBOR: London Interbank Offered Rate
PIK: Denotes that all or a portion of the income is paid in-kind in the form of additional principal.
REIT: Real Estate Investment Trust
At June 30, 2012, open credit default swap contracts sold were as follows:
Effective/ Expiration Date | Notional Amount ($) (g) | Fixed Cash Flows Received | Underlying Debt Obligation/ Quality Rating (h) | Value ($) | Upfront Payments Paid/ (Received) ($) | Unrealized Appreciation/ (Depreciation) ($) | |||||||||||||||
12/20/2011 3/20/2017 | 370,000 | 1 | 5.0 | % | CIT Group, Inc., 5.50%, 2/15/2019, BB- | 24,047 | 14,725 | 9,322 | |||||||||||||
6/21/2010 9/20/2013 | 1,230,000 | 2 | 5.0 | % | Ford Motor Co., 6.5%, 8/1/2018, BB+ | 62,600 | (37,768 | ) | 100,368 | ||||||||||||
6/21/2010 9/20/2013 | 380,000 | 3 | 5.0 | % | Ford Motor Co., 6.5%, 8/1/2018, BB+ | 19,339 | 4,657 | 14,682 | |||||||||||||
6/21/2010 9/20/2015 | 175,000 | 4 | 5.0 | % | Ford Motor Co., 6.5%, 8/1/2018, BB+ | 15,759 | (16,625 | ) | 32,384 | ||||||||||||
6/21/2010 9/20/2015 | 320,000 | 1 | 5.0 | % | Ford Motor Co., 6.5%, 8/1/2018, BB+ | 28,816 | (27,750 | ) | 56,566 | ||||||||||||
6/21/2010 9/20/2015 | 100,000 | 2 | 5.0 | % | Ford Motor Co., 6.5%, 8/1/2018, BB+ | 9,005 | (6,896 | ) | 15,901 | ||||||||||||
6/21/2010 9/20/2015 | 560,000 | 5 | 5.0 | % | Ford Motor Co., 6.5%, 8/1/2018, BB+ | 50,430 | (9,983 | ) | 60,413 | ||||||||||||
6/20/2011 9/20/2016 | 575,000 | 5 | 5.0 | % | Ford Motor Co., 6.5%, 8/1/2018, BB+ | 53,705 | 44,895 | 8,810 | |||||||||||||
3/21/2011 6/20/2016 | 1,085,000 | 6 | 5.0 | % | Ford Motor Credit Co., LLC, 5.0%, 5/15/2018, BB+ | 116,915 | 103,310 | 13,605 | |||||||||||||
6/20/2011 9/20/2016 | 440,000 | 6 | 5.0 | % | Forest Oil Corp., 7.25%, 6/15/2019, B | (31,122 | ) | 13,849 | (44,971 | ) | |||||||||||
9/20/2011 12/20/2016 | 250,000 | 6 | 5.0 | % | Forest Oil Corp., 7.25%, 6/15/2019, B | (19,886 | ) | (4,366 | ) | (15,520 | ) | ||||||||||
9/20/2011 12/20/2016 | 165,000 | 2 | 5.0 | % | Forest Oil Corp., 7.25%, 6/15/2019, B | (13,125 | ) | (2,882 | ) | (10,243 | ) | ||||||||||
6/20/2011 9/20/2015 | 1,145,000 | 2 | 5.0 | % | HCA, Inc., 6.375%, 1/15/2015, B- | 54,832 | 46,987 | 7,845 | |||||||||||||
3/21/2011 6/20/2016 | 610,000 | 4 | 5.0 | % | HCA, Inc., 6.375%, 1/15/2015, B- | 21,052 | 18,135 | 2,917 | |||||||||||||
Total net unrealized appreciation | 252,079 |
(g) 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.
(h) The quality ratings represent the higher of Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") credit ratings and are unaudited.
Counterparties:
1 Credit Suisse
2 The Goldman Sachs & Co.
3 Citigroup, Inc.
4 JPMorgan Chase Securities, Inc.
5 Bank of America
6 Barclays Bank PLC
At June 30, 2012, the Fund had the following open forward foreign currency exchange contracts:
Contracts to Deliver | In Exchange For | Settlement Date | Unrealized Depreciation ($) | Counterparty | |||||||||||
EUR | 3,172,400 | USD | 3,999,026 | 8/2/2012 | (16,718 | ) | Citigroup, Inc. | ||||||||
EUR | 600 | USD | 747 | 8/2/2012 | (13 | ) | JPMorgan Chase Securities, Inc. | ||||||||
Total unrealized depreciation | (16,731 | ) |
Currency Abbreviations |
EUR Euro USD United States Dollar |
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 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 June 30, 2012 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 (i) | ||||||||||||||||
Corporate Bonds | $ | — | $ | 143,200,026 | $ | 2,608,123 | $ | 145,808,149 | ||||||||
Loan Participations and Assignments | — | 1,350,938 | 0 | 1,350,938 | ||||||||||||
Convertible Bonds | — | 718,450 | — | 718,450 | ||||||||||||
Preferred Securities | — | 930,700 | — | 930,700 | ||||||||||||
Other Investments | — | — | 29,995 | 29,995 | ||||||||||||
Common Stocks (i) | 7,397 | 0 | 172,539 | 179,936 | ||||||||||||
Preferred Stock | — | 445,453 | — | 445,453 | ||||||||||||
Warrants (i) | — | — | 8,986 | 8,986 | ||||||||||||
Short-Term Investments (i) | 12,167,856 | ��� | — | 12,167,856 | ||||||||||||
Derivatives (j) | — | 322,813 | — | 322,813 | ||||||||||||
Total | $ | 12,175,253 | $ | 146,968,380 | $ | 2,819,643 | $ | 161,963,276 | ||||||||
Liabilities | ||||||||||||||||
Derivatives (j) | $ | — | $ | (87,465 | ) | $ | — | $ | (87,465 | ) | ||||||
Total | $ | — | $ | (87,465 | ) | $ | — | $ | (87,465 | ) |
There have been no transfers between Level 1 and Level 2 fair value measurements during the period ended June 30, 2012.
(i) See Investment Portfolio for additional detailed categorizations.
(j) Derivatives include unrealized appreciation (depreciation) on credit default swap contracts and forward foreign currency exchange contracts.
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 | Loan Participations and Assignments | Other Investments | Common Stocks | Warrants | Total | |||||||||||||||||||
Balance as of December 31, 2011 | $ | 2,733,713 | $ | 0 | $ | 31,000 | $ | 177,317 | $ | 9,254 | $ | 2,951,284 | ||||||||||||
Realized gains (loss) | (1,056,073 | ) | — | — | 179,597 | — | (876,476 | ) | ||||||||||||||||
Change in unrealized appreciation (depreciation) | 1,058,292 | 0 | (1,005 | ) | (1,415 | ) | (268 | ) | 1,055,604 | |||||||||||||||
Amortization premium/discount | 14,497 | — | — | — | — | 14,497 | ||||||||||||||||||
Purchases | 22,977 | — | — | (182,960 | ) | — | (159,983 | ) | ||||||||||||||||
(Sales) | (165,283 | ) | — | — | — | — | (165,283 | ) | ||||||||||||||||
Transfers into Level 3 | — | — | — | — | — | — | ||||||||||||||||||
Transfers (out) of Level 3 | — | — | — | — | — | — | ||||||||||||||||||
Balance as of June 30, 2012 | $ | 2,608,123 | $ | 0 | $ | 29,995 | $ | 172,539 | $ | 8,986 | $ | 2,819,643 | ||||||||||||
Net change in unrealized appreciation (depreciation) from investments still held as of June 30, 2012 | $ | 1,058,292 | $ | 0 | $ | (1,005 | ) | $ | (1,415 | ) | $ | (268 | ) | $ | 1,055,604 |
Quantitative Disclosure About Significant Unobservable Inputs | ||||||||||
Asset Class | Fair Value at 6/30/12 | Valuation Technique(s) | Unobservable Input | Range (Weighted Average) | ||||||
Other Investments | ||||||||||
Consumer Discretionary | $ | 29,995 | Book Value | Book Value of Equity | $936.11 per share | |||||
Discount for Lack of Marketability | 10 | % | ||||||||
Common Stock | ||||||||||
Consumer Discretionary | $ | 7 | Market Approach | EV/EBITDA Multiple | 3.5-5.5 | |||||
Discount for Lack of Marketability | 10%-20 | % | ||||||||
Industrials | $ | 0 | Book Value | Book Value of Equity | 0 | |||||
Materials | $ | 172,532 | Market Approach | EV/EBITDA Multiple | 9.9 | |||||
Discount for Lack of Marketability | 25 | % | ||||||||
$ | 0 | Book Value | Book Value of Equity | 0 | ||||||
Warrants | ||||||||||
Consumer Discretionary | $ | 190 | Broker Quote | Discount for Lack of Marketability | 20 | % | ||||
Materials | $ | 8,796 | Black Scholes Option Pricing Model | Implied Volatility | 44%-57% | (51%) | ||||
Discount for Lack of Marketability | 20 | % | ||||||||
Loan Participations & Assignments | ||||||||||
Senior Loans | $ | 0 | Last Pricing Vendor Quote | Bid/Ask Spread | 0 | |||||
Corporate Bonds | ||||||||||
Materials | $ | 149,132 | Discounted Cash Flow Methodology | Discount Rate | 15 | % | ||||
Discount for Lack of Marketability | 10 | % | ||||||||
$ | 2,458,991 | Discounted Cash Flow Methodology | Discount Rate | 9.6 | % | |||||
Discount for Lack of Marketability | 10 | % |
Qualitative Disclosure About Unobservable Inputs
Significant unobservable inputs developed by the Pricing Committee and used in the fair value measurement of the Fund's equity investments include book value of equity with a discount for lack of marketability and enterprise value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio with a discount for lack of marketability. A significant change in the EV to EBITDA ratio may result in a significant change in the fair value measurement, while a significant change in the discount for lack of marketability is unlikely to result in a materially higher or lower fair value measurement.
Significant unobservable inputs developed by the Pricing Committee and used in the fair value measurement of the Fund's fixed income investments include the discounted cash flow methodology. A significant change in the discount rate could have a material change on the fair value measurement, while a significant change in the discount for lack of marketability is unlikely to result in a materially higher or lower fair value measurement. Generally, there is an inverse relationship between the discount rate and the fair value measurement of a fixed income investment.
The accompanying notes are an integral part of the financial statements.
as of June 30, 2012 (Unaudited) | ||||
Assets | ||||
Investments: Investments in non-affiliated securities, at value (cost $150,393,187) — including $7,984,244 of securities loaned | $ | 149,472,607 | ||
Investment in Daily Assets Fund Institutional (cost $8,285,046)* | 8,285,046 | |||
Investment in Central Cash Management Fund (cost $3,882,810) | 3,882,810 | |||
Total investments in securities, at value (cost $162,561,043) | 161,640,463 | |||
Cash | 24,589 | |||
Foreign currency, at value (cost $94) | 95 | |||
Receivable for investments sold | 1,114,851 | |||
Receivable for Fund shares sold | 4,317 | |||
Interest receivable | 3,078,520 | |||
Unrealized appreciation on swap contracts | 322,813 | |||
Upfront payments paid on swap contracts | 246,558 | |||
Foreign taxes recoverable | 368 | |||
Other assets | 566 | |||
Total assets | 166,433,140 | |||
Liabilities | ||||
Payable upon return of securities loaned | 8,285,046 | |||
Payable for investments purchased | 687,533 | |||
Payable for investments purchased — when-issued securities | 580,363 | |||
Payable for Fund shares redeemed | 176,667 | |||
Unrealized depreciation on swap contracts | 70,734 | |||
Unrealized depreciation on forward foreign currency exchange contracts | 16,731 | |||
Upfront payments received on swap contracts | 106,270 | |||
Accrued management fee | 63,843 | |||
Accrued Trustees' fees | 768 | |||
Other accrued expenses and payables | 82,268 | |||
Total liabilities | 10,070,223 | |||
Net assets, at value | $ | 156,362,917 | ||
Net Assets Consist of | ||||
Undistributed net investment income | 5,825,288 | |||
Net unrealized appreciation (depreciation) on: Investments | (920,580 | ) | ||
Swap contracts | 252,079 | |||
Foreign currency | (18,976 | ) | ||
Accumulated net realized gain (loss) | (44,257,077 | ) | ||
Paid-in capital | 195,482,183 | |||
Net assets, at value | $ | 156,362,917 | ||
Class A Net Asset Value, offering and redemption price per share ($156,273,816 ÷ 24,246,379 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | $ | 6.45 | ||
Class B Net Asset Value, offering and redemption price per share ($89,101 ÷ 13,739 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | $ | 6.49 |
* Represents collateral on securities loaned.
The accompanying notes are an integral part of the financial statements.
Statement of Operations
for the six months ended June 30, 2012 (Unaudited) | ||||
Investment Income | ||||
Interest | $ | 6,629,215 | ||
Dividends | 28 | |||
Income distributions — Central Cash Management Fund | 3,615 | |||
Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates | 29,385 | |||
Total income | 6,662,243 | |||
Expenses: Management fee | 423,836 | |||
Administration fee | 84,876 | |||
Distribution service fee (Class B) | 113 | |||
Custodian fee | 15,374 | |||
Audit and tax fees | 35,460 | |||
Legal fees | 5,145 | |||
Reports to shareholders | 20,978 | |||
Trustees' fees and expenses | 4,845 | |||
Other | 24,414 | |||
Total expenses | 615,041 | |||
Net investment income (loss) | 6,047,202 | |||
Realized and Unrealized Gain (Loss) | ||||
Net realized gain (loss) from: Investments | 964,279 | |||
Swap contracts | 127,889 | |||
Foreign currency | 144,960 | |||
1,237,128 | ||||
Change in net unrealized appreciation (depreciation) on: Investments | 3,636,463 | |||
Swap contracts | 162,109 | |||
Foreign currency | (48,218 | ) | ||
3,750,354 | ||||
Net gain (loss) | 4,987,482 | |||
Net increase (decrease) in net assets resulting from operations | $ | 11,034,684 |
The accompanying notes are an integral part of the financial statements.
Increase (Decrease) in Net Assets | Six Months Ended June 30, 2012 (Unaudited) | Year Ended December 31, 2011 | ||||||
Operations: Net investment income | $ | 6,047,202 | $ | 13,489,647 | ||||
Operations: Net investment income | $ | 6,047,202 | $ | 13,489,647 | ||||
Net realized gain (loss) | 1,237,128 | (3,786,632 | ) | |||||
Change in net unrealized appreciation (depreciation) | 3,750,354 | (2,401,972 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 11,034,684 | 7,301,043 | ||||||
Distributions to shareholders from: Net investment income: Class A | (13,517,771 | ) | (16,387,608 | ) | ||||
Class B | (7,507 | ) | (11,864 | ) | ||||
Total distributions | (13,525,278 | ) | (16,399,472 | ) | ||||
Fund share transactions: Class A Proceeds from shares sold | 16,874,777 | 46,414,241 | ||||||
Reinvestment of distributions | 13,517,771 | 16,387,608 | ||||||
Payments for shares redeemed | (41,068,513 | ) | (79,145,753 | ) | ||||
Net increase (decrease) in net assets from Class A share transactions | (10,675,965 | ) | (16,343,904 | ) | ||||
Class B Proceeds from shares sold | 8,203 | 9,003 | ||||||
Reinvestment of distributions | 7,507 | 11,864 | ||||||
Payments for shares redeemed | (9,379 | ) | (73,315 | ) | ||||
Net increase (decrease) in net assets from Class B share transactions | 6,331 | (52,448 | ) | |||||
Increase (decrease) in net assets | (13,160,228 | ) | (25,494,781 | ) | ||||
Net assets at beginning of period | 169,523,145 | 195,017,926 | ||||||
Net assets at end of period (including undistributed net investment income of $5,825,288 and $13,303,364, respectively) | $ | 156,362,917 | $ | 169,523,145 | ||||
Other Information | ||||||||
Class A Shares outstanding at beginning of period | 25,818,935 | 28,235,548 | ||||||
Shares sold | 2,594,005 | 7,106,488 | ||||||
Shares issued to shareholders in reinvestment of distributions | 2,118,773 | 2,479,214 | ||||||
Shares redeemed | (6,285,334 | ) | (12,002,315 | ) | ||||
Net increase (decrease) in Class A shares | (1,572,556 | ) | (2,416,613 | ) | ||||
Shares outstanding at end of period | 24,246,379 | 25,818,935 | ||||||
Class B Shares outstanding at beginning of period | 12,847 | 20,802 | ||||||
Shares sold | 1,183 | 1,284 | ||||||
Shares issued to shareholders in reinvestment of distributions | 1,167 | 1,784 | ||||||
Shares redeemed | (1,458 | ) | (11,023 | ) | ||||
Net increase (decrease) in Class B shares | 892 | (7,955 | ) | |||||
Shares outstanding at end of period | 13,739 | 12,847 |
The accompanying notes are an integral part of the financial statements.
Years Ended December 31, | ||||||||||||||||||||||||
Class A | Six Months Ended 6/30/12 (Unaudited) | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Selected Per Share Data | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.56 | $ | 6.90 | $ | 6.55 | $ | 5.30 | $ | 7.81 | $ | 8.38 | ||||||||||||
Income (loss) from investment operations: Net investment incomea | .24 | .51 | .52 | .51 | .57 | .63 | ||||||||||||||||||
Net realized and unrealized gain (loss) | .21 | (.24 | ) | .36 | 1.40 | (2.29 | ) | (.54 | ) | |||||||||||||||
Total from investment operations | .45 | .27 | .88 | 1.91 | (1.72 | ) | .09 | |||||||||||||||||
Less distributions from: Net investment income | (.56 | ) | (.61 | ) | (.53 | ) | (.66 | ) | (.79 | ) | (.66 | ) | ||||||||||||
Net asset value, end of period | $ | 6.45 | $ | 6.56 | $ | 6.90 | $ | 6.55 | $ | 5.30 | $ | 7.81 | ||||||||||||
Total Return (%) | 6.79 | ** | 3.84 | 14.00 | 39.99 | (23.94 | )b | .96 | ||||||||||||||||
Ratios to Average Net Assets and Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period ($ millions) | 156 | 169 | 195 | 197 | 154 | 248 | ||||||||||||||||||
Ratio of expenses before expense reductions (%) | .72 | * | .72 | .72 | .67 | .80 | .69 | |||||||||||||||||
Ratio of expenses after expense reductions (%) | .72 | * | .72 | .72 | .67 | .79 | .69 | |||||||||||||||||
Ratio of net investment income (%) | 7.12 | * | 7.59 | 7.90 | 8.81 | 8.42 | 7.84 | |||||||||||||||||
Portfolio turnover rate (%) | 28 | ** | 59 | 93 | 66 | 38 | 61 | |||||||||||||||||
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. * Annualized ** Not annualized |
Years Ended December 31, | ||||||||||||||||||||||||
Class B | Six Months Ended 6/30/12 (Unaudited) | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Selected Per Share Data | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.59 | $ | 6.93 | $ | 6.58 | $ | 5.31 | $ | 7.81 | $ | 8.38 | ||||||||||||
Income (loss) from investment operations: Net investment incomea | .23 | .49 | .50 | .49 | .53 | .60 | ||||||||||||||||||
Net realized and unrealized gain (loss) | .21 | (.24 | ) | .36 | 1.42 | (2.27 | ) | (.54 | ) | |||||||||||||||
Total from investment operations | .44 | .25 | .86 | 1.91 | (1.74 | ) | .06 | |||||||||||||||||
Less distributions from: Net investment income | (.54 | ) | (.59 | ) | (.51 | ) | (.64 | ) | (.76 | ) | (.63 | ) | ||||||||||||
Net asset value, end of period | $ | 6.49 | $ | 6.59 | $ | 6.93 | $ | 6.58 | $ | 5.31 | $ | 7.81 | ||||||||||||
Total Return (%) | 6.63 | ** | 3.57 | 13.64 | 39.64 | (24.13 | )b | .54 | ||||||||||||||||
Ratios to Average Net Assets and Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period ($ millions) | .1 | .1 | .1 | .2 | .1 | 10 | ||||||||||||||||||
Ratio of expenses before expense reductions (%) | 1.00 | * | .99 | .99 | .94 | 1.25 | 1.08 | |||||||||||||||||
Ratio of expenses after expense reductions (%) | 1.00 | * | .99 | .99 | .94 | 1.23 | 1.08 | |||||||||||||||||
Ratio of net investment income (%) | 6.86 | * | 7.33 | 7.63 | 8.54 | 7.98 | 7.45 | |||||||||||||||||
Portfolio turnover rate (%) | 28 | ** | 59 | 93 | 66 | 38 | 61 | |||||||||||||||||
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. * Annualized ** Not annualized |
A. Organization and Significant Accounting Policies
DWS High Income VIP (the "Fund") is a diversified series of DWS Variable Series II (the "Trust"), which 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.
Multiple Classes of Shares of Beneficial Interest. The Fund offers two classes of shares (Class A shares and Class B shares). Sales of Class B shares are subject to 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 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 recordkeeping 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 Fund'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 Fund 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 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.
Equity securities are valued at the most recent sale price or official closing price reported on the exchange (U.S. or foreign) or over-the-counter market on which they trade and are categorized as Level 1 securities. Securities 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.
Debt securities and loan participations and assignments are valued at prices supplied by independent pricing services approved by the Fund's 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.
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.
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.
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 the 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 Fund's Investment Portfolio.
Foreign Currency Translations. The books and records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing exchange rates at period end. Purchases and sales of investment securities, income and expenses are translated into U.S. 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 acquisition and disposition of foreign currencies, and the difference between the amount of net investment income accrued and the U.S. 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.
Securities Lending. The Fund may lend 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 under 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.
Loan Participations and Assignments. Senior loans are portions of loans originated by banks and sold in pieces to investors. These U.S. dollar-denominated fixed and floating rate loans ("Loans") in which the Fund invests are arranged through private negotiations between the borrower and one or more financial institutions ("Lenders"). 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, nor 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 contractual relationship with the borrower, and the Fund may enforce compliance by the borrower with the terms of the loan agreement. Senior loans held by the Fund are generally in the form of Assignments, but the Fund may also invest in Participations. All senior loans involve interest rate risk, liquidity risk and credit risk, including the potential default or insolvency of the borrower.
When-Issued/Delayed Delivery Securities. The Fund 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 transaction 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. At the time the Fund enters into a purchase 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 transaction 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. The 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.
Under the Regulated Investment Company Modernization Act of 2010, net capital losses may be carried forward indefinitely, and their character is retained as short-term and/or long-term. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
At December 31, 2011, the Fund had a net tax basis capital loss carryforward of approximately $39,234,000 of pre-enactment losses, which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until December 31, 2014 ($3,844,000), December 31, 2015 ($858,000), December 31, 2016 ($17,300,000) and December 31, 2017 ($17,232,000), the respective expiration dates, whichever occurs first.
In addition, from November 1, 2011 through December 31, 2011, the Fund elects to defer qualified late year losses of approximately $2,439,000 of net realized long-term capital losses and $519,000 of net realized short-term capital losses. The Fund intends to elect to defer these losses and treat them as arising in the fiscal year ending December 31, 2012.
The Fund has reviewed the tax positions for the open tax years as of December 31, 2011 and has determined that no provision for income tax is required in the Fund's financial statements. The Fund's federal tax returns for the prior three fiscal years remain open subject to examination by the Internal Revenue Service.
Distribution of Income and Gains. Distributions of net investment income of the Fund, if any, are made annually. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed and, therefore, will be distributed to shareholders at least annually. The Fund may also make additional distributions for tax purposes if necessary.
The timing and characterization of certain income and capital gain 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 investments in foreign denominated investments, investments in forward currency contracts, investments in swap contracts 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, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.
The tax character of current year distributions will be determined at the end of the current fiscal year.
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, the Fund may enter into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet been made. However, based on experience, the Fund expects the risk of loss to be remote.
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. Realized gains and losses from investment transactions are recorded on an identified cost basis and may include proceeds from litigation. All discounts and premiums are accreted/amortized for both tax and financial reporting purposes for the Fund, with the exception of securities in default of principal.
B. Derivative Instruments
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 six months ended June 30, 2012, the Fund sold credit default swap contracts to gain exposure to an underlying issuer's credit quality characteristics without directly investing in that issuer. 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 U.S. or foreign corporate issuer, on the reference entity, which 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, if any, made by the Fund is recorded as an asset in the Statement of Assets and Liabilities. An upfront payment, if any, 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 gains or losses in the Statement of Operations.
A summary of the open credit default swap contracts as of June 30, 2012 is included in a table following the Fund's Investment Portfolio. For the six months ended June 30, 2012, the Fund's investment in credit default swap contracts sold had a total notional value generally indicative of a range from approximately $6,455,000 to $7,405,000.
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 six months ended June 30, 2012, the Fund 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.
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 June 30, 2012 is included in a table following the Fund's Investment Portfolio. For the six months ended June 30, 2012, the Fund's investment in forward currency contracts short vs. U.S. dollars had a total contract value generally indicative of a range from approximately $3,001,000 to $4,068,000.
The following tables summarize the value of the Fund's derivative instruments held as of June 30, 2012 and the related location in the accompanying Statement of Assets and Liabilities, presented by primary underlying risk exposure:
Asset Derivative | Swap Contracts | |||
Credit Contracts (a) | $ | 322,813 |
The above derivative is located in the following Statement of Assets and Liabilities account:
(a) Unrealized appreciation on swap contracts
Liability Derivatives | Forward Contracts | Swap Contracts | Total | |||||||||
Credit Contracts (a) | $ | — | $ | (70,734 | ) | $ | (70,734 | ) | ||||
Foreign Exchange Contracts (b) | (16,731 | ) | — | (16,731 | ) | |||||||
$ | (16,731 | ) | $ | (70,734 | ) | $ | (87,465 | ) |
Each of the above derivatives is located in the following Statement of Assets and Liabilities accounts:
(a) Unrealized depreciation on swap contracts
(b) Unrealized depreciation on forward foreign currency exchange contracts
Additionally, the amount of unrealized and realized gains and losses on derivative instruments recognized in Fund earnings during the six months ended June 30, 2012 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) | $ | — | $ | 127,889 | $ | 127,889 | ||||||
Foreign Exchange Contracts (b) | 152,560 | — | 152,560 | |||||||||
$ | 152,560 | $ | 127,889 | $ | 280,449 |
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) | $ | — | $ | 162,109 | $ | 162,109 | ||||||
Foreign Exchange Contracts (b) | (49,399 | ) | — | (49,399 | ) | |||||||
$ | (49,399 | ) | $ | 162,109 | $ | 112,710 |
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)
C. Purchases and Sales of Securities
During the six months ended June 30, 2012, purchases and sales of investment securities (excluding short-term investments and U.S. Treasury securities) aggregated $43,230,868 and $50,427,875, respectively. Purchases and sales of U.S. Treasury securities aggregated $1,018,128 and $2,016,517, respectively.
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 the 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 the Fund.
Pursuant to the Investment Management Agreement with the Advisor, the Fund pays a monthly management fee based on the Fund's average daily net assets, computed and accrued daily and payable monthly, at the following annual rates:
First $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 | % |
Accordingly, for the six months ended June 30, 2012, the fee pursuant to the Investment Management Agreement was equivalent to an annualized effective rate of 0.50% of the Fund's average daily net assets.
Administration Fee. Pursuant to an Administrative Services Agreement, DIMA provides most administrative services to the Fund. For all services provided under the Administrative Services Agreement, the Fund pays DIMA an annual fee ("Administration Fee") of 0.10% of the Fund's average daily net assets, computed and accrued daily and payable monthly. For the six months ended June 30, 2012, the Administration Fee was $84,876, of which $12,769 is unpaid.
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 the 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 the Fund. For the six months ended June 30, 2012, the amounts charged to the Fund by DISC were as follows:
Services to Shareholders | Total Aggregated | Unpaid at June 30, 2012 | ||||||
Class A | $ | 134 | $ | 47 | ||||
Class B | 10 | 4 | ||||||
$ | 144 | $ | 51 |
Distribution Service Agreement. Under the Fund's 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 six months ended June 30, 2012, the Distribution Service Fee aggregated $113, of which $18 is unpaid.
Typesetting and Filing Service Fees. Under an agreement with DIMA, DIMA is compensated for providing typesetting and certain regulatory filing services to the Fund. For the six months ended June 30, 2012, the amount charged to the Fund by DIMA included in the Statement of Operations under "reports to shareholders" aggregated $11,326, of which $1,570 is unpaid.
Trustees' Fees and Expenses. The Fund paid retainer fees to each Trustee not affiliated with the Advisor, plus specified amounts to the Board Chairperson and to each committee Chairperson.
Affiliated Cash Management Vehicle. The Fund may invest uninvested cash balances in Central Cash Management Fund, which is managed by the Advisor. The Fund indirectly bears its proportionate share of the expenses of Central Cash Management Fund. 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.
Security Lending Fees. Effective January 27, 2012, Deutsche Bank AG serves as lending agent for the Fund. For the period from January 27, 2012 through June 30, 2012, the Fund incurred lending agent fees to Deutsche Bank AG for the amount of $3,243.
E. Investing in High-Yield Securities
The Fund's 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 risk of loss from default by the issuer is significantly greater. Prices and yields of high-yield securities will fluctuate over time and, during periods of economic uncertainty, volatility of high-yield securities may adversely affect a fund's net asset value. Because the Fund may invest in securities not paying current interest or in securities already in default, these risks may be more pronounced.
F. Ownership of the Fund
At June 30, 2012, three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 30%, 30% and 30%. 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%.
G. Line of Credit
The Fund and other affiliated funds (the "Participants") share in a $375 million revolving credit facility provided by a syndication of banks. The Fund 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 Fund may borrow up to a maximum of 33 percent of its net assets under the agreement. The Fund had no outstanding loans at June 30, 2012.
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 (January 1, 2012 to June 30, 2012).
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 June 30, 2012 | ||||||||
Actual Fund Return | Class A | Class B | ||||||
Beginning Account Value 1/1/12 | $ | 1,000.00 | $ | 1,000.00 | ||||
Ending Account Value 6/30/12 | $ | 1,067.90 | $ | 1,066.30 | ||||
Expenses Paid per $1,000* | $ | 3.70 | $ | 5.14 | ||||
Hypothetical 5% Fund Return | Class A | Class B | ||||||
Beginning Account Value 1/1/12 | $ | 1,000.00 | $ | 1,000.00 | ||||
Ending Account Value 6/30/12 | $ | 1,021.28 | $ | 1,019.89 | ||||
Expenses Paid per $1,000* | $ | 3.62 | $ | 5.02 |
* 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 182 (the number of days in the most recent six-month period), then divided by 366.
Annualized Expense Ratios | Class A | Class B | ||
DWS Variable Series II — DWS High Income VIP | .72% | 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 or any variable life insurance policy or variable annuity contract for which the Fund is an investment option.
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.
September 26, 2011
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 report summarizes my evaluation for 2011, 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, 2009 and 2010.
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 109 mutual 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
President, Thomas H. Mack & Co., Inc.
Notes
DWS Investments Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606
(800) 621-1148
VS2HI-3 (R-028385-1 8/12)
JUNE 30, 2012
SEMIANNUAL REPORT
DWS VARIABLE SERIES II
DWS Large Cap Value VIP
Contents
3 Performance Summary 4 Portfolio Summary 4 Portfolio Management Team 5 Investment Portfolio 8 Statement of Assets and Liabilities 9 Statement of Operations 10 Statement of Changes in Net Assets 12 Financial Highlights 14 Notes to Financial Statements 18 Information About Your Fund's Expenses 18 Proxy Voting 20 Summary of Management Fee Evaluation by Independent Fee Consultant |
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.
Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. The Fund may lend securities to approved institutions. Stocks may decline in value. See the prospectus for details.
DWS Investments is part of Deutsche Bank's Asset Management division and, within the U.S., represents the retail asset management activities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company.
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
Fund 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 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, 2012 are 0.79% and 1.10% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Growth of an Assumed $10,000 Investment in DWS Large Cap Value VIP | ||
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. The Russell 1000® Index is an unmanaged price-only index of the 1,000 largest capitalized companies that are domiciled in the U.S. and whose common stocks are traded. Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index. | ||
Yearly periods ended June 30 |
Comparative Results | |||||||||||||||||||||
DWS Large Cap Value VIP | 6-Month‡ | 1-Year | 3-Year | 5-Year | 10-Year | ||||||||||||||||
Class A | Growth of $10,000 | $ | 10,450 | $ | 9,805 | $ | 13,537 | $ | 9,778 | $ | 15,546 | ||||||||||
Average annual total return | 4.50 | % | -1.95 | % | 10.62 | % | -0.45 | % | 4.51 | % | |||||||||||
Russell 1000® Value Index | Growth of $10,000 | $ | 10,868 | $ | 10,301 | $ | 15,529 | $ | 8,951 | $ | 16,722 | ||||||||||
Average annual total return | 8.68 | % | 3.01 | % | 15.80 | % | -2.19 | % | 5.28 | % | |||||||||||
DWS Large Cap Value VIP | 6-Month‡ | 1-Year | 3-Year | 5-Year | Life of Class* | ||||||||||||||||
Class B | Growth of $10,000 | $ | 10,434 | $ | 9,775 | $ | 13,419 | $ | 9,622 | $ | 15,258 | ||||||||||
Average annual total return | 4.34 | % | -2.25 | % | 10.30 | % | -0.77 | % | 4.32 | % | |||||||||||
Russell 1000® Value Index | Growth of $10,000 | $ | 10,868 | $ | 10,301 | $ | 15,529 | $ | 8,951 | $ | 16,722 | ||||||||||
Average annual total return | 8.68 | % | 3.01 | % | 15.80 | % | -2.19 | % | 5.28 | % |
The growth of $10,000 is cumulative.
‡ Total returns shown for periods less than one year are not annualized.
* The Fund commenced offering Class B shares on July 1, 2002. The performance shown for the index is for the time period of June 30, 2002 through June 30, 2012, which is based on the performance period of the life of the class.
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | 6/30/12 | 12/31/11 |
Common Stocks | 96% | 94% |
Cash Equivalents | 3% | 5% |
Exchange-Traded Fund | 1% | 1% |
100% | 100% |
Sector Diversification (As a % of Common Stocks) | 6/30/12 | 12/31/11 |
Financials | 17% | 14% |
Health Care | 14% | 13% |
Energy | 13% | 15% |
Utilities | 11% | 12% |
Consumer Staples | 10% | 13% |
Materials | 8% | 10% |
Information Technology | 7% | 7% |
Consumer Discretionary | 7% | 4% |
Industrials | 7% | 6% |
Telecommunication Services | 6% | 6% |
100% | 100% |
Portfolio holdings and characteristics are subject to change.
For more complete details about the Fund's investment portfolio, see page 5.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
Thomas Schuessler, PhD.
Lead Portfolio Manager
Peter Steffen, CFA
Oliver Pfeil, PhD.
Portfolio Managers
Shares | Value ($) | |||||||
Common Stocks 95.7% | ||||||||
Consumer Discretionary 6.8% | ||||||||
Distributors 1.3% | ||||||||
Genuine Parts Co. | 83,080 | 5,005,570 | ||||||
Diversified Consumer Services 1.1% | ||||||||
H&R Block, Inc. (a) | 274,010 | 4,378,680 | ||||||
Media 2.5% | ||||||||
Comcast Corp. "A" | 174,752 | 5,586,821 | ||||||
Time Warner, Inc. | 110,093 | 4,238,581 | ||||||
9,825,402 | ||||||||
Multiline Retail 1.9% | ||||||||
Family Dollar Stores, Inc. | 81,686 | 5,430,485 | ||||||
Target Corp. | 33,435 | 1,945,583 | ||||||
7,376,068 | ||||||||
Consumer Staples 9.9% | ||||||||
Beverages 1.4% | ||||||||
PepsiCo, Inc. | 76,185 | 5,383,232 | ||||||
Food & Staples Retailing 2.5% | ||||||||
CVS Caremark Corp. | 163,554 | 7,642,878 | ||||||
Walgreen Co. | 66,135 | 1,956,273 | ||||||
9,599,151 | ||||||||
Food Products 3.8% | ||||||||
DE Master Blenders 1753 NV* | 182,398 | 2,056,647 | ||||||
General Mills, Inc. | 106,489 | 4,104,086 | ||||||
Hillshire Brands Co. (a) | 36,479 | 1,057,526 | ||||||
Kellogg Co. | 75,569 | 3,727,819 | ||||||
Mead Johnson Nutrition Co. | 47,828 | 3,850,632 | ||||||
14,796,710 | ||||||||
Tobacco 2.2% | ||||||||
Altria Group, Inc. | 139,588 | 4,822,765 | ||||||
Philip Morris International, Inc. | 45,717 | 3,989,266 | ||||||
8,812,031 | ||||||||
Energy 12.1% | ||||||||
Energy Equipment & Services 2.0% | ||||||||
Cameron International Corp.* | 87,222 | 3,725,251 | ||||||
Noble Corp.* | 127,760 | 4,156,033 | ||||||
7,881,284 | ||||||||
Oil, Gas & Consumable Fuels 10.1% | ||||||||
Canadian Natural Resources Ltd. | 125,247 | 3,362,882 | ||||||
Chevron Corp. | 69,692 | 7,352,506 | ||||||
ConocoPhillips | 79,517 | 4,443,410 | ||||||
Marathon Oil Corp. | 159,855 | 4,087,492 | ||||||
Marathon Petroleum Corp. | 120,305 | 5,404,101 | ||||||
Nexen, Inc. (a) | 108,809 | 1,837,784 | ||||||
Occidental Petroleum Corp. | 63,319 | 5,430,871 | ||||||
Phillips 66* | 70,078 | 2,329,393 | ||||||
Suncor Energy, Inc. | 175,050 | 5,067,697 | ||||||
39,316,136 | ||||||||
Financials 16.4% | ||||||||
Capital Markets 1.5% | ||||||||
Ameriprise Financial, Inc. | 76,426 | 3,994,023 | ||||||
The Goldman Sachs Group, Inc. | 19,704 | 1,888,825 | ||||||
5,882,848 | ||||||||
Commercial Banks 2.4% | ||||||||
U.S. Bancorp. (a) | 167,937 | 5,400,854 | ||||||
Wells Fargo & Co. | 115,837 | 3,873,589 | ||||||
9,274,443 | ||||||||
Shares | Value ($) | |||||||
Consumer Finance 1.3% | ||||||||
Capital One Financial Corp. | 91,494 | 5,001,062 | ||||||
Diversified Financial Services 2.9% | ||||||||
JPMorgan Chase & Co. | 214,108 | 7,650,079 | ||||||
The NASDAQ OMX Group, Inc. | 161,715 | 3,666,079 | ||||||
11,316,158 | ||||||||
Insurance 8.3% | ||||||||
Alleghany Corp.* | 12,663 | 4,302,254 | ||||||
Fidelity National Financial, Inc. "A" | 224,338 | 4,320,750 | ||||||
HCC Insurance Holdings, Inc. | 139,854 | 4,391,416 | ||||||
Lincoln National Corp. | 182,910 | 4,000,242 | ||||||
MetLife, Inc. | 104,854 | 3,234,746 | ||||||
PartnerRe Ltd. | 107,613 | 8,143,076 | ||||||
Prudential Financial, Inc. | 82,861 | 4,012,958 | ||||||
32,405,442 | ||||||||
Health Care 13.2% | ||||||||
Health Care Equipment & Supplies 2.5% | ||||||||
Baxter International, Inc. | 104,370 | 5,547,265 | ||||||
Becton, Dickinson & Co. (a) | 56,297 | 4,208,201 | ||||||
9,755,466 | ||||||||
Health Care Providers & Services 4.0% | ||||||||
Aetna, Inc. | 94,398 | 3,659,811 | ||||||
Humana, Inc. | 65,226 | 5,051,101 | ||||||
McKesson Corp. | 72,687 | 6,814,406 | ||||||
15,525,318 | ||||||||
Pharmaceuticals 6.7% | ||||||||
Johnson & Johnson (a) | 125,849 | 8,502,359 | ||||||
Merck & Co., Inc. | 185,411 | 7,740,909 | ||||||
Pfizer, Inc. | 430,059 | 9,891,357 | ||||||
26,134,625 | ||||||||
Industrials 6.8% | ||||||||
Aerospace & Defense 4.2% | ||||||||
Northrop Grumman Corp. | 73,662 | 4,698,899 | ||||||
Raytheon Co. | 133,107 | 7,532,525 | ||||||
United Technologies Corp. | 53,303 | 4,025,976 | ||||||
16,257,400 | ||||||||
Industrial Conglomerates 2.6% | ||||||||
General Electric Co. | 480,462 | 10,012,828 | ||||||
Information Technology 7.1% | ||||||||
Communications Equipment 1.4% | ||||||||
Cisco Systems, Inc. | 305,474 | 5,244,989 | ||||||
Computers & Peripherals 0.6% | ||||||||
Hewlett-Packard Co. | 118,009 | 2,373,161 | ||||||
Semiconductors & Semiconductor Equipment 1.3% | ||||||||
Intel Corp. | 193,319 | 5,151,951 | ||||||
Software 3.8% | ||||||||
BMC Software, Inc.* | 107,598 | 4,592,283 | ||||||
Microsoft Corp. | 191,624 | 5,861,778 | ||||||
Oracle Corp. | 150,602 | 4,472,879 | ||||||
14,926,940 | ||||||||
Materials 7.9% | ||||||||
Chemicals 4.3% | ||||||||
Air Products & Chemicals, Inc. | 75,621 | 6,104,883 | ||||||
Potash Corp. of Saskatchewan, Inc. (a) | 111,919 | 4,889,741 | ||||||
Praxair, Inc. | 51,024 | 5,547,840 | ||||||
16,542,464 | ||||||||
Shares | Value ($) | |||||||
Containers & Packaging 1.5% | ||||||||
Sonoco Products Co. | 191,948 | 5,787,232 | ||||||
Metals & Mining 2.1% | ||||||||
Goldcorp, Inc. | 121,937 | 4,582,392 | ||||||
Newmont Mining Corp. | 77,092 | 3,739,733 | ||||||
8,322,125 | ||||||||
Telecommunication Services 5.4% | ||||||||
Diversified Telecommunication Services 3.9% | ||||||||
AT&T, Inc. (a) | 217,567 | 7,758,439 | ||||||
CenturyLink, Inc. (a) | 185,205 | 7,313,746 | ||||||
15,072,185 | ||||||||
Wireless Telecommunication Services 1.5% | ||||||||
Vodafone Group PLC (ADR) | 213,431 | 6,014,485 | ||||||
Utilities 10.1% | ||||||||
Electric Utilities 8.9% | ||||||||
American Electric Power Co., Inc. | 156,172 | 6,231,263 | ||||||
Duke Energy Corp. (a) | 194,292 | 4,480,374 | ||||||
Entergy Corp. (a) | 83,783 | 5,688,028 | ||||||
Exelon Corp. | 168,886 | 6,353,491 | ||||||
FirstEnergy Corp. | 162,594 | 7,997,999 | ||||||
Southern Co. | 89,931 | 4,163,805 | ||||||
34,914,960 | ||||||||
Shares | Value ($) | |||||||
Multi-Utilities 1.2% | ||||||||
PG&E Corp. | 101,163 | 4,579,649 | ||||||
Total Common Stocks (Cost $324,493,469) | 372,869,995 | |||||||
Exchange-Traded Fund 1.1% | ||||||||
SPDR Gold Trust* (Cost $4,735,603) | 27,876 | 4,326,077 | ||||||
Securities Lending Collateral 10.1% | ||||||||
Daily Assets Fund Institutional, 0.24% (b) (c) (Cost $39,145,600) | 39,145,600 | 39,145,600 | ||||||
Cash Equivalents 3.2% | ||||||||
Central Cash Management Fund, 0.14% (b) (Cost $12,437,485) | 12,437,485 | 12,437,485 |
% of Net Assets | Value ($) | |||||||
Total Investment Portfolio (Cost $380,812,157)+ | 110.1 | 428,779,157 | ||||||
Other Assets and Liabilities, Net | (10.1 | ) | (39,179,397 | ) | ||||
Net Assets | 100.0 | 389,599,760 |
* Non-income producing security.
+ The cost for federal income tax purposes was $383,384,571. At June 30, 2012, net unrealized appreciation for all securities based on tax cost was $45,394,586. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $64,095,062 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $18,700,476.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at June 30, 2012 amounted to $39,609,543, which is 10.2% 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
SPDR: Standard & Poor's 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 June 30, 2012 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 | ||||||||||||||||
Consumer Discretionary | $ | 26,585,720 | $ | — | $ | — | $ | 26,585,720 | ||||||||
Consumer Staples | 36,534,477 | 2,056,647 | — | 38,591,124 | ||||||||||||
Energy | 47,197,420 | — | — | 47,197,420 | ||||||||||||
Financials | 63,879,953 | — | — | 63,879,953 | ||||||||||||
Health Care | 51,415,409 | — | — | 51,415,409 | ||||||||||||
Industrials | 26,270,228 | — | — | 26,270,228 | ||||||||||||
Information Technology | 27,697,041 | — | — | 27,697,041 | ||||||||||||
Materials | 30,651,821 | — | — | 30,651,821 | ||||||||||||
Telecommunication Services | 21,086,670 | — | — | 21,086,670 | ||||||||||||
Utilities | 39,494,609 | — | — | 39,494,609 | ||||||||||||
Exchange-Traded Funds | 4,326,077 | — | — | 4,326,077 | ||||||||||||
Short-Term Investments (d) | 51,583,085 | — | — | 51,583,085 | ||||||||||||
Total | $ | 426,722,510 | $ | 2,056,647 | $ | — | $ | 428,779,157 |
There have been no transfers between Level 1 and Level 2 fair value measurements during the period ended June 30, 2012.
(d) See Investment Portfolio for additional detailed categorizations.
The accompanying notes are an integral part of the financial statements.
as of June 30, 2012 (Unaudited) | ||||
Assets | ||||
Investments: Investments in non-affiliated securities, at value (cost $329,229,072) — including $39,609,543 of securities loaned | $ | 377,196,072 | ||
Investment in Daily Assets Fund Institutional (cost $39,145,600) | 39,145,600 | |||
Investment in Central Cash Management Fund (cost $12,437,485) | 12,437,485 | |||
Total investments in securities, at value (cost $380,812,157) | 428,779,157 | |||
Cash | 547,194 | |||
Foreign currency, at value (cost $31,425) | 33,352 | |||
Receivable for investments sold | 10,469,044 | |||
Receivable for Fund shares sold | 2,561 | |||
Dividends receivable | 902,560 | |||
Interest receivable | 5,301 | |||
Foreign taxes recoverable | 2,107 | |||
Other assets | 3,402 | |||
Total assets | 440,744,678 | |||
Liabilities | ||||
Payable upon return of securities loaned | 39,145,600 | |||
Payable for investments purchased | 11,242,970 | |||
Payable for Fund shares redeemed | 478,513 | |||
Accrued management fee | 200,433 | |||
Accrued Trustees' fees | 30 | |||
Other accrued expenses and payables | 77,372 | |||
Total liabilities | 51,144,918 | |||
Net assets, at value | $ | 389,599,760 | ||
Net Assets Consist of | ||||
Undistributed net investment income | 4,296,752 | |||
Net unrealized appreciation (depreciation) on: Investments | 47,967,000 | |||
Foreign currency | 2,075 | |||
Accumulated net realized gain (loss) | (149,028,534 | ) | ||
Paid-in capital | 486,362,467 | |||
Net assets, at value | $ | 389,599,760 | ||
Class A Net Asset Value, offering and redemption price per share ($386,255,838 ÷ 32,600,293 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | $ | 11.85 | ||
Class B Net Asset Value, offering and redemption price per share ($3,343,922 ÷ 281,536 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | $ | 11.88 |
The accompanying notes are an integral part of the financial statements.
Statement of Operations
for the six months ended June 30, 2012 (Unaudited) | ||||
Investment Income | ||||
Income: Dividends (net of foreign taxes withheld of $31,347) | $ | 5,958,726 | ||
Income distributions — Central Cash Management Fund | 7,721 | |||
Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates | 22,154 | |||
Total income | 5,988,601 | |||
Expenses: Management fee | 1,279,244 | |||
Administration fee | 200,688 | |||
Services to shareholders | 1,333 | |||
Record keeping fees (Class B) | 897 | |||
Distribution service fee (Class B) | 4,395 | |||
Custodian fee | 7,344 | |||
Professional fees | 31,188 | |||
Reports to shareholders | 18,002 | |||
Trustees' fees and expenses | 10,316 | |||
Other | 12,628 | |||
Total expenses | 1,566,035 | |||
Net investment income | 4,422,566 | |||
Realized and Unrealized Gain (Loss) | ||||
Net realized gain (loss) from: Investments | 1,805,118 | |||
Foreign currency | 174 | |||
1,805,292 | ||||
Change in net unrealized appreciation (depreciation) on: Investments | 12,006,823 | |||
Foreign currency | (683 | ) | ||
12,006,140 | ||||
Net gain (loss) | 13,811,432 | |||
Net increase (decrease) in net assets resulting from operations | $ | 18,233,998 |
The accompanying notes are an integral part of the financial statements.
Increase (Decrease) in Net Assets | Six Months Ended June 30, 2012 (Unaudited) | Year Ended December 31, 2011 | ||||||
Operations: Net investment income (loss) | $ | 4,422,566 | $ | 7,625,478 | ||||
Operations: Net investment income (loss) | $ | 4,422,566 | $ | 7,625,478 | ||||
Net realized gain (loss) | 1,805,292 | (4,703,481 | ) | |||||
Change in net unrealized appreciation (depreciation) | 12,006,140 | (23,495,585 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 18,233,998 | (20,573,588 | ) | |||||
Distributions to shareholders from: Net investment income: Class A | (7,645,527 | ) | (4,120,416 | ) | ||||
Class B | (54,663 | ) | (23,046 | ) | ||||
Total distributions | (7,700,190 | ) | (4,143,462 | ) | ||||
Fund share transactions: Class A Proceeds from shares sold | 5,358,071 | 16,221,346 | ||||||
Net assets acquired in tax-free reorganization | — | 273,358,779 | ||||||
Reinvestment of distributions | 7,645,527 | 4,120,416 | ||||||
Payments for shares redeemed | (33,333,094 | ) | (78,529,959 | ) | ||||
Net increase (decrease) in net assets from Class A share transactions | (20,329,496 | ) | 215,170,582 | |||||
Class B Proceeds from shares sold | 394,081 | 1,297,157 | ||||||
Net assets acquired in tax-free reorganization | — | 1,731,132 | ||||||
Reinvestment of distributions | 54,663 | 23,046 | ||||||
Payments for shares redeemed | (655,706 | ) | (661,197 | ) | ||||
Net increase (decrease) in net assets from Class B share transactions | (206,962 | ) | 2,390,138 | |||||
Increase (decrease) in net assets | (10,002,650 | ) | 192,843,670 | |||||
Net assets at beginning of period | 399,602,410 | 206,758,740 | ||||||
Net assets at end of period (including undistributed net investment income of $4,296,752 and $7,574,376, respectively) | $ | 389,599,760 | $ | 399,602,410 | ||||
Other Information | ||||||||
Class A Shares outstanding at beginning of period | 34,282,579 | 17,416,427 | ||||||
Shares sold | 448,415 | 1,390,527 | ||||||
Shares issued in tax-free reorganization | — | 21,886,687 | ||||||
Shares issued to shareholders in reinvestment of distributions | 631,340 | 332,559 | ||||||
Shares redeemed | (2,762,041 | ) | (6,743,621 | ) | ||||
Net increase (decrease) in Class A shares | (1,682,286 | ) | 16,866,152 | |||||
Shares outstanding at end of period | 32,600,293 | 34,282,579 | ||||||
Class B Shares outstanding at beginning of period | 298,416 | 105,172 | ||||||
Shares sold | 32,482 | 108,601 | ||||||
Shares issued in tax-free reorganization | — | 138,157 | ||||||
Shares issued to shareholders in reinvestment of distributions | 4,499 | 1,856 | ||||||
Shares redeemed | (53,861 | ) | (55,370 | ) | ||||
Net increase (decrease) in Class B shares | (16,880 | ) | 193,244 | |||||
Shares outstanding at end of period | 281,536 | 298,416 |
The accompanying notes are an integral part of the financial statements.
Years Ended December 31, | ||||||||||||||||||||||||
Class A | Six Months Ended 6/30/12 (Unaudited) | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Selected Per Share Data | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.56 | $ | 11.80 | $ | 10.86 | $ | 8.92 | $ | 19.21 | $ | 17.96 | ||||||||||||
Income (loss) from investment operations: Net investment income (loss)a | .13 | .25 | .23 | .21 | .21 | .26 | ||||||||||||||||||
Net realized and unrealized gain (loss) | .39 | (.24 | ) | .93 | 1.97 | (5.68 | ) | 1.98 | ||||||||||||||||
Total from investment operations | .52 | .01 | 1.16 | 2.18 | (5.47 | ) | 2.24 | |||||||||||||||||
Less distributions from: Net investment income | (.23 | ) | (.25 | ) | (.22 | ) | (.24 | ) | (.34 | ) | (.32 | ) | ||||||||||||
Net realized gains | — | — | — | — | (4.48 | ) | (.67 | ) | ||||||||||||||||
Total distributions | (.23 | ) | (.25 | ) | (.22 | ) | (.24 | ) | (4.82 | ) | (.99 | ) | ||||||||||||
Net asset value, end of period | $ | 11.85 | $ | 11.56 | $ | 11.80 | $ | 10.86 | $ | 8.92 | $ | 19.21 | ||||||||||||
Total Return (%) | 4.50 | ** | (.07 | ) | 10.77 | 25.37 | (36.40 | )b | 13.15 | b,c | ||||||||||||||
Ratios to Average Net Assets and Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period ($ millions) | 386 | 396 | 206 | 214 | 118 | 229 | ||||||||||||||||||
Ratio of expenses before expense reductions (%) | .78 | * | .79 | .82 | .76 | .87 | .83 | |||||||||||||||||
Ratio of expenses after expense reductions (%) | .78 | * | .79 | .82 | .76 | .86 | .82 | |||||||||||||||||
Ratio of net investment income (loss) (%) | 2.21 | * | 2.15 | 2.13 | 2.22 | 1.59 | 1.43 | |||||||||||||||||
Portfolio turnover rate (%) | 24 | ** | 28 | 32 | 76 | 97 | 103 | |||||||||||||||||
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. c 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. * Annualized ** Not annualized |
Years Ended December 31, | ||||||||||||||||||||||||
Class B | Six Months Ended 6/30/12 (Unaudited) | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Selected Per Share Data | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.57 | $ | 11.81 | $ | 10.86 | $ | 8.92 | $ | 19.20 | $ | 17.94 | ||||||||||||
Income (loss) from investment operations: Net investment income (loss)a | .11 | .22 | .20 | .19 | .12 | .19 | ||||||||||||||||||
Net realized and unrealized gain (loss) | .40 | (.25 | ) | .93 | 1.96 | (5.64 | ) | 1.99 | ||||||||||||||||
Total from investment operations | .51 | (.03 | ) | 1.13 | 2.15 | (5.52 | ) | 2.18 | ||||||||||||||||
Less distributions from: Net investment income | (.20 | ) | (.21 | ) | (.18 | ) | (.21 | ) | (.28 | ) | (.25 | ) | ||||||||||||
Net realized gains | — | — | — | — | (4.48 | ) | (.67 | ) | ||||||||||||||||
Total distributions | (.20 | ) | (.21 | ) | (.18 | ) | (.21 | ) | (4.76 | ) | (.92 | ) | ||||||||||||
Net asset value, end of period | $ | 11.88 | $ | 11.57 | $ | 11.81 | $ | 10.86 | $ | 8.92 | $ | 19.20 | ||||||||||||
Total Return (%) | 4.34 | ** | (.36 | ) | 10.53 | 24.86 | (36.64 | )b | 12.77 | b,c | ||||||||||||||
Ratios to Average Net Assets and Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period ($ millions) | 3 | 3 | 1 | 1 | .29 | 8 | ||||||||||||||||||
Ratio of expenses before expense reductions (%) | 1.08 | * | 1.10 | 1.11 | 1.06 | 1.28 | 1.21 | |||||||||||||||||
Ratio of expenses after expense reductions (%) | 1.08 | * | 1.10 | 1.11 | 1.06 | 1.26 | 1.20 | |||||||||||||||||
Ratio of net investment income (loss) (%) | 1.88 | * | 1.84 | 1.84 | 1.92 | 1.20 | 1.06 | |||||||||||||||||
Portfolio turnover rate (%) | 24 | ** | 28 | 32 | 76 | 97 | 103 | |||||||||||||||||
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. c 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. * Annualized ** Not annualized |
A. Organization and Significant Accounting Policies
DWS Large Cap Value VIP (the "Fund") is a diversified series of DWS Variable Series II (the "Trust"), which 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.
Multiple Classes of Shares of Beneficial Interest. The Fund offers two classes of shares (Class A shares and Class B shares). Sales of Class B shares are subject to recordkeeping 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 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 recordkeeping 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 Fund'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 Fund 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 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.
Equity securities and exchange traded funds ("ETFs") are valued at the most recent sale price or official closing price reported on the exchange (U.S. or foreign) or over-the-counter market on which they trade and are categorized as Level 1 securities. Securities 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.
Investments in open-end investment companies are valued at their net asset value each business day 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 the 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 Fund's Investment Portfolio.
Foreign Currency Translations. The books and records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing exchange rates at period end. Purchases and sales of investment securities, income and expenses are translated into U.S. 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 acquisition and disposition of foreign currencies, and the difference between the amount of net investment income accrued and the U.S. 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.
Securities Lending. The Fund 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 under 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.
Federal Income Taxes. The 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.
Under the Regulated Investment Company Modernization Act of 2010, net capital losses may be carried forward indefinitely, and their character is retained as short-term and/or long-term. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
At December 31, 2011, the Fund had a net tax basis capital loss carryforward of approximately $148,261,000, including $143,482,000 of pre-enactment losses of which $102,395,000 was inherited from its merger with DWS Strategic Value VIP and $31,552,000 was inherited from its merger with another affiliated fund in a previous year and may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until December 31, 2015 ($14,184,000), December 31, 2016 ($117,215,000) and December 31, 2017 ($12,083,000), the respective expiration dates, whichever occurs first; and which may be subject to certain limitations under Section 382-384 of the Internal Revenue Code, and $4,779,000 of post-enactment losses which may be applied against realized net taxable capital gains indefinitely, including short-term losses ($3,552,000) and long-term losses ($1,227,000).
The Fund has reviewed the tax positions for the open tax years as of December 31, 2011 and has determined that no provision for income tax is required in the Fund's financial statements. The Fund's federal tax returns for the prior three fiscal years remain open subject to examination by the Internal Revenue Service.
Distribution of Income and Gains. Net investment income of the Fund, if any, is declared and distributed to shareholders annually. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed and, therefore, will be distributed to shareholders at least annually. The Fund may also make additional distributions for tax purposes if necessary.
The timing and characterization of certain income and capital gain 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 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, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.
The tax character of current year distributions will be determined at the end of the current fiscal year.
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, the Fund may enter into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet been made. However, based on experience, the Fund expects the risk of loss to be remote.
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. Realized gains and losses from investment transactions are recorded on an identified cost basis and may include proceeds from litigation.
B. Purchases and Sales of Securities
During the six months ended June 30, 2012, purchases and sales of investment transactions (excluding short-term investments) aggregated $92,357,351 and $108,797,484, respectively.
C. 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 the 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 the Fund.
Under the Investment Management Agreement with the Advisor, the Fund pays a monthly management fee based on the Fund's average daily net assets, computed and accrued daily and payable monthly, at the following annual rates:
First $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 | % |
Accordingly, for the six months ended June 30, 2012, the fee pursuant to the Investment Management Agreement was equivalent to an annualized effective rate of 0.64% of the Fund's average daily net assets.
Administration Fee. Pursuant to an Administrative Services Agreement, DIMA provides most administrative services to the Fund. For all services provided under the Administrative Services Agreement, the Fund pays DIMA an annual fee ("Administration Fee") of 0.10% of the Fund's average daily net assets, computed and accrued daily and payable monthly. For the six months ended June 30, 2012, the Administration Fee was $200,688, of which $31,250 is unpaid.
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 the 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 the Fund. For the six months ended June 30, 2012, the amounts charged to the Fund by DISC were as follows:
Services to Shareholders | Total Aggregated | Unpaid at June 30, 2012 | ||||||
Class A | $ | 182 | $ | 64 | ||||
Class B | 85 | 23 | ||||||
$ | 267 | $ | 87 |
Distribution Service Agreement. Under the Fund's 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 six months ended June 30, 2012, the Distribution Service Fee aggregated $4,395, of which $667 is unpaid.
Typesetting and Filing Service Fees. Under an agreement with DIMA, DIMA is compensated for providing typesetting and certain regulatory filing services to the Fund. For the six months ended June 30, 2012, the amount charged to the Fund by DIMA included in the Statement of Operations under "reports to shareholders" aggregated $10,488, of which $1,663 is unpaid.
Trustees' Fees and Expenses. The Fund paid retainer fees to each Trustee not affiliated with the Advisor, plus specified amounts to the Board Chairperson and to each committee Chairperson.
Affiliated Cash Management Vehicle. The Fund may invest uninvested cash balances in Central Cash Management Fund, which is managed by the Advisor. The Fund indirectly bears its proportionate share of the expenses of Central Cash Management Fund. 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.
Securities Lending Agent Fees. Deutsche Bank AG serves as securities lending agent for the Fund. For the six months ended June 30, 2012, the Fund incurred securities lending agent fees to Deutsche Bank AG in the amount of $2,437.
D. Ownership of the Fund
At June 30, 2012, two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 54% and 28%. Two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class B shares of the Fund, each owning 63% and 11%.
E. Line of Credit
The Fund and other affiliated funds (the "Participants") share in a $375 million revolving credit facility provided by a syndication of banks. The Fund 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 Fund may borrow up to a maximum of 33 percent of its net assets under the agreement. The Fund had no outstanding loans at June 30, 2012.
F. Acquisition of Assets
On April 29, 2011, the Fund acquired all of the net assets of DWS Strategic Value VIP pursuant to a plan of reorganization approved by shareholders on January 12, 2011. The acquisition was accomplished by a tax-free exchange of 31,515,416 Class A shares and 198,385 Class B shares of DWS Strategic Value VIP for 21,886,687 Class A shares and 138,157 Class B shares of the Fund, respectively, outstanding on April 29, 2011. DWS Strategic Value VIP's net assets at that date, $275,089,911, including $20,489,725 of net unrealized appreciation, were combined with those of the Fund. The aggregate net assets of the Fund immediately before the acquisition were $212,494,328. The combined net assets of the Fund immediately following the acquisition were $487,584,239.
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 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 (January 1, 2012 to June 30, 2012).
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 June 30, 2012 | ||||||||
Actual Fund Return | Class A | Class B | ||||||
Beginning Account Value 1/1/12 | $ | 1,000.00 | $ | 1,000.00 | ||||
Ending Account Value 6/30/12 | $ | 1,045.00 | $ | 1,043.40 | ||||
Expenses Paid per $1,000* | $ | 3.97 | $ | 5.49 | ||||
Hypothetical 5% Fund Return | Class A | Class B | ||||||
Beginning Account Value 1/1/12 | $ | 1,000.00 | $ | 1,000.00 | ||||
Ending Account Value 6/30/12 | $ | 1,020.98 | $ | 1,019.49 | ||||
Expenses Paid per $1,000* | $ | 3.92 | $ | 5.42 |
* 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 182 (the number of days in the most recent six-month period), then divided by 366.
Annualized Expense Ratios | Class A | Class B | ||
DWS Variable Series II — DWS Large Cap Value VIP | .78% | 1.08% |
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 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.
September 26, 2011
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 report summarizes my evaluation for 2011, 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, 2009 and 2010.
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 109 mutual 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
President, Thomas H. Mack & Co., Inc.
DWS Investments Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606
(800) 621-1148
VS2LCV-3 (R-028386-1 8/12)
JUNE 30, 2012
SEMIANNUAL REPORT
DWS VARIABLE SERIES II
DWS Money Market VIP
Contents
3 Performance Summary 4 Portfolio Summary 6 Investment Portfolio 10 Statement of Assets and Liabilities 11 Statement of Operations 12 Statement of Changes in Net Assets 13 Financial Highlights 14 Notes to Financial Statements 16 Information About Your Fund's Expenses 17 Proxy Voting 18 Summary of Management Fee Evaluation by Independent Fee Consultant |
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.
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.
DWS Investments is part of Deutsche Bank's Asset Management division and, within the U.S., represents the retail asset management activities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company.
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
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 returns. The yield quotation more closely reflects the current earnings of the Fund than the total return quotation.
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.
Fund's Class A Shares Yield | 7-day current yield | |||
June 30, 2012 | 0.01 | %* | ||
December 31, 2011 | 0.01 | %* |
* The investment advisor has agreed to waive fees/reimburse expenses. Without such fee waivers/expense reimbursements, the 7-day current yield would have been lower.
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.
Asset Allocation (As a % of Investment Portfolio) | 6/30/12 | 12/31/11 |
Commercial Paper | 45% | 36% |
Short-Term Notes | 16% | 16% |
Certificates of Deposit and Bank Notes | 14% | 18% |
Repurchase Agreements | 13% | 18% |
Government & Agency Obligations | 11% | 12% |
Time Deposits | 1% | — |
100% | 100% |
Weighted Average Maturity* | 6/30/12 | 12/31/11 |
DWS Variable Series II — DWS Money Market VIP | 39 days | 43 days |
First Tier Retail Money Fund Average | 40 days | 38 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 U.S. Treasury, U.S. 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 maturity date of bonds held by the Fund taking into consideration any available maturity shortening features.
Portfolio holdings and characteristics are subject to change.
For more complete details about the Fund's investment portfolio, see page 6.
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.
Principal Amount ($) | Value ($) | |||||||
Certificates of Deposit and Bank Notes 13.6% | ||||||||
Banco del Estado de Chile, 0.44%, 7/20/2012 | 1,000,000 | 1,000,000 | ||||||
Bank of Tokyo-Mitsubishi UFJ Ltd., 0.35%, 8/14/2012 | 2,000,000 | 2,000,244 | ||||||
China Construction Bank Corp.: | ||||||||
0.4%, 7/25/2012 | 1,000,000 | 1,000,000 | ||||||
0.4%, 8/1/2012 | 400,000 | 400,000 | ||||||
0.47%, 7/3/2012 | 500,000 | 500,000 | ||||||
0.51%, 7/10/2012 | 1,000,000 | 1,000,000 | ||||||
DZ Bank: | ||||||||
0.3%, 8/21/2012 | 2,000,000 | 2,000,000 | ||||||
0.33%, 8/23/2012 | 1,700,000 | 1,700,000 | ||||||
Industrial & Commercial Bank of China: | ||||||||
0.35%, 8/3/2012 | 500,000 | 500,000 | ||||||
0.4%, 7/30/2012 | 2,000,000 | 2,000,000 | ||||||
Mizuho Corporate Bank Ltd., 0.23%, 7/20/2012 | 1,800,000 | 1,800,000 | ||||||
Nordea Bank Finland PLC: | ||||||||
0.28%, 9/18/2012 | 2,000,000 | 1,999,868 | ||||||
0.29%, 9/7/2012 | 1,000,000 | 1,000,000 | ||||||
Rabobank Nederland NV, 0.35%, 8/16/2012 | 2,500,000 | 2,500,032 | ||||||
Skandinaviska Enskilda Banken AB: | ||||||||
0.25%, 8/3/2012 | 2,500,000 | 2,500,000 | ||||||
0.27%, 7/24/2012 | 1,500,000 | 1,500,000 | ||||||
0.47%, 7/18/2012 | 1,000,000 | 1,000,104 | ||||||
0.49%, 8/23/2012 | 1,500,000 | 1,500,000 | ||||||
Svenska Handelsbanken AB, 0.31%, 9/28/2012 | 3,000,000 | 3,000,037 | ||||||
Total Certificates of Deposit and Bank Notes (Cost $28,900,285) | 28,900,285 | |||||||
Collateralized Mortgage Obligation 0.2% | ||||||||
The Superannuation Members Home Loan Programme, "A1", Series 2012-1, 0.644%*, 3/20/2013 (Cost $500,000) | 500,000 | 500,000 | ||||||
Commercial Paper 44.8% | ||||||||
Issued at Discount** 41.3% | ||||||||
Alpine Securitization, 144A, 0.25%, 7/25/2012 | 2,000,000 | 1,999,667 | ||||||
ASB Finance Ltd., 0.58%, 7/12/2012 | 2,000,000 | 1,999,646 | ||||||
Barclays Bank PLC, 0.22%, 7/6/2012 | 1,000,000 | 999,969 | ||||||
BNZ International Funding Ltd., 144A, 0.58%, 7/12/2012 | 1,500,000 | 1,499,734 | ||||||
Coca-Cola Co., 0.23%, 9/5/2012 | 1,000,000 | 999,578 | ||||||
Collateralized Commercial Paper Co., LLC: | ||||||||
0.25%, 7/26/2012 | 5,500,000 | 5,499,045 | ||||||
0.45%, 10/16/2012 | 2,500,000 | 2,496,656 | ||||||
DNB Bank ASA, 0.305%, 9/11/2012 | 1,000,000 | 999,390 | ||||||
Erste Abwicklungsanstalt: | ||||||||
0.385%, 9/10/2012 | 1,000,000 | 999,241 | ||||||
0.52%, 12/4/2012 | 1,500,000 | 1,496,620 | ||||||
0.54%, 11/9/2012 | 1,000,000 | 998,035 | ||||||
0.57%, 8/31/2012 | 500,000 | 499,517 | ||||||
0.57%, 1/8/2013 | 400,000 | 398,790 | ||||||
Principal Amount ($) | Value ($) | |||||||
0.58%, 10/18/2012 | 800,000 | 798,595 | ||||||
0.68%, 8/13/2012 | 800,000 | 799,350 | ||||||
0.72%, 9/4/2012 | 500,000 | 499,350 | ||||||
0.8%, 8/13/2012 | 600,000 | 599,427 | ||||||
0.83%, 8/2/2012 | 1,000,000 | 999,262 | ||||||
Gotham Funding Corp., 144A, 0.22%, 8/1/2012 | 3,000,000 | 2,999,432 | ||||||
Hannover Funding Co., LLC: | ||||||||
0.499%, 8/7/2012 | 1,000,000 | 999,486 | ||||||
0.5%, 7/16/2012 | 1,000,000 | 999,792 | ||||||
0.5%, 8/17/2012 | 500,000 | 499,674 | ||||||
Kells Funding LLC: | ||||||||
144A, 0.51%, 10/5/2012 | 1,000,000 | 998,640 | ||||||
144A, 0.54%, 10/1/2012 | 3,500,000 | 3,495,170 | ||||||
144A, 0.58%, 11/2/2012 | 1,000,000 | 998,002 | ||||||
144A, 0.59%, 8/23/2012 | 1,000,000 | 999,131 | ||||||
144A, 0.65%, 8/3/2012 | 1,000,000 | 999,404 | ||||||
144A, 0.68%, 8/21/2012 | 1,000,000 | 999,037 | ||||||
Kreditanstal Fuer Wiederaufbau, 144A, 0.225%, 7/13/2012 | 1,000,000 | 999,925 | ||||||
Liberty Street Funding LLC, 144A, 0.1%, 7/2/2012 | 4,000,000 | 3,999,989 | ||||||
National Australia Funding (Delaware), Inc., 144A, 0.2%, 8/8/2012 | 1,000,000 | 999,789 | ||||||
Nieuw Amsterdam Receivables Corp., 144A, 0.2%, 7/20/2012 | 5,000,000 | 4,999,472 | ||||||
Nordea North America, Inc., 0.59%, 8/15/2012 | 400,000 | 399,705 | ||||||
NRW.Bank: | ||||||||
0.26%, 8/1/2012 | 4,000,000 | 3,999,104 | ||||||
0.315%, 9/6/2012 | 1,000,000 | 999,414 | ||||||
0.37%, 9/25/2012 | 2,000,000 | 1,998,232 | ||||||
Regency Markets No. 1 LLC, 144A, 0.2%, 7/12/2012 | 1,000,000 | 999,936 | ||||||
SBAB Bank AB: | ||||||||
144A, 0.48%, 9/5/2012 | 1,000,000 | 999,120 | ||||||
144A, 0.51%, 8/1/2012 | 1,000,000 | 999,561 | ||||||
144A, 0.51%, 9/14/2012 | 1,000,000 | 998,937 | ||||||
144A, 0.55%, 9/24/2012 | 2,000,000 | 1,997,403 | ||||||
144A, 0.55%, 9/25/2012 | 1,500,000 | 1,498,029 | ||||||
144A, 0.58%, 7/3/2012 | 3,000,000 | 2,999,903 | ||||||
Skandinaviska Enskilda Banken AB: | ||||||||
0.27%, 8/24/2012 | 2,500,000 | 2,498,987 | ||||||
0.485%, 7/11/2012 | 1,500,000 | 1,499,798 | ||||||
Societe Generale North America, Inc., 0.2%, 7/2/2012 | 3,500,000 | 3,499,981 | ||||||
Standard Chartered Bank: | ||||||||
0.28%, 7/2/2012 | 3,500,000 | 3,499,973 | ||||||
0.36%, 10/9/2012 | 1,500,000 | 1,498,500 | ||||||
Starbird Funding Corp., 144A, 0.2%, 7/2/2012 | 650,000 | 649,996 | ||||||
UOB Funding LLC, 0.3%, 11/5/2012 | 1,000,000 | 998,942 | ||||||
Victory Receivables Corp.: | ||||||||
144A, 0.2%, 7/5/2012 | 1,000,000 | 999,978 | ||||||
144A, 0.2%, 7/12/2012 | 1,000,000 | 999,939 | ||||||
144A, 0.22%, 7/23/2012 | 1,000,000 | 999,866 | ||||||
Westpac Banking Corp., 0.56%, 8/14/2012 | 1,000,000 | 999,316 | ||||||
Windmill Funding Corp., 144A, 0.25%, 7/2/2012 | 2,000,000 | 1,999,986 | ||||||
87,603,421 | ||||||||
Principal Amount ($) | Value ($) | |||||||
Issued at Par 3.5% | ||||||||
ASB Finance Ltd., 144A, 0.49%*, 2/13/2013 | 1,500,000 | 1,500,000 | ||||||
Australia & New Zealand Banking Group Ltd., 144A, 0.295%*, 11/26/2012 | 3,000,000 | 3,000,000 | ||||||
Kells Funding LLC, 144A, 0.575%*, 1/17/2013 | 1,500,000 | 1,500,000 | ||||||
Westpac Banking Corp., 144A, 0.525%*, 10/26/2012 | 1,500,000 | 1,500,000 | ||||||
7,500,000 | ||||||||
Total Commercial Paper (Cost $95,103,421) | 95,103,421 | |||||||
Short-Term Notes* 15.4% | ||||||||
Bank of Nova Scotia: | ||||||||
0.38%, 12/14/2012 | 2,500,000 | 2,500,000 | ||||||
0.546%, 12/11/2012 | 1,000,000 | 1,000,000 | ||||||
0.668%, 10/1/2012 | 1,000,000 | 1,000,436 | ||||||
Canadian Imperial Bank of Commerce: | ||||||||
0.485%, 4/26/2013 | 1,500,000 | 1,500,000 | ||||||
0.515%, 2/7/2013 | 1,000,000 | 1,000,000 | ||||||
0.52%, 4/26/2013 | 2,500,000 | 2,500,000 | ||||||
Commonwealth Bank of Australia, 144A, 0.5%, 3/1/2013 | 3,000,000 | 3,000,000 | ||||||
JPMorgan Chase Bank NA, 0.527%, 12/7/2012 | 2,000,000 | 2,000,000 | ||||||
National Australia Bank Ltd.: | ||||||||
0.295%, 10/29/2012 | 1,000,000 | 1,000,000 | ||||||
0.5%, 3/8/2013 | 1,500,000 | 1,500,000 | ||||||
Nordea Bank Finland PLC, 0.867%, 9/13/2012 | 1,500,000 | 1,500,739 | ||||||
Queensland Treasury Corp., 0.5%, 11/19/2012 | 2,000,000 | 2,000,000 | ||||||
Rabobank Nederland NV: | ||||||||
0.392%, 8/16/2012 | 1,000,000 | 1,000,000 | ||||||
0.567%, 12/21/2012 | 1,000,000 | 1,000,000 | ||||||
0.615%, 5/7/2013 | 1,000,000 | 1,000,000 | ||||||
0.623%, 1/23/2013 | 2,000,000 | 2,000,000 | ||||||
0.669%, 10/12/2012 | 1,500,000 | 1,500,000 | ||||||
Royal Bank of Canada: | ||||||||
0.55%, 6/4/2013 | 1,000,000 | 1,000,000 | ||||||
0.55%, 6/13/2013 | 1,500,000 | 1,500,000 | ||||||
Sumitomo Mitsui Banking Corp., 0.34%, 3/15/2013 | 1,000,000 | 1,000,000 | ||||||
Svensk Exportkredit AB, 144A, 0.44%, 5/22/2013 | 700,000 | 700,000 | ||||||
Svenska Handelsbanken AB, 144A, 0.426%, 8/7/2012 | 750,000 | 750,000 | ||||||
Westpac Banking Corp., 0.33%, 7/11/2012 | 750,000 | 750,000 | ||||||
Total Short-Term Notes (Cost $32,701,175) | 32,701,175 | |||||||
Principal Amount ($) | Value ($) | |||||||
Time Deposit 1.4% | ||||||||
Royal Bank of Canada, 0.12%, 7/2/2012 (Cost $3,000,000) | 3,000,000 | 3,000,000 | ||||||
Government & Agency Obligations 10.9% | ||||||||
U.S. Government Sponsored Agencies 4.7% | ||||||||
Federal Home Loan Bank: | ||||||||
0.069%**, 8/2/2012 | 1,200,000 | 1,199,925 | ||||||
0.159%**, 11/13/2012 | 1,000,000 | 999,400 | ||||||
0.17%, 1/23/2013 | 800,000 | 799,895 | ||||||
0.17%*, 11/8/2013 | 500,000 | 499,730 | ||||||
0.23%, 8/24/2012 | 1,200,000 | 1,200,074 | ||||||
Federal Home Loan Mortgage Corp.: | ||||||||
0.099%**, 10/2/2012 | 1,250,000 | 1,249,677 | ||||||
0.118%**, 8/28/2012 | 1,000,000 | 999,807 | ||||||
0.127%**, 8/14/2012 | 2,000,000 | 1,999,682 | ||||||
0.179%**, 1/9/2013 | 1,000,000 | 999,040 | ||||||
9,947,230 | ||||||||
U.S. Treasury Obligations 6.2% | ||||||||
U.S. Treasury Notes: | ||||||||
0.375%, 8/31/2012 | 2,130,000 | 2,130,796 | ||||||
0.375%, 9/30/2012 | 1,000,000 | 1,000,613 | ||||||
0.625%, 7/31/2012 | 4,000,000 | 4,001,652 | ||||||
1.375%, 10/15/2012 | 3,500,000 | 3,512,346 | ||||||
3.375%, 11/30/2012 | 1,000,000 | 1,013,283 | ||||||
4.0%, 11/15/2012 | 1,500,000 | 1,521,410 | ||||||
13,180,100 | ||||||||
Total Government & Agency Obligations (Cost $23,127,330) | 23,127,330 | |||||||
Repurchase Agreements 13.2% | ||||||||
BNP Paribas, 0.19%, dated 6/29/2012, to be repurchased at $11,000,174 on 7/2/2012 (a) | 11,000,000 | 11,000,000 | ||||||
Credit Suisse Securities (U.S.A.) LLC, 0.42%, dated 6/12/2012, to be repurchased at $1,500,613 on 7/17/2012 (b) | 1,500,000 | 1,500,000 | ||||||
JPMorgan Securities, Inc, 0.14%, dated 6/29/2012, to be repurchased at $4,000,047 on 7/2/2012 (c) | 4,000,000 | 4,000,000 | ||||||
JPMorgan Securities, Inc, 0.22%, dated 6/29/2012, to be repurchased at $2,000,037 on 7/2/2012 (d) | 2,000,000 | 2,000,000 | ||||||
Merrill Lynch & Co., Inc., 0.14%, dated 6/29/2012, to be repurchased at $9,523,458 on 7/2/2012 (e) | 9,523,347 | 9,523,347 | ||||||
Total Repurchase Agreements (Cost $28,023,347) | 28,023,347 |
% of Net Assets | Value ($) | |||||||
Total Investment Portfolio (Cost $211,355,558)+ | 99.5 | 211,355,558 | ||||||
Other Assets and Liabilities, Net | 0.5 | 1,012,488 | ||||||
Net Assets | 100.0 | 212,368,046 |
* Floating rate securities' yields vary with a designated market index or market rate, such as the coupon-equivalent of the U.S. Treasury Bill rate. These securities are shown at their current rate as of June 30, 2012.
** Annualized yield at time of purchase; not a coupon rate.
+ The cost for federal income tax purposes was $211,355,558.
(a) Collateralized by $10,477,314 Federal National Mortgage Association, 4.0%, with various maturity dates of 1/1/2042-2/1/2042 with a value of $11,220,000.
(b) Collateralized by:
Principal Amount ($) | Security | Rate (%) | Maturity Date | Collateral Value ($) | ||||||||
380,000 | Express Scripts Holding Co. | 6.125 | 11/15/2041 | 394,550 | ||||||||
931,266 | Newcrest Finance Property Ltd. | 4.45 | 11/15/2021 | 1,154,309 | ||||||||
Total Collateral Value | 1,548,859 |
(c) Collateralized by $3,926,700 U.S. Treasury Notes, with various coupon rates 1.375-3.125%, with various maturity dates of 8/31/2013-2/28/2019 with a value of $4,081,460.
(d) Collateralized by $2,055,000 Ally Auto Receivables Trust, 1.06%, maturing on 5/15/2017 with a value of $2,060,250.
(e) Collateralized by $9,527,700 U.S. Treasury Note, 1.25%, maturing on 3/15/2014 with a value of $9,713,857.
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.
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 the 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.
The following is a summary of the inputs used as of June 30, 2012 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) | $ | — | $ | 183,332,211 | $ | — | $ | 183,332,211 | ||||||||
Repurchase Agreements | — | 28,023,347 | — | 28,023,347 | ||||||||||||
Total | $ | — | $ | 211,355,558 | $ | — | $ | 211,355,558 |
There have been no transfers between Level 1 and Level 2 fair value measurements during the period ended June 30, 2012.
(f) See Investment Portfolio for additional detailed categorizations.
The accompanying notes are an integral part of the financial statements.
as of June 30, 2012 (Unaudited) | ||||
Assets | ||||
Investments: Investments in non-affiliated securities, valued at amortized cost | $ | 183,332,211 | ||
Repurchase agreements, valued at amortized cost | 28,023,347 | |||
Total investments, valued at amortized cost | 211,355,558 | |||
Cash | 252 | |||
Receivable for investments sold | 1,279,000 | |||
Receivable for Fund shares sold | 171,823 | |||
Interest receivable | 82,230 | |||
Other assets | 265 | |||
Total assets | 212,889,128 | |||
Liabilities | ||||
Payable for Fund shares redeemed | 392,953 | |||
Distributions payable | 754 | |||
Accrued management fee | 31,681 | |||
Accrued Trustees' fees | 3,637 | |||
Other accrued expenses and payables | 92,057 | |||
Total liabilities | 521,082 | |||
Net assets, at value | $ | 212,368,046 | ||
Net Assets Consist of | ||||
Distributions in excess of net investment income | (659 | ) | ||
Accumulated net realized gain (loss) | 362 | |||
Paid-in capital | 212,368,343 | |||
Net assets, at value | $ | 212,368,046 | ||
Class A Net Asset Value, offering and redemption price per share ($212,368,046 ÷ 212,452,059 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 six months ended June 30, 2012 (Unaudited) | ||||
Investment Income | ||||
Income: Interest | $ | 346,109 | ||
Expenses: Management fee | 296,426 | |||
Administration fee | 104,009 | |||
Services to shareholders | 660 | |||
Custodian fee | 9,612 | |||
Professional fees | 27,156 | |||
Reports to shareholders | 30,270 | |||
Trustees' fee and expenses | 8,562 | |||
Other | 6,353 | |||
Total expenses | 483,048 | |||
Expense reductions | (147,373 | ) | ||
Total expenses after expense reductions | 335,675 | |||
Net investment income | 10,434 | |||
Net realized gain (loss) | 362 | |||
Net increase (decrease) in net assets resulting from operations | $ | 10,796 |
The accompanying notes are an integral part of the financial statements.
Increase (Decrease) in Net Assets | Six Months Ended June 30, 2012 (Unaudited) | Year Ended December 31, 2011 | ||||||
Operations: Net investment income | $ | 10,434 | $ | 21,576 | ||||
Operations: Net investment income | $ | 10,434 | $ | 21,576 | ||||
Net realized gain (loss) | 362 | 348 | ||||||
Net increase (decrease) in net assets resulting from operations | 10,796 | 21,924 | ||||||
Distributions to shareholders from: Net investment income Class A | (10,434 | ) | (21,576 | ) | ||||
Total distributions | (10,434 | ) | (21,576 | ) | ||||
Fund share transactions: Class A Proceeds from shares sold | 42,519,300 | 147,415,537 | ||||||
Reinvestment of distributions | 10,674 | 21,589 | ||||||
Payments for shares redeemed | (47,114,507 | ) | (150,401,802 | ) | ||||
Net increase (decrease) in net assets from Class A share transactions | (4,584,533 | ) | (2,964,676 | ) | ||||
Increase (decrease) in net assets | (4,584,171 | ) | (2,964,328 | ) | ||||
Net assets at beginning of period | 216,952,217 | 219,916,545 | ||||||
Net assets at end of period (including distributions in excess of net investment income of $659 and $659, respectively) | $ | 212,368,046 | $ | 216,952,217 | ||||
Other Information | ||||||||
Class A Shares outstanding at beginning of period | 217,036,592 | 220,001,268 | ||||||
Shares sold | 42,519,300 | 147,415,537 | ||||||
Shares issued to shareholders in reinvestment of distributions | 10,674 | 21,589 | ||||||
Shares redeemed | (47,114,507 | ) | (150,401,802 | ) | ||||
Net increase (decrease) in Class A shares | (4,584,533 | ) | (2,964,676 | ) | ||||
Shares outstanding at end of period | 212,452,059 | 217,036,592 |
The accompanying notes are an integral part of the financial statements.
Years Ended December 31, | ||||||||||||||||||||||||
Class A | Six Months Ended 6/30/12 (Unaudited) | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Selected Per Share Data | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 1.000 | $ | 1.000 | $ | 1.000 | $ | 1.000 | $ | 1.000 | $ | 1.000 | ||||||||||||
Income from investment operations: Net investment income | .000 | *** | .000 | *** | .000 | *** | .003 | .026 | .049 | |||||||||||||||
Total from investment operations | .000 | *** | .000 | *** | .000 | *** | .003 | .026 | .049 | |||||||||||||||
Less distributions from: Net investment income | (.000 | )*** | (.000 | )*** | (.000 | )*** | (.003 | ) | (.026 | ) | (.049 | ) | ||||||||||||
Net asset value, end of period | $ | 1.000 | $ | 1.000 | $ | 1.000 | $ | 1.000 | $ | 1.000 | $ | 1.000 | ||||||||||||
Total Return (%) | .01 | a** | .01 | a | .01 | a | .34 | 2.64 | a | 5.00 | a | |||||||||||||
Ratios to Average Net Assets and Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period ($ millions) | 212 | 217 | 220 | 270 | 398 | 355 | ||||||||||||||||||
Ratio of expenses before expense reductions (%) | .46 | * | .51 | .46 | .43 | .52 | .46 | |||||||||||||||||
Ratio of expenses after expense reductions (%) | .32 | * | .25 | .34 | .43 | .50 | .45 | |||||||||||||||||
Ratio of net investment income (%) | .01 | * | .01 | .01 | .37 | 2.56 | 4.88 | |||||||||||||||||
a Total return would have been lower had certain expenses not been reduced. * Annualized ** Not annualized *** Amount is less than $.0005. |
A. Organization and Significant Accounting Policies
DWS Money Market VIP (the "Fund") is a diversified series of DWS Variable Series II (the "Trust"), which 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 Fund'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 Fund in the preparation of its financial statements.
Security Valuation. 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 Fund 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 the 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.
Disclosure about the classification of fair value measurements is included in a table following the Fund's Investment Portfolio.
Repurchase Agreements. The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund, through its custodian or a 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 or another designated sub-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.
Federal Income Taxes. The 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.
The Fund has reviewed the tax positions for the open tax years as of December 31, 2011 and has determined that no provision for income tax is required in the Fund's financial statements. The Fund's federal tax returns for the prior three fiscal years remain open subject to examination by the Internal Revenue Service.
Distribution of Income and Gains. Net investment income of the Fund is declared as a daily dividend and is distributed to shareholders monthly. The Fund may take into account capital gains and losses in its daily dividend declarations. The Fund may also make additional distributions for tax purposes if necessary.
Permanent book and tax differences relating to shareholder distributions will result in reclassifications to paid-in capital. Temporary book and tax differences will reverse in a subsequent period. There were no significant book to tax differences for the Fund.
The tax character of current year distributions will be determined at the end of the current fiscal year.
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, the Fund may enter into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet been made. However, based on experience, the Fund expects the risk of loss to be remote.
Other. Investment transactions are accounted for on a trade date. Interest income is recorded on the accrual basis. 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.
B. 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 the 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 the Fund.
Pursuant to the Investment Management Agreement with the Advisor, the Fund pays a monthly management fee based on the Fund's average daily net assets, computed and accrued daily and payable monthly, at the following annual rates:
First $500 million | .285 | % | ||
Next $500 million | .270 | % | ||
Next $1.0 billion | .255 | % | ||
Over $2.0 billion | .240 | % |
For the period from January 1, 2012 through September 30, 2012, 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) at 0.51%.
In addition, the Advisor has agreed to voluntarily waive additional expenses for the Fund. 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 six months ended June 30, 2012, the Advisor waived a portion of its management fee pursuant to the Investment Management Agreement aggregating $147,077, and the amount charged aggregated $149,349, which was equivalent to an annualized effective rate of 0.14% of the Fund's average daily net assets.
Administration Fee. Pursuant to an Administrative Services Agreement, DIMA provides most administrative services to the Fund. For all services provided under the Administrative Services Agreement, the Fund pays DIMA an annual fee ("Administration Fee") of 0.10% of the Fund's average daily net assets, computed and accrued daily and payable monthly. For the six months ended June 30, 2012, the Administration Fee was $104,009, of which $17,389 is unpaid.
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 the 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 the Fund. For the six months ended June 30, 2012, the amounts charged to the Fund by DISC aggregated $296, all of which was waived.
Typesetting and Filing Service Fees. Under an agreement with DIMA, DIMA is compensated for providing typesetting and certain regulatory filing services to the Fund. For the six months ended June 30, 2012, the amount charged to the Fund by DIMA included in the Statement of Operations under "reports to shareholders" aggregated $5,550, of which $1,506 is unpaid.
Trustees' Fees and Expenses. The Fund paid retainer fees to each Trustee not affiliated with the Advisor, plus specified amounts to the Board Chairperson and to each committee Chairperson.
C. Ownership of the Fund
At June 30, 2012, 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%, 21% and 12%.
D. Line of Credit
The Fund and other affiliated funds (the "Participants") share in a $375 million revolving credit facility provided by a syndication of banks. The Fund 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 Fund may borrow up to a maximum of 33 percent of its net assets under the agreement: The Fund had no outstanding loans at June 30, 2012.
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 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 (January 1, 2012 to June 30, 2012).
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 June 30, 2012 | ||||
Actual Fund Return | Class A | |||
Beginning Account Value 1/1/12 | $ | 1,000.00 | ||
Ending Account Value 6/30/12 | $ | 1,000.10 | ||
Expenses Paid per $1,000* | $ | 1.59 | ||
Hypothetical 5% Fund Return | Class A | |||
Beginning Account Value 1/1/12 | $ | 1,000.00 | ||
Ending Account Value 6/30/12 | $ | 1,023.27 | ||
Expenses Paid per $1,000* | $ | 1.61 |
* Expenses are equal to the Fund's annualized expense ratio, multiplied by the average account value over the period, multiplied by 182 (the number of days in the most recent six-month period), then divided by 366.
Annualized Expense Ratio | Class A | |
DWS Variable Series II — DWS Money Market VIP | .32% |
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 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.
September 26, 2011
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 report summarizes my evaluation for 2011, 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, 2009 and 2010.
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 109 mutual 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
President, Thomas H. Mack & Co., Inc.
Notes
DWS Investments Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606
(800) 621-1148
VS2MM-3 (R-028387-1 8/12)
JUNE 30, 2012
SEMIANNUAL REPORT
DWS VARIABLE SERIES II
DWS Small Mid Cap Growth VIP
Contents
3 Performance Summary 4 Portfolio Summary 4 Portfolio Management Team 5 Investment Portfolio 8 Statement of Assets and Liabilities 9 Statement of Operations 10 Statement of Changes in Net Assets 12 Financial Highlights 13 Notes to Financial Statements 16 Information About Your Fund's Expenses 16 Proxy Voting 18 Summary of Management Fee Evaluation by Independent Fee Consultant |
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.
Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. Stocks of smaller- and medium-sized companies involve greater risk than securities of larger, more-established companies. The Fund may lend securities to approved institutions. Stocks may decline in value. See the prospectus for details.
DWS Investments is part of Deutsche Bank's Asset Management division and, within the U.S., represents the retail asset management activities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company.
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
Fund 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, 2012 is 0.73% for Class A shares and may differ from the expense ratio disclosed in the Financial Highlights table in this report.
Growth of an Assumed $10,000 Investment in DWS Small Mid Cap Growth VIP | ||
The Russell 2500™ Growth Index is an unmanaged index that measures the performance of the small- to mid-cap growth segment of the U.S. equity universe. It includes those Russell 2500 companies with higher price-to-book ratios and higher forecasted growth values. Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index. | ||
Yearly periods ended June 30 |
Comparative Results | |||||||||||||||||||||
DWS Small Mid Cap Growth VIP | 6-Month‡ | 1-Year | 3-Year | 5-Year | 10-Year | ||||||||||||||||
Class A | Growth of $10,000 | $ | 10,665 | $ | 9,277 | $ | 16,718 | $ | 8,989 | $ | 14,528 | ||||||||||
Average annual total return | 6.65 | % | -7.23 | % | 18.68 | % | -2.11 | % | 3.81 | % | |||||||||||
Russell 2500 Growth Index | Growth of $10,000 | $ | 10,844 | $ | 9,681 | $ | 17,013 | $ | 11,232 | $ | 22,308 | ||||||||||
Average annual total return | 8.44 | % | -3.19 | % | 19.38 | % | 2.35 | % | 8.35 | % |
The growth of $10,000 is cumulative.
‡ Total returns shown for periods less than one year are not annualized.
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | 6/30/12 | 12/31/11 |
Common Stocks | 96% | 98% |
Cash Equivalents | 4% | 2% |
100% | 100% |
Sector Diversification (As a % of Common Stocks) | 6/30/12 | 12/31/11 |
Information Technology | 23% | 22% |
Health Care | 20% | 17% |
Industrials | 17% | 19% |
Consumer Discretionary | 16% | 17% |
Energy | 7% | 8% |
Materials | 7% | 6% |
Financials | 6% | 6% |
Consumer Staples | 4% | 5% |
100% | 100% |
Portfolio holdings and characteristics are subject to change.
For more complete details about the Fund's investment portfolio, see page 5.
Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.
Joseph Axtell, CFA
Rafaelina M. Lee
Portfolio Managers
Shares | Value ($) | |||||||
Common Stocks 96.0% | ||||||||
Consumer Discretionary 15.2% | ||||||||
Auto Components 1.6% | ||||||||
BorgWarner, Inc.* (a) | 18,970 | 1,244,242 | ||||||
TRW Automotive Holdings Corp.* | 27,381 | 1,006,526 | ||||||
2,250,768 | ||||||||
Hotels, Restaurants & Leisure 1.4% | ||||||||
Panera Bread Co. "A"* | 14,533 | 2,026,482 | ||||||
Household Durables 1.4% | ||||||||
Jarden Corp. (a) | 46,664 | 1,960,821 | ||||||
Media 2.1% | ||||||||
Cinemark Holdings, Inc. | 77,831 | 1,778,438 | ||||||
Interpublic Group of Companies, Inc. | 117,895 | 1,279,161 | ||||||
3,057,599 | ||||||||
Specialty Retail 7.0% | ||||||||
Advance Auto Parts, Inc. (a) | 18,114 | 1,235,737 | ||||||
Ascena Retail Group, Inc.* | 36,562 | 680,785 | ||||||
Children's Place Retail Stores, Inc.* (a) | 31,673 | 1,578,266 | ||||||
DSW, Inc. "A" | 30,153 | 1,640,323 | ||||||
Guess?, Inc. | 31,136 | 945,600 | ||||||
PetSmart, Inc. (a) | 36,100 | 2,461,298 | ||||||
Ulta Salon, Cosmetics & Fragrance, Inc. | 17,632 | 1,646,476 | ||||||
10,188,485 | ||||||||
Textiles, Apparel & Luxury Goods 1.7% | ||||||||
Deckers Outdoor Corp.* (a) | 17,215 | 757,632 | ||||||
Hanesbrands, Inc.* | 63,258 | 1,754,144 | ||||||
2,511,776 | ||||||||
Consumer Staples 3.5% | ||||||||
Food Products 1.8% | ||||||||
Green Mountain Coffee Roasters, Inc.* (a) | 15,542 | 338,504 | ||||||
Hain Celestial Group, Inc.* | 11,171 | 614,852 | ||||||
TreeHouse Foods, Inc.* | 27,348 | 1,703,507 | ||||||
2,656,863 | ||||||||
Household Products 1.7% | ||||||||
Church & Dwight Co., Inc. | 42,765 | 2,372,175 | ||||||
Energy 7.1% | ||||||||
Energy Equipment & Services 4.1% | ||||||||
Core Laboratories NV (a) | 15,044 | 1,743,600 | ||||||
Dresser-Rand Group, Inc.* | 30,386 | 1,353,392 | ||||||
Dril-Quip, Inc.* | 25,752 | 1,689,074 | ||||||
Hornbeck Offshore Services, Inc.* | 28,026 | 1,086,848 | ||||||
5,872,914 | ||||||||
Oil, Gas & Consumable Fuels 3.0% | ||||||||
Alpha Natural Resources, Inc.* | 33,081 | 288,136 | ||||||
Approach Resources, Inc.* (a) | 58,754 | 1,500,577 | ||||||
Energy XXI (Bermuda) Ltd. (a) | 43,308 | 1,355,107 | ||||||
Rosetta Resources, Inc.* (a) | 33,719 | 1,235,464 | ||||||
4,379,284 | ||||||||
Financials 5.4% | ||||||||
Capital Markets 1.8% | ||||||||
Affiliated Managers Group, Inc.* | 16,674 | 1,824,970 | ||||||
Lazard Ltd. "A" | 30,574 | 794,618 | ||||||
2,619,588 | ||||||||
Shares | Value ($) | |||||||
Consumer Finance 0.8% | ||||||||
DFC Global Corp.* | 66,316 | 1,222,204 | ||||||
Insurance 1.8% | ||||||||
W.R. Berkley Corp. (a) | 65,258 | 2,539,841 | ||||||
Real Estate Management & Development 1.0% | ||||||||
CBRE Group, Inc.* | 87,473 | 1,431,058 | ||||||
Health Care 19.5% | ||||||||
Biotechnology 2.5% | ||||||||
Alkermes PLC* | 58,282 | 989,046 | ||||||
Incyte Corp., Ltd.* (a) | 61,974 | 1,406,810 | ||||||
Regeneron Pharmaceuticals, Inc.* (a) | 10,842 | 1,238,373 | ||||||
3,634,229 | ||||||||
Health Care Equipment & Supplies 3.6% | ||||||||
ABIOMED, Inc.* (a) | 39,390 | 898,880 | ||||||
Accuray, Inc.* (a) | 195,206 | 1,335,209 | ||||||
Thoratec Corp.* | 49,752 | 1,670,672 | ||||||
Volcano Corp.* | 47,497 | 1,360,789 | ||||||
5,265,550 | ||||||||
Health Care Providers & Services 7.2% | ||||||||
Centene Corp.* (a) | 58,367 | 1,760,349 | ||||||
DaVita, Inc.* | 15,967 | 1,568,119 | ||||||
ExamWorks Group, Inc.* | 94,584 | 1,251,346 | ||||||
Humana, Inc. | 20,206 | 1,564,753 | ||||||
Metropolitan Health Networks, Inc.* | 210,310 | 2,012,667 | ||||||
Molina Healthcare, Inc.* | 54,501 | 1,278,593 | ||||||
WellCare Health Plans, Inc.* | 18,359 | 973,027 | ||||||
10,408,854 | ||||||||
Health Care Technology 1.0% | ||||||||
SXC Health Solutions Corp.* (a) | 14,431 | 1,431,699 | ||||||
Pharmaceuticals 5.2% | ||||||||
Pacira Pharmaceuticals, Inc.* (a) | 170,735 | 2,738,589 | ||||||
Par Pharmaceutical Companies, Inc.* | 55,980 | 2,023,117 | ||||||
Questcor Pharmaceuticals, Inc.* (a) | 31,020 | 1,651,505 | ||||||
VIVUS, Inc.* (a) | 38,898 | 1,110,149 | ||||||
7,523,360 | ||||||||
Industrials 15.9% | ||||||||
Aerospace & Defense 1.4% | ||||||||
BE Aerospace, Inc.* | 45,706 | 1,995,524 | ||||||
Commercial Services & Supplies 1.7% | ||||||||
Portfolio Recovery Associates, Inc.* (a) | 27,689 | 2,526,898 | ||||||
Construction & Engineering 1.7% | ||||||||
Chicago Bridge & Iron Co. NV | 30,733 | 1,166,624 | ||||||
MYR Group, Inc.* | 74,029 | 1,262,935 | ||||||
2,429,559 | ||||||||
Electrical Equipment 1.2% | ||||||||
General Cable Corp.* | 35,881 | 930,753 | ||||||
The Babcock & Wilcox Co.* | 34,191 | 837,680 | ||||||
1,768,433 | ||||||||
Shares | Value ($) | |||||||
Machinery 6.1% | ||||||||
Altra Holdings, Inc. (a) | 56,839 | 896,919 | ||||||
Chart Industries, Inc.* | 32,869 | 2,260,073 | ||||||
Joy Global, Inc. | 23,292 | 1,321,355 | ||||||
Manitowoc Co., Inc. (a) | 98,216 | 1,149,127 | ||||||
Sauer-Danfoss, Inc. | 45,579 | 1,592,075 | ||||||
WABCO Holdings, Inc.* | 30,374 | 1,607,696 | ||||||
8,827,245 | ||||||||
Professional Services 1.2% | ||||||||
Robert Half International, Inc. (a) | 62,533 | 1,786,568 | ||||||
Road & Rail 1.0% | ||||||||
Kansas City Southern | 20,958 | 1,457,838 | ||||||
Trading Companies & Distributors 1.6% | ||||||||
Applied Industrial Technologies, Inc. | 25,858 | 952,867 | ||||||
United Rentals, Inc.* (a) | 41,158 | 1,401,019 | ||||||
2,353,886 | ||||||||
Information Technology 22.5% | ||||||||
Communications Equipment 2.7% | ||||||||
Finisar Corp.* | 41,805 | 625,403 | ||||||
Harris Corp. | 31,404 | 1,314,257 | ||||||
Procera Networks, Inc.* (a) | 38,181 | 928,180 | ||||||
Sycamore Networks, Inc.* | 68,948 | 1,001,125 | ||||||
3,868,965 | ||||||||
Computers & Peripherals 1.4% | ||||||||
Western Digital Corp.* | 65,236 | 1,988,393 | ||||||
Electronic Equipment, Instruments & Components 1.3% | ||||||||
Cognex Corp. | 40,544 | 1,283,218 | ||||||
Coherent, Inc.* | 14,001 | 606,243 | ||||||
1,889,461 | ||||||||
Internet Software & Services 2.1% | ||||||||
Equinix, Inc.* | 12,514 | 2,198,084 | ||||||
Saba Software, Inc.* | 98,915 | 917,931 | ||||||
3,116,015 | ||||||||
IT Services 5.0% | ||||||||
Cardtronics, Inc.* (a) | 68,253 | 2,061,923 | ||||||
MAXIMUS, Inc. | 31,016 | 1,605,078 | ||||||
Syntel, Inc. | 33,051 | 2,006,196 | ||||||
VeriFone Systems, Inc.* (a) | 48,151 | 1,593,317 | ||||||
7,266,514 | ||||||||
Semiconductors & Semiconductor Equipment 2.9% | ||||||||
Cavium, Inc.* (a) | 39,787 | 1,114,036 | ||||||
Cypress Semiconductor Corp.* | 53,862 | 712,056 | ||||||
ON Semiconductor Corp.* | 175,979 | 1,249,451 | ||||||
Skyworks Solutions, Inc.* | 41,472 | 1,135,088 | ||||||
4,210,631 | ||||||||
Shares | Value ($) | |||||||
Software 7.1% | ||||||||
Allot Communications Ltd.* | 32,547 | 906,759 | ||||||
Concur Technologies, Inc.* (a) | 15,238 | 1,037,708 | ||||||
Informatica Corp.* | 27,864 | 1,180,319 | ||||||
Kenexa Corp.* | 41,355 | 1,200,536 | ||||||
MICROS Systems, Inc.* | 33,130 | 1,696,256 | ||||||
NQ Mobile, Inc. (ADR)* (a) | 83,404 | 683,079 | ||||||
Parametric Technology Corp.* | 54,884 | 1,150,368 | ||||||
Red Hat, Inc.* | 19,554 | 1,104,410 | ||||||
Ultimate Software Group, Inc.* | 15,689 | 1,398,204 | ||||||
10,357,639 | ||||||||
Materials 6.9% | ||||||||
Chemicals 2.9% | ||||||||
CF Industries Holdings, Inc. | 8,632 | 1,672,364 | ||||||
Rockwood Holdings, Inc. | 27,347 | 1,212,839 | ||||||
Westlake Chemical Corp. (a) | 25,969 | 1,357,140 | ||||||
4,242,343 | ||||||||
Containers & Packaging 1.2% | ||||||||
Crown Holdings, Inc.* | 48,858 | 1,685,113 | ||||||
Metals & Mining 2.0% | ||||||||
Allegheny Technologies, Inc. | 18,281 | 582,981 | ||||||
Cliffs Natural Resources, Inc. (a) | 11,236 | 553,822 | ||||||
Detour Gold Corp.* | 31,861 | 641,852 | ||||||
Haynes International, Inc. | 14,496 | 738,426 | ||||||
Thompson Creek Metals Co., Inc.* | 147,580 | 470,780 | ||||||
2,987,861 | ||||||||
Paper & Forest Products 0.8% | ||||||||
Schweitzer-Mauduit International, Inc. | 17,205 | 1,172,350 | ||||||
Total Common Stocks (Cost $123,873,017) | 139,284,786 | |||||||
Securities Lending Collateral 29.8% | ||||||||
Daily Assets Fund Institutional, 0.24% (b) (c) (Cost $43,185,638) | 43,185,638 | 43,185,638 | ||||||
Cash Equivalents 4.0% | ||||||||
Central Cash Management Fund, 0.14% (b) (Cost $5,828,534) | 5,828,534 | 5,828,534 |
% of Net Assets | Value ($) | |||||||
Total Investment Portfolio (Cost $172,887,189)+ | 129.8 | 188,298,958 | ||||||
Other Assets and Liabilities, Net | (29.8 | ) | (43,198,043 | ) | ||||
Net Assets | 100.0 | 145,100,915 |
* Non-income producing security.
+ The cost for federal income tax purposes was $173,451,065. At June 30, 2012, net unrealized appreciation for all securities based on tax cost was $14,847,893. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $24,522,844 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $9,674,951.
(a) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at June 30, 2012 amounted to $43,635,052, which is 30.1% 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 June 30, 2012 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) | $ | 139,284,786 | $ | — | $ | — | $ | 139,284,786 | ||||||||
Short-Term Investments (d) | 49,014,172 | — | — | 49,014,172 | ||||||||||||
Total | $ | 188,298,958 | $ | — | $ | — | $ | 188,298,958 |
There have been no transfers between Level 1 and Level 2 fair value measurements during the period ended June 30, 2012.
(d) See Investment Portfolio for additional detailed categorizations.
The accompanying notes are an integral part of the financial statements.
as of June 30, 2012 (Unaudited) | ||||
Assets | ||||
Investments: Investments in non-affiliated securities, at value (cost $123,873,017) — including $43,635,052 of securities loaned | $ | 139,284,786 | ||
Investment in Daily Assets Fund Institutional (cost $43,185,638)* | 43,185,638 | |||
Investment in Central Cash Management Fund (cost $5,828,534) | 5,828,534 | |||
Total investments in securities, at value (cost $172,887,189) | 188,298,958 | |||
Cash | 1,557 | |||
Foreign currency, at value (cost $279) | 278 | |||
Receivable for investments sold | 1,485,742 | |||
Receivable for Fund shares sold | 104 | |||
Dividends receivable | 47,099 | |||
Interest receivable | 13,872 | |||
Other assets | 1,891 | |||
Total assets | 189,849,501 | |||
Liabilities | ||||
Payable upon return of securities loaned | 43,185,638 | |||
Payable for investments purchased | 1,298,499 | |||
Payable for Fund shares redeemed | 112,404 | |||
Accrued management fee | 63,310 | |||
Accrued Trustees' fees | 2,739 | |||
Other accrued expenses and payables | 85,996 | |||
Total liabilities | 44,748,586 | |||
Net assets, at value | $ | 145,100,915 | ||
Net Assets Consist of | ||||
Net investment loss | (134,220 | ) | ||
Net unrealized appreciation (depreciation) on: Investments | 15,411,769 | |||
Foreign currency | (1 | ) | ||
Accumulated net realized gain (loss) | (31,520,563 | ) | ||
Paid-in capital | 161,343,930 | |||
Net assets, at value | $ | 145,100,915 | ||
Class A Net Asset Value, offering and redemption price per share ($145,100,915 ÷ 10,275,202 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | $ | 14.12 |
* Represents collateral on securities loaned.
The accompanying notes are an integral part of the financial statements.
Statement of Operations
for the six months ended June 30, 2012 (Unaudited) | ||||
Investment Income | ||||
Income: Dividends (net of foreign taxes withheld of $2,080) | $ | 392,061 | ||
Income distributions — Central Cash Management Fund | 2,160 | |||
Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates | 87,962 | |||
Total income | 482,183 | |||
Expenses: Management fee | 425,597 | |||
Administration fee | 77,137 | |||
Services to shareholders | 2,084 | |||
Custodian fee | 5,706 | |||
Audit and tax fees | 29,562 | |||
Legal fees | 5,676 | |||
Reports to shareholders | 15,314 | |||
Trustees' fees and expenses | 6,426 | |||
Other | 3,300 | |||
Total expenses | 570,802 | |||
Net investment income (loss) | (88,619 | ) | ||
Realized and Unrealized Gain (Loss) | ||||
Net realized gain (loss) from: Investments | 3,677,203 | |||
Foreign currency | (360 | ) | ||
3,676,843 | ||||
Change in net unrealized appreciation (depreciation) on: Investments | 6,523,734 | |||
Foreign currency | (12 | ) | ||
6,523,722 | ||||
Net gain (loss) | 10,200,565 | |||
Net increase (decrease) in net assets resulting from operations | $ | 10,111,946 |
The accompanying notes are an integral part of the financial statements.
Increase (Decrease) in Net Assets | Six Months Ended June 30, 2012 (Unaudited) | Year Ended December 31, 2011 | ||||||
Operations: Net investment income (loss) | $ | (88,619 | ) | $ | (318,019 | ) | ||
Operations: Net investment income (loss) | $ | (88,619 | ) | $ | (318,019 | ) | ||
Net realized gain (loss) | 3,676,843 | 15,261,496 | ||||||
Change in net unrealized appreciation (depreciation) | 6,523,722 | (32,232,742 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 10,111,946 | (17,289,265 | ) | |||||
Distributions to shareholders from: Net investment income: Class A | — | (545,355 | ) | |||||
Total distributions | — | (545,355 | ) | |||||
Fund share transactions: Class A Proceeds from shares sold | 2,374,721 | 15,498,269 | ||||||
Net assets acquired in tax-free reorganization (see Note F) | — | 93,892,921 | ||||||
Reinvestment of distributions | — | 545,355 | ||||||
Cost of shares redeemed | (14,274,866 | ) | (33,642,074 | ) | ||||
Net increase (decrease) in net assets from Class A share transactions | (11,900,145 | ) | 76,294,471 | |||||
Increase (decrease) in net assets | (1,788,199 | ) | 58,459,851 | |||||
Net assets at beginning of period | 146,889,114 | 88,429,263 | ||||||
Net assets at end of period (including net investment loss and distributions in excess of net investment income of $134,220 and $45,601, respectively) | $ | 145,100,915 | $ | 146,889,114 | ||||
Other Information | ||||||||
Class A Shares outstanding at beginning of period | 11,094,343 | 6,384,947 | ||||||
Shares sold | 159,479 | 1,084,284 | ||||||
Shares issued in tax-free reorganization | — | 6,003,455 | ||||||
Shares issued to shareholders in reinvestment of distributions | — | 34,959 | ||||||
Shares redeemed | (978,620 | ) | (2,413,302 | ) | ||||
Net increase (decrease) in Class A shares | (819,141 | ) | 4,709,396 | |||||
Shares outstanding at end of period | 10,275,202 | 11,094,343 |
The accompanying notes are an integral part of the financial statements.
Years Ended December 31, | ||||||||||||||||||||||||
Class A | Six Months Ended 6/30/12 (Unaudited) | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Selected Per Share Data | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 13.24 | $ | 13.85 | $ | 10.70 | $ | 7.61 | $ | 15.07 | $ | 14.19 | ||||||||||||
Income (loss) from investment operations: Net investment income (loss)a | (.01 | ) | (.03 | ) | (.01 | ) | (.02 | ) | (.01 | ) | (.01 | ) | ||||||||||||
Net realized and unrealized gain (loss) | .89 | (.50 | ) | 3.16 | 3.11 | (7.45 | ) | .89 | ||||||||||||||||
Total from investment operations | .88 | (.53 | ) | 3.15 | 3.09 | (7.46 | ) | .88 | ||||||||||||||||
Less distributions from: Net investment income | — | (.08 | ) | — | — | — | — | |||||||||||||||||
Net asset value, end of period | $ | 14.12 | $ | 13.24 | $ | 13.85 | $ | 10.70 | $ | 7.61 | $ | 15.07 | ||||||||||||
Total Return (%) | 6.65 | ** | (3.91 | ) | 29.44 | 40.60 | (49.50 | )b | 6.20 | b | ||||||||||||||
Ratios to Average Net Assets and Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period ($ millions) | 145 | 147 | 88 | 80 | 69 | 174 | ||||||||||||||||||
Ratio of expenses before expense reductions (%) | .74 | * | .73 | .78 | .77 | .88 | .75 | |||||||||||||||||
Ratio of expenses after expense reductions (%) | .74 | * | .73 | .78 | .77 | .85 | .72 | |||||||||||||||||
Ratio of net investment income (loss) (%) | (.11 | )* | (.23 | ) | (.12 | ) | (.22 | ) | (.04 | ) | (.09 | ) | ||||||||||||
Portfolio turnover rate (%) | 26 | ** | 84 | 64 | 93 | 67 | 67 | |||||||||||||||||
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. * Annualized ** Not annualized |
A. Organization and Significant Accounting Policies
DWS Small Mid Cap Growth VIP (the "Fund") is a diversified series of DWS Variable Series II (the "Trust"), which 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 Fund'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 Fund 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 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.
Equity securities are valued at the most recent sale price or official closing price reported on the exchange (U.S. or foreign) or over-the-counter market on which they trade and are categorized as Level 1 securities. Securities 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.
Investments in open-end investment companies are valued at their net asset value each business day 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 the 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 Fund's Investment Portfolio.
Securities Lending. The Fund 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 under 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.
Federal Income Taxes. The 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.
Under the Regulated Investment Company Modernization Act of 2010, net capital losses may be carried forward indefinitely, and their character is retained as short-term and/or long-term. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
At December 31, 2011, the Fund had a net tax bases capital loss carryforward of approximately $29,395,000 of pre-enactment losses, of which $5,435,000 was inherited from its mergers with DWS Turner Mid Cap Growth VIP and DWS Mid Cap Growth VIP, and which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until December 31, 2016 ($5,435,000) and December 31, 2017 ($23,960,000), the respective expiration dates, whichever occurs first, and which may be subject to certain limitations under Section 382-384 of the Internal Revenue Code.
In addition, from November 1, 2011 to December 31, 2011, the Fund elects to defer qualified late year losses of approximately $5,239,000 of net short-term realized capital losses and approximately $46,000 of net ordinary losses and treat them as arising in the fiscal year ending December 31, 2012.
The Fund has reviewed the tax positions for the open tax years as of December 31, 2011 and has determined that no provision for income tax is required in the Fund's financial statements. The Fund's federal tax returns for the prior three fiscal years remain open subject to examination by the Internal Revenue Service.
Distribution of Income and Gains. Net investment income of the Fund, if any, is declared and distributed to shareholders annually. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed and, therefore, will be distributed to shareholders at least annually. The Fund may also make additional distributions for tax purposes if necessary.
The timing and characterization of certain income and capital gain 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 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, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.
The tax character of current year distributions will be determined at the end of the current fiscal year.
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, the Fund may enter into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet been made. However, based on experience, the Fund expects the risk of loss to be remote.
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. Realized gains and losses from investment transactions are recorded on an identified cost basis and may include proceeds from litigation.
B. Purchases and Sales of Securities
During the six months ended June 30, 2012, purchases and sales of investment transactions (excluding short-term investments) aggregated $38,581,663 and $53,594,548, respectively.
C. 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 the 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 the Fund.
Pursuant to the Investment Management Agreement with the Advisor, the Fund pays a monthly management fee based on the Fund's average daily net assets, computed and accrued daily and payable monthly, at the following annual rates:
First $250 million | .550 | % | ||
Next $750 million | .525 | % | ||
Over $1 billion | .500 | % |
Accordingly, for the six months ended June 30, 2012, the fee pursuant to the Investment Management Agreement was equivalent to an annualized effective rate of 0.55% of the Fund's average daily net assets.
Administration Fee. Pursuant to an Administrative Services Agreement, DIMA provides most administrative services to the Fund. For all services provided under the Administrative Services Agreement, the Fund pays DIMA an annual fee ("Administration Fee") of 0.10% of the Fund's average daily net assets, computed and accrued daily and payable monthly. For the six months ended June 30, 2012, the Administration Fee was $77,137, of which $11,511 is unpaid.
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 the 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 the Fund. For the six months ended June 30, 2012, the amounts charged to the Fund by DISC aggregated $174, of which $58 is unpaid.
Typesetting and Filing Service Fees. Under an agreement with DIMA, DIMA is compensated for providing typesetting and certain regulatory filing services to the Fund. For the six months ended June 30, 2012, the amount charged to the Fund by DIMA included in the Statement of Operations under "reports to shareholders" aggregated $5,670, of which $646 is unpaid.
Trustees' Fees and Expenses. The Fund paid retainer fees to each Trustee not affiliated with the Advisor, plus specified amounts to the Board Chairperson and to each committee Chairperson.
Affiliated Cash Management Vehicle. The Fund may invest uninvested cash balances in Central Cash Management Fund, which is managed by the Advisor. The Fund indirectly bears its proportionate share of the expenses of Central Cash Management Fund. 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.
Securities Lending Agent Fees. Deutsche Bank AG serves as securities lending agent for the Fund. For the six months ended June 30, 2012, the Fund incurred securities lending agent fees to Deutsche Bank AG in the amount of $9,650.
D. Ownership of the Fund
At June 30, 2012, three Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 54%, 23% and 15%.
E. Line of Credit
The Fund and other affiliated funds (the "Participants") share in a $375 million revolving credit facility provided by a syndication of banks. The Fund 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 Fund may borrow up to a maximum of 33 percent of its net assets under the agreement. The Fund had no outstanding loans at June 30, 2012.
F. Acquisition of Assets
On April 29, 2011, the Fund acquired all of the net assets of DWS Mid Cap Growth VIP and DWS Turner Mid Cap Growth VIP pursuant to a plan of reorganization approved by shareholders on January 12, 2011. The acquisition was accomplished by a tax-free exchange of 2,029,578 Class A shares of DWS Mid Cap Growth VIP and 6,543,235 Class A shares of DWS Turner Mid Cap Growth VIP for 1,818,964 Class A shares and 4,184,491 Class A shares of the Fund, respectively, outstanding on April 29, 2011. DWS Mid Cap Growth VIP and DWS Turner Mid Cap Growth VIP's net assets at that date, $28,448,304 and $65,444,617, respectively, including $6,234,926 and $6,931,871 of net unrealized appreciation, respectively, were combined with those of the Fund. The aggregate net assets of the Fund immediately before the acquisition were $105,299,610. The combined net assets of the Fund immediately following the acquisition were $199,192,531.
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 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 (January 1, 2012 to June 30, 2012).
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 June 30, 2012 | ||||
Actual Fund Return | Class A | |||
Beginning Account Value 1/1/12 | $ | 1,000.00 | ||
Ending Account Value 6/30/12 | $ | 1,066.50 | ||
Expenses Paid per $1,000* | $ | 3.80 | ||
Hypothetical 5% Fund Return | Class A | |||
Beginning Account Value 1/1/12 | $ | 1,000.00 | ||
Ending Account Value 6/30/12 | $ | 1,021.18 | ||
Expenses Paid per $1,000* | $ | 3.72 |
* Expenses are equal to the Fund's annualized expense ratio, multiplied by the average account value over the period, multiplied by 182 (the number of days in the most recent six-month period), then divided by 366.
Annualized Expense Ratio | Class A | |
DWS Variable Series II — DWS Small Mid Cap Growth VIP | .74% |
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 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.
September 26, 2011
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 report summarizes my evaluation for 2011, 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, 2009 and 2010.
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 109 mutual 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
President, Thomas H. Mack & Co., Inc.
DWS Investments Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606
(800) 621-1148
VS2SMCG-3 (R-028388-1 8/12)
JUNE 30, 2012
SEMIANNUAL REPORT
DWS VARIABLE SERIES II
DWS Unconstrained Income VIP
Contents
3 Performance Summary 4 Portfolio Summary 4 Portfolio Management Team 5 Investment Portfolio 22 Statement of Assets and Liabilities 23 Statement of Operations 24 Statement of Changes in Net Assets 26 Financial Highlights 27 Notes to Financial Statements 35 Information About Your Fund's Expenses 35 Proxy Voting 37 Summary of Management Fee Evaluation by Independent Fee Consultant |
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.
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 ("junk bonds") 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 Tactical Asset Allocation (GTAA) 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. The Fund may lend securities to approved institutions. See the prospectus for details.
DWS Investments is part of Deutsche Bank's Asset Management division and, within the U.S., represents the retail asset management activities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company.
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
Fund 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, 2012 is 0.99% for Class A shares and may differ from the expense ratio disclosed in the Financial Highlights table in this report.
Growth of an Assumed $10,000 Investment in DWS Unconstrained Income VIP | ||
The Barclays U.S. 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 do not reflect any fees or expenses and it is not possible to invest directly into an index. | ||
Yearly periods ended June 30 |
Comparative Results | |||||||||||||||||||||
DWS Unconstrained Income VIP | 6-Month‡ | 1-Year | 3-Year | 5-Year | 10-Year | ||||||||||||||||
Class A | Growth of $10,000 | $ | 10,563 | $ | 10,818 | $ | 13,759 | $ | 14,365 | $ | 20,501 | ||||||||||
Average annual total return | 5.63 | % | 8.18 | % | 11.22 | % | 7.51 | % | 7.44 | % | |||||||||||
Barclays U.S. Aggregate Bond Index | Growth of $10,000 | $ | 10,237 | $ | 10,747 | $ | 12,227 | $ | 13,890 | $ | 17,296 | ||||||||||
Average annual total return | 2.37 | % | 7.47 | % | 6.93 | % | 6.79 | % | 5.63 | % |
The growth of $10,000 is cumulative.
‡ Total returns shown for periods less than one year are not annualized.
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | 6/30/12 | 12/31/11 |
Corporate Bonds | 60% | 66% |
Government & Agency Obligations | 15% | 11% |
Cash Equivalents | 10% | 8% |
Collateralized Mortgage Obligations | 4% | 4% |
Loan Participations and Assignments | 4% | 3% |
Commercial Mortgage-Backed Securities | 3% | 2% |
Mortgage-Backed Securities Pass-Throughs | 2% | — |
Municipal Bonds and Notes | 1% | 1% |
Asset-Backed | 1% | 1% |
Convertible Bonds | 0% | 3% |
Preferred Securities | 0% | 1% |
100% | 100% |
Quality (Excludes Cash Equivalents and Securities Lending Collateral) | 6/30/12 | 12/31/11 |
AAA | 13% | 8% |
AA | 2% | 3% |
A | 6% | 9% |
BBB | 24% | 23% |
BB | 22% | 24% |
B | 24% | 25% |
CCC | 3% | 4% |
Not Rated | 6% | 4% |
100% | 100% |
Interest Rate Sensitivity | 6/30/12 | 12/31/11 |
Effective Maturity | 6.6 years | 6.0 years |
Effective Duration | 4.6 years | 4.4 years |
The quality ratings represent the higher 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. Credit quality measures a bond issuer's ability to repay interest and principal in a timely manner. Ratings are relative and subjective and are not absolute standards of quality. Credit quality does not remove market risk and is subject to change.
Effective maturity is the weighted average of the maturity date of bonds held by the Fund taking into consideration any available 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.
Portfolio holdings and characteristics are subject to change.
For more complete details about the Fund's investment portfolio, see page 5.
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.
Gary Russell, CFA
William Chepolis, CFA
John D. Ryan
Philip G. Condon
Ohn Choe, CFA
Darwei Kung
Portfolio Managers, Deutsche Investment Management Americas Inc.
Robert Wang
Thomas Picciochi
Portfolio Managers, QS Investors, LLC, Subadvisor to the Fund
Principal Amount ($)(a) | Value ($) | ||||||||
Corporate Bonds 60.5% | |||||||||
Consumer Discretionary 8.8% | |||||||||
AMC Networks, Inc., 144A, 7.75%, 7/15/2021 | 15,000 | 16,538 | |||||||
American Achievement Corp., 144A, 10.875%, 4/15/2016 | 45,000 | 32,738 | |||||||
Asbury Automotive Group, Inc., 8.375%, 11/15/2020 | 80,000 | 87,200 | |||||||
AutoZone, Inc., 3.7%, 4/15/2022 | 90,000 | 92,700 | |||||||
Avis Budget Car Rental LLC: | |||||||||
8.25%, 1/15/2019 | 95,000 | 101,887 | |||||||
9.625%, 3/15/2018 | 45,000 | 49,275 | |||||||
Block Communications, Inc., 144A, 7.25%, 2/1/2020 | 65,000 | 65,975 | |||||||
Bresnan Broadband Holdings LLC, 144A, 8.0%, 12/15/2018 (b) | 95,000 | 99,275 | |||||||
Cablevision Systems Corp.: | |||||||||
7.75%, 4/15/2018 | 10,000 | 10,650 | |||||||
8.0%, 4/15/2020 | 10,000 | 10,800 | |||||||
Caesar's Entertainment Operating Co., Inc.: | |||||||||
144A, 8.5%, 2/15/2020 | 120,000 | 120,900 | |||||||
11.25%, 6/1/2017 | 240,000 | 261,900 | |||||||
CCO Holdings LLC: | |||||||||
6.5%, 4/30/2021 | 215,000 | 228,975 | |||||||
6.625%, 1/31/2022 | 70,000 | 74,900 | |||||||
7.0%, 1/15/2019 | 20,000 | 21,600 | |||||||
7.25%, 10/30/2017 | 90,000 | 98,100 | |||||||
7.375%, 6/1/2020 | 10,000 | 10,988 | |||||||
7.875%, 4/30/2018 | 40,000 | 43,500 | |||||||
8.125%, 4/30/2020 | 25,000 | 27,875 | |||||||
Cequel Communications Holdings I LLC, 144A, 8.625%, 11/15/2017 | 300,000 | 323,250 | |||||||
Chester Downs & Marina LLC, 144A, 9.25%, 2/1/2020 | 25,000 | 26,063 | |||||||
Clear Channel Communications, Inc., 9.0%, 3/1/2021 | 25,000 | 21,750 | |||||||
Clear Channel Worldwide Holdings, Inc.: | |||||||||
144A, 7.625%, 3/15/2020 | 20,000 | 19,150 | |||||||
144A, 7.625%, 3/15/2020 | 185,000 | 180,837 | |||||||
Series A, 9.25%, 12/15/2017 | 15,000 | 16,313 | |||||||
Series B, 9.25%, 12/15/2017 | 25,000 | 27,250 | |||||||
Crown Media Holdings, Inc., 10.5%, 7/15/2019 | 55,000 | 59,400 | |||||||
Cumulus Media Holdings, Inc., 7.75%, 5/1/2019 (b) | 45,000 | 42,412 | |||||||
Desarrolladora Homex SAB de CV, 144A, 9.75%, 3/25/2020 (b) | 200,000 | 210,000 | |||||||
DIRECTV Holdings LLC, 3.8%, 3/15/2022 | 200,000 | 202,259 | |||||||
Discovery Communications LLC, 3.3%, 5/15/2022 | 50,000 | 50,461 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
DISH DBS Corp.: | |||||||||
6.625%, 10/1/2014 | 65,000 | 69,712 | |||||||
6.75%, 6/1/2021 | 10,000 | 10,800 | |||||||
7.125%, 2/1/2016 | 155,000 | 170,112 | |||||||
Fontainebleau Las Vegas Holdings LLC, 144A, 11.0%, 6/15/2015* | 65,000 | 41 | |||||||
Great Canadian Gaming Corp., 144A, 7.25%, 2/15/2015 | 55,000 | 55,756 | |||||||
Harron Communications LP, 144A, 9.125%, 4/1/2020 | 45,000 | 46,575 | |||||||
Hertz Corp.: | |||||||||
6.75%, 4/15/2019 (b) | 15,000 | 15,600 | |||||||
144A, 6.75%, 4/15/2019 | 35,000 | 36,400 | |||||||
7.5%, 10/15/2018 | 155,000 | 166,237 | |||||||
Lear Corp.: | |||||||||
7.875%, 3/15/2018 | 40,000 | 44,150 | |||||||
8.125%, 3/15/2020 | 40,000 | 44,800 | |||||||
Libbey Glass, Inc., 144A, 6.875%, 5/15/2020 | 20,000 | 20,550 | |||||||
Limited Brands, Inc., 7.0%, 5/1/2020 | 20,000 | 22,200 | |||||||
Lions Gate Entertainment, Inc., 144A, 10.25%, 11/1/2016 | 95,000 | 104,025 | |||||||
Lowe's Companies, Inc., 3.12%, 4/15/2022 | 80,000 | 81,858 | |||||||
Macy's Retail Holdings, Inc., 5.125%, 1/15/2042 | 80,000 | 84,217 | |||||||
Marriott International, Inc., 3.0%, 3/1/2019 | 60,000 | 60,664 | |||||||
Mattel, Inc., 5.45%, 11/1/2041 | 141,400 | 154,557 | |||||||
Mediacom Broadband LLC, 8.5%, 10/15/2015 (b) | 110,000 | 113,025 | |||||||
Mediacom LLC: | |||||||||
7.25%, 2/15/2022 | 20,000 | 20,350 | |||||||
9.125%, 8/15/2019 | 30,000 | 32,925 | |||||||
MGM Resorts International: | |||||||||
7.625%, 1/15/2017 | 100,000 | 103,250 | |||||||
144A, 8.625%, 2/1/2019 | 140,000 | 149,800 | |||||||
9.0%, 3/15/2020 | 65,000 | 72,150 | |||||||
10.375%, 5/15/2014 | 45,000 | 50,737 | |||||||
11.125%, 11/15/2017 | 50,000 | 56,125 | |||||||
Michaels Stores, Inc., 13.0%, 11/1/2016 | 15,000 | 16,069 | |||||||
National CineMedia LLC: | |||||||||
144A, 6.0%, 4/15/2022 | 35,000 | 35,612 | |||||||
7.875%, 7/15/2021 | 45,000 | 47,700 | |||||||
Palace Entertainment Holdings LLC, 144A, 8.875%, 4/15/2017 | 75,000 | 78,375 | |||||||
Penske Automotive Group, Inc., 7.75%, 12/15/2016 | 120,000 | 124,500 | |||||||
Regal Entertainment Group, 9.125%, 8/15/2018 (b) | 35,000 | 38,500 | |||||||
Sabre Holdings Corp., 8.35%, 3/15/2016 | 55,000 | 51,975 | |||||||
Seminole Indian Tribe of Florida: | |||||||||
144A, 7.75%, 10/1/2017 | 40,000 | 43,600 | |||||||
144A, 7.804%, 10/1/2020 | 70,000 | 69,413 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
Servicios Corporativos Javer SAPI de CV, 144A, 9.875%, 4/6/2021 | 100,000 | 94,000 | |||||||
Sirius XM Radio, Inc., 144A, 8.75%, 4/1/2015 | 155,000 | 174,375 | |||||||
Sonic Automotive, Inc.: | |||||||||
144A, 7.0%, 7/15/2022 (c) | 15,000 | 15,525 | |||||||
Series B, 9.0%, 3/15/2018 | 95,000 | 103,312 | |||||||
Toys "R" Us-Delaware, Inc., 144A, 7.375%, 9/1/2016 | 35,000 | 34,650 | |||||||
Travelport LLC, 9.0%, 3/1/2016 | 10,000 | 7,000 | |||||||
UCI International, Inc., 8.625%, 2/15/2019 | 20,000 | 20,125 | |||||||
Unitymedia Hessen GmbH & Co., KG, 144A, 8.125%, 12/1/2017 | 200,000 | 215,000 | |||||||
Univision Communications, Inc.: | |||||||||
144A, 6.875%, 5/15/2019 | 10,000 | 10,300 | |||||||
144A, 7.875%, 11/1/2020 | 25,000 | 26,750 | |||||||
UPC Holding BV: | |||||||||
144A, 8.375%, 8/15/2020 | EUR | 50,000 | 65,490 | ||||||
144A, 9.75%, 4/15/2018 | EUR | 100,000 | 135,725 | ||||||
Visteon Corp., 6.75%, 4/15/2019 | 75,000 | 72,937 | |||||||
Whirlpool Corp., 4.7%, 6/1/2022 | 110,000 | 111,212 | |||||||
Wyndham Worldwide Corp., 5.75%, 2/1/2018 | 135,000 | 150,101 | |||||||
Yonkers Racing Corp., 144A, 11.375%, 7/15/2016 | 60,000 | 63,750 | |||||||
6,227,533 | |||||||||
Consumer Staples 2.6% | |||||||||
Alliance One International, Inc., 10.0%, 7/15/2016 | 25,000 | 25,062 | |||||||
Altria Group, Inc., 9.95%, 11/10/2038 | 145,000 | 230,560 | |||||||
B&G Foods, Inc., 7.625%, 1/15/2018 | 35,000 | 37,625 | |||||||
Central Garden & Pet Co., 8.25%, 3/1/2018 | 15,000 | 15,038 | |||||||
Constellation Brands, Inc., 6.0%, 5/1/2022 | 15,000 | 16,125 | |||||||
Darling International, Inc., 8.5%, 12/15/2018 | 80,000 | 89,800 | |||||||
Del Monte Corp., 7.625%, 2/15/2019 (b) | 80,000 | 80,700 | |||||||
Delhaize Group SA, 4.125%, 4/10/2019 | 140,000 | 135,452 | |||||||
Dole Food Co., Inc., 144A, 8.0%, 10/1/2016 | 20,000 | 20,875 | |||||||
FAGE Dairy Industry SA, 144A, 9.875%, 2/1/2020 | 85,000 | 74,800 | |||||||
Grupo Bimbo SAB de CV, 144A, 4.5%, 1/25/2022 | 200,000 | 212,759 | |||||||
JBS U.S.A. LLC, 144A, 8.25%, 2/1/2020 | 25,000 | 24,313 | |||||||
NBTY, Inc., 9.0%, 10/1/2018 | 25,000 | 27,625 | |||||||
Pilgrim's Pride Corp., 7.875%, 12/15/2018 | 45,000 | 45,619 | |||||||
Reynolds American, Inc., 6.75%, 6/15/2017 | 200,000 | 240,114 | |||||||
Safeway, Inc., 4.75%, 12/1/2021 | 135,000 | 133,884 | |||||||
Smithfield Foods, Inc.: | |||||||||
7.75%, 7/1/2017 | 220,000 | 243,375 | |||||||
10.0%, 7/15/2014 | 85,000 | 97,006 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
SUPERVALU, Inc., 8.0%, 5/1/2016 (b) | 35,000 | 35,437 | |||||||
TreeHouse Foods, Inc., 7.75%, 3/1/2018 | 45,000 | 48,769 | |||||||
1,834,938 | |||||||||
Energy 8.1% | |||||||||
Alpha Natural Resources, Inc., 6.0%, 6/1/2019 (b) | 60,000 | 51,150 | |||||||
Arch Coal, Inc.: | |||||||||
7.0%, 6/15/2019 (b) | 20,000 | 16,900 | |||||||
7.25%, 10/1/2020 | 20,000 | 16,900 | |||||||
7.25%, 6/15/2021 (b) | 35,000 | 29,313 | |||||||
8.75%, 8/1/2016 (b) | 60,000 | 57,300 | |||||||
Berry Petroleum Co., 6.75%, 11/1/2020 | 90,000 | 94,050 | |||||||
BreitBurn Energy Partners LP, 8.625%, 10/15/2020 | 35,000 | 37,013 | |||||||
Chesapeake Energy Corp.: | |||||||||
6.125%, 2/15/2021 (b) | 40,000 | 38,700 | |||||||
6.875%, 11/15/2020 (b) | 90,000 | 88,650 | |||||||
Chesapeake Midstream Partners LP, 6.125%, 7/15/2022 | 55,000 | 53,900 | |||||||
Chesapeake Oilfield Operating LLC, 144A, 6.625%, 11/15/2019 | 25,000 | 22,500 | |||||||
Cimarex Energy Co., 5.875%, 5/1/2022 | 35,000 | 36,356 | |||||||
CITGO Petroleum Corp., 144A, 11.5%, 7/1/2017 | 105,000 | 117,862 | |||||||
CONSOL Energy, Inc.: | |||||||||
6.375%, 3/1/2021 | 15,000 | 14,100 | |||||||
8.0%, 4/1/2017 | 75,000 | 77,812 | |||||||
8.25%, 4/1/2020 | 35,000 | 36,750 | |||||||
Continental Resources, Inc.: | |||||||||
7.125%, 4/1/2021 | 30,000 | 33,450 | |||||||
7.375%, 10/1/2020 | 35,000 | 39,025 | |||||||
8.25%, 10/1/2019 | 20,000 | 22,350 | |||||||
Crestwood Midstream Partners LP, 7.75%, 4/1/2019 | 160,000 | 158,800 | |||||||
Crosstex Energy LP: | |||||||||
144A, 7.125%, 6/1/2022 | 15,000 | 14,775 | |||||||
8.875%, 2/15/2018 | 55,000 | 58,094 | |||||||
Devon Energy Corp., 3.25%, 5/15/2022 | 135,000 | 137,347 | |||||||
Dresser-Rand Group, Inc., 6.5%, 5/1/2021 | 75,000 | 77,813 | |||||||
Eagle Rock Energy Partners LP, 8.375%, 6/1/2019 | 95,000 | 94,762 | |||||||
El Paso LLC, 7.25%, 6/1/2018 (b) | 55,000 | 63,445 | |||||||
Energy Transfer Partners LP, 5.2%, 2/1/2022 | 140,000 | 149,928 | |||||||
EP Energy LLC: | |||||||||
144A, 6.875%, 5/1/2019 | 60,000 | 62,700 | |||||||
144A, 9.375%, 5/1/2020 | 25,000 | 25,906 | |||||||
EV Energy Partners LP, 8.0%, 4/15/2019 | 140,000 | 138,950 | |||||||
Frontier Oil Corp., 6.875%, 11/15/2018 | 55,000 | 57,200 | |||||||
Genesis Energy LP, 7.875%, 12/15/2018 | 40,000 | 41,000 | |||||||
Global Geophysical Services, Inc., 10.5%, 5/1/2017 | 130,000 | 123,825 | |||||||
Halcon Resources Corp., 144A, 9.75%, 7/15/2020 (c) | 50,000 | 50,875 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
Holly Energy Partners LP: | |||||||||
144A, 6.5%, 3/1/2020 | 20,000 | 20,150 | |||||||
8.25%, 3/15/2018 | 55,000 | 58,300 | |||||||
IPIC GMTN Ltd., 144A, 6.875%, 11/1/2041 | 200,000 | 233,500 | |||||||
Kinder Morgan Energy Partners LP, 5.8%, 3/1/2021 | 194,000 | 221,305 | |||||||
Kodiak Oil & Gas Corp., 144A, 8.125%, 12/1/2019 | 25,000 | 25,750 | |||||||
Linn Energy LLC: | |||||||||
144A, 6.25%, 11/1/2019 | 110,000 | 107,800 | |||||||
144A, 6.5%, 5/15/2019 | 15,000 | 14,850 | |||||||
MEG Energy Corp., 144A, 6.5%, 3/15/2021 | 40,000 | 40,850 | |||||||
Newfield Exploration Co., 7.125%, 5/15/2018 | 90,000 | 95,287 | |||||||
Noble Holding International Ltd., 3.95%, 3/15/2022 | 50,000 | 50,559 | |||||||
Northern Oil & Gas, Inc., 144A, 8.0%, 6/1/2020 | 85,000 | 84,575 | |||||||
Oasis Petroleum, Inc.: | |||||||||
6.5%, 11/1/2021 | 25,000 | 24,750 | |||||||
7.25%, 2/1/2019 | 40,000 | 41,000 | |||||||
Offshore Group Investments Ltd.: | |||||||||
11.5%, 8/1/2015 | 10,000 | 10,850 | |||||||
144A, 11.5%, 8/1/2015 | 10,000 | 10,850 | |||||||
OGX Austria GmbH, 144A, 8.375%, 4/1/2022 | 200,000 | 172,500 | |||||||
Peabody Energy Corp.: | |||||||||
144A, 6.0%, 11/15/2018 | 20,000 | 19,900 | |||||||
144A, 6.25%, 11/15/2021 | 25,000 | 24,750 | |||||||
Petroleos de Venezuela SA: | |||||||||
144A, 8.5%, 11/2/2017 | 100,000 | 81,250 | |||||||
144A, 9.0%, 11/17/2021 | 100,000 | 72,700 | |||||||
Petroleos Mexicanos, 144A, 5.5%, 6/27/2044 (b) | 700,000 | 715,750 | |||||||
Plains All American Pipeline LP, 3.65%, 6/1/2022 | 100,000 | 102,117 | |||||||
Plains Exploration & Production Co.: | |||||||||
6.125%, 6/15/2019 | 40,000 | 40,200 | |||||||
6.75%, 2/1/2022 | 80,000 | 81,600 | |||||||
7.625%, 6/1/2018 | 60,000 | 63,750 | |||||||
Quicksilver Resources, Inc., 11.75%, 1/1/2016 | 15,000 | 14,606 | |||||||
Regency Energy Partners LP: | |||||||||
6.875%, 12/1/2018 | 35,000 | 36,838 | |||||||
9.375%, 6/1/2016 | 75,000 | 82,500 | |||||||
Reliance Holdings U.S.A., Inc.: | |||||||||
144A, 5.4%, 2/14/2022 | 250,000 | 249,985 | |||||||
144A, 6.25%, 10/19/2040 (b) | 250,000 | 234,500 | |||||||
SandRidge Energy, Inc., 7.5%, 3/15/2021 | 20,000 | 19,750 | |||||||
SESI LLC: | |||||||||
6.375%, 5/1/2019 | 40,000 | 41,900 | |||||||
144A, 7.125%, 12/15/2021 | 115,000 | 125,062 | |||||||
Stone Energy Corp., 8.625%, 2/1/2017 | 25,000 | 25,375 | |||||||
Swift Energy Co., 7.875%, 3/1/2022 | 70,000 | 70,350 | |||||||
Venoco, Inc., 8.875%, 2/15/2019 | 105,000 | 95,550 | |||||||
Weatherford International Ltd., 4.5%, 4/15/2022 | 95,000 | 97,366 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
WPX Energy, Inc.: | |||||||||
5.25%, 1/15/2017 | 75,000 | 75,938 | |||||||
6.0%, 1/15/2022 | 55,000 | 54,725 | |||||||
5,778,839 | |||||||||
Financials 16.1% | |||||||||
African Development Bank, 5.75%, 1/25/2016 | AUD | 500,000 | 546,266 | ||||||
Ally Financial, Inc.: | |||||||||
5.5%, 2/15/2017 | 60,000 | 60,944 | |||||||
6.25%, 12/1/2017 | 95,000 | 100,065 | |||||||
8.0%, 3/15/2020 | 115,000 | 132,250 | |||||||
8.3%, 2/12/2015 | 135,000 | 147,150 | |||||||
Alrosa Finance SA, 144A, 7.75%, 11/3/2020 | 200,000 | 209,454 | |||||||
American International Group, Inc.: | |||||||||
3.8%, 3/22/2017 | 60,000 | 61,163 | |||||||
Series G, 5.6%, 10/18/2016 | 145,000 | 157,670 | |||||||
AmeriGas Finance LLC: | |||||||||
6.75%, 5/20/2020 | 20,000 | 20,400 | |||||||
7.0%, 5/20/2022 | 20,000 | 20,600 | |||||||
Antero Resources Finance Corp.: | |||||||||
7.25%, 8/1/2019 | 50,000 | 51,750 | |||||||
9.375%, 12/1/2017 | 30,000 | 33,150 | |||||||
Banco Bradesco SA: | |||||||||
144A, 4.5%, 1/12/2017 | 200,000 | 208,360 | |||||||
144A, 5.75%, 3/1/2022 | 200,000 | 202,500 | |||||||
Banco de Bogota SA, 144A, 5.0%, 1/15/2017 | 200,000 | 211,000 | |||||||
Banco Latinoamericano de Comercio Exterior SA, 144A, 3.75%, 4/4/2017 | 150,000 | 149,250 | |||||||
Bancolombia SA, 5.95%, 6/3/2021 | 200,000 | 213,500 | |||||||
Bank of America Corp., 5.0%, 5/13/2021 | 150,000 | 154,756 | |||||||
Bank of Ireland Mortgage Bank, 4.0%, 7/5/2013 | EUR | 750,000 | 915,905 | ||||||
Braskem America Finance Co., 144A, 7.125%, 7/22/2041 (b) | 200,000 | 199,500 | |||||||
Calpine Construction Finance Co., LP, 144A, 8.0%, 6/1/2016 | 200,000 | 216,000 | |||||||
Case New Holland, Inc., 7.75%, 9/1/2013 | 45,000 | 47,812 | |||||||
CCL Finance Ltd., 144A, 9.5%, 8/15/2014 | 100,000 | 111,280 | |||||||
CIT Group, Inc.: | |||||||||
144A, 4.75%, 2/15/2015 | 260,000 | 266,175 | |||||||
5.0%, 5/15/2017 | 80,000 | 82,400 | |||||||
5.25%, 3/15/2018 | 90,000 | 92,925 | |||||||
144A, 7.0%, 5/2/2017 | 136,288 | 136,544 | |||||||
Citigroup, Inc., 5.875%, 1/30/2042 | 60,000 | 65,530 | |||||||
CNOOC Finance 2012 Ltd., 144A, 3.875%, 5/2/2022 (b) | 200,000 | 206,856 | |||||||
Codere Finance Luxembourg SA, 144A, 9.25%, 2/15/2019 | 35,000 | 24,675 | |||||||
Deutsche Telekom International Finance BV, 144A, 4.875%, 3/6/2042 | 200,000 | 190,009 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
E*TRADE Financial Corp.: | |||||||||
6.75%, 6/1/2016 | 130,000 | 132,275 | |||||||
12.5%, 11/30/2017 | 50,000 | 57,312 | |||||||
Export Credit Bank of Turkey, 144A, 5.375%, 11/4/2016 | 250,000 | 258,125 | |||||||
Fibria Overseas Finance Ltd., 144A, 6.75%, 3/3/2021 | 150,000 | 149,700 | |||||||
Ford Motor Credit Co., LLC: | |||||||||
144A, 3.984%, 6/15/2016 | 145,000 | 149,337 | |||||||
7.5%, 8/1/2012 | 500,000 | 501,971 | |||||||
Fresenius Medical Care U.S. Finance II, Inc.: | |||||||||
144A, 5.625%, 7/31/2019 | 35,000 | 36,487 | |||||||
144A, 5.875%, 1/31/2022 | 30,000 | 31,238 | |||||||
Fresenius Medical Care U.S. Finance, Inc., 144A, 6.5%, 9/15/2018 | 20,000 | 21,750 | |||||||
General Electric Capital Corp., 5.3%, 2/11/2021 | 75,000 | 84,179 | |||||||
Hartford Financial Services Group, Inc., 5.125%, 4/15/2022 | 80,000 | 82,380 | |||||||
HCP, Inc., (REIT), 5.375%, 2/1/2021 | 143,000 | 158,130 | |||||||
Hellas Telecommunications Finance SCA, 144A, 8.985%**, 7/15/2015 (PIK)* | EUR | 109,187 | 83 | ||||||
Hexion U.S. Finance Corp.: | |||||||||
6.625%, 4/15/2020 | 15,000 | 15,375 | |||||||
8.875%, 2/1/2018 | 340,000 | 346,800 | |||||||
International Lease Finance Corp.: | |||||||||
5.75%, 5/15/2016 | 20,000 | 20,292 | |||||||
6.25%, 5/15/2019 | 50,000 | 50,937 | |||||||
8.625%, 9/15/2015 | 40,000 | 44,200 | |||||||
8.625%, 1/15/2022 | 45,000 | 52,113 | |||||||
8.75%, 3/15/2017 | 180,000 | 202,050 | |||||||
Itau Unibanco Holding SA, 144A, 5.65%, 3/19/2022 | 200,000 | 200,760 | |||||||
JPMorgan Chase & Co., 4.35%, 8/15/2021 | 200,000 | 211,080 | |||||||
Level 3 Financing, Inc.: | |||||||||
8.125%, 7/1/2019 | 75,000 | 76,969 | |||||||
8.625%, 7/15/2020 (b) | 50,000 | 52,500 | |||||||
Lincoln National Corp., 4.2%, 3/15/2022 | 60,000 | 59,950 | |||||||
MPT Operating Partnership LP (REIT): | |||||||||
6.375%, 2/15/2022 | 30,000 | 30,075 | |||||||
6.875%, 5/1/2021 | 50,000 | 52,125 | |||||||
Murray Street Investment Trust I, 4.647%, 3/9/2017 | 200,000 | 200,386 | |||||||
Neuberger Berman Group LLC: | |||||||||
144A, 5.625%, 3/15/2020 | 25,000 | 26,063 | |||||||
144A, 5.875%, 3/15/2022 | 45,000 | 47,025 | |||||||
NII Capital Corp., 7.625%, 4/1/2021 | 70,000 | 60,025 | |||||||
Nuveen Investments, Inc., 10.5%, 11/15/2015 | 185,000 | 187,775 | |||||||
Odebrecht Finance Ltd., 144A, 5.125%, 6/26/2022 | 200,000 | 198,060 | |||||||
Petrobras International Finance Co., 5.75%, 1/20/2020 | 200,000 | 218,776 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
Reynolds Group Issuer, Inc.: | |||||||||
144A, 6.875%, 2/15/2021 | 100,000 | 104,000 | |||||||
144A, 7.125%, 4/15/2019 | 100,000 | 104,750 | |||||||
Santander US Debt SA Unipersonal, 144A, 3.724%, 1/20/2015 | 45,000 | 41,855 | |||||||
Schaeffler Finance BV, 144A, 7.75%, 2/15/2017 | EUR | 100,000 | 131,941 | ||||||
Simon Property Group LP, 4.75%, 3/15/2042 | 100,000 | 100,040 | |||||||
Telemovil Finance Co., Ltd., 144A, 8.0%, 10/1/2017 | 100,000 | 102,497 | |||||||
The Goldman Sachs Group, Inc., 5.75%, 1/24/2022 | 160,000 | 168,897 | |||||||
Toys "R" Us Property Co. I, LLC, 10.75%, 7/15/2017 | 50,000 | 54,625 | |||||||
UR Merger Sub Corp.: | |||||||||
144A, 5.75%, 7/15/2018 | 60,000 | 62,400 | |||||||
144A, 7.375%, 5/15/2020 | 95,000 | 99,275 | |||||||
144A, 7.625%, 4/15/2022 | 95,000 | 99,512 | |||||||
Vale Overseas Ltd., 8.25%, 1/17/2034 | 250,000 | 319,035 | |||||||
Virgin Media Finance PLC, Series 1, 9.5%, 8/15/2016 | 125,000 | 139,375 | |||||||
Virgin Media Secured Finance PLC, 6.5%, 1/15/2018 | 375,000 | 407,812 | |||||||
Wells Fargo & Co., 3.5%, 3/8/2022 | 135,000 | 138,910 | |||||||
Xstrata Finance Canada Ltd., 144A, 4.95%, 11/15/2021 | 115,000 | 118,823 | |||||||
11,445,889 | |||||||||
Health Care 2.6% | |||||||||
Amgen, Inc., 3.875%, 11/15/2021 | 100,000 | 105,586 | |||||||
Aviv Healthcare Properties LP, 7.75%, 2/15/2019 | 85,000 | 87,550 | |||||||
Community Health Systems, Inc., 8.875%, 7/15/2015 | 24,000 | 24,630 | |||||||
Express Scripts Holding Co., 144A, 4.75%, 11/15/2021 | 145,000 | 160,454 | |||||||
Gilead Sciences, Inc., 5.65%, 12/1/2041 | 145,000 | 169,021 | |||||||
HCA Holdings, Inc., 7.75%, 5/15/2021 (b) | 105,000 | 112,612 | |||||||
HCA, Inc.: | |||||||||
5.875%, 3/15/2022 | 40,000 | 41,800 | |||||||
6.5%, 2/15/2020 | 210,000 | 227,587 | |||||||
7.5%, 2/15/2022 | 155,000 | 168,950 | |||||||
7.875%, 2/15/2020 | 365,000 | 405,150 | |||||||
8.5%, 4/15/2019 | 45,000 | 50,400 | |||||||
Mylan, Inc., 144A, 7.875%, 7/15/2020 | 15,000 | 16,819 | |||||||
Physio-Control International, Inc., 144A, 9.875%, 1/15/2019 | 50,000 | 53,250 | |||||||
STHI Holding Corp., 144A, 8.0%, 3/15/2018 | 60,000 | 63,450 | |||||||
Tenet Healthcare Corp., 6.25%, 11/1/2018 | 100,000 | 105,750 | |||||||
Warner Chilcott Co., LLC, 7.75%, 9/15/2018 | 75,000 | 80,438 | |||||||
1,873,447 | |||||||||
Industrials 5.0% | |||||||||
Accuride Corp., 9.5%, 8/1/2018 | 75,000 | 77,250 | |||||||
ADT Corp., 144A, 3.5%, 7/15/2022 (c) | 90,000 | 90,302 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
Air Lease Corp., 144A, 5.625%, 4/1/2017 | 75,000 | 73,875 | |||||||
ARAMARK Corp., 8.5%, 2/1/2015 | 20,000 | 20,475 | |||||||
ARAMARK Holdings Corp., 144A, 8.625%, 5/1/2016 (PIK) | 20,000 | 20,475 | |||||||
Armored Autogroup, Inc., 144A, 9.5%, 11/1/2018 | 105,000 | 90,562 | |||||||
BE Aerospace, Inc.: | |||||||||
6.875%, 10/1/2020 | 25,000 | 27,625 | |||||||
8.5%, 7/1/2018 | 85,000 | 92,969 | |||||||
Belden, Inc.: | |||||||||
7.0%, 3/15/2017 | 45,000 | 46,350 | |||||||
9.25%, 6/15/2019 | 40,000 | 43,600 | |||||||
Bombardier, Inc.: | |||||||||
144A, 5.75%, 3/15/2022 | 55,000 | 54,794 | |||||||
144A, 7.75%, 3/15/2020 | 45,000 | 50,063 | |||||||
Briggs & Stratton Corp., 6.875%, 12/15/2020 | 35,000 | 37,450 | |||||||
Casella Waste Systems, Inc., 7.75%, 2/15/2019 | 110,000 | 108,350 | |||||||
Cenveo Corp., 8.875%, 2/1/2018 | 85,000 | 76,075 | |||||||
Ducommun, Inc., 9.75%, 7/15/2018 | 65,000 | 68,413 | |||||||
DynCorp International, Inc., 10.375%, 7/1/2017 | 85,000 | 72,675 | |||||||
Florida East Coast Railway Corp., 8.125%, 2/1/2017 | 40,000 | 41,800 | |||||||
FTI Consulting, Inc., 6.75%, 10/1/2020 | 145,000 | 152,975 | |||||||
Garda World Security Corp., 144A, 9.75%, 3/15/2017 | 60,000 | 63,450 | |||||||
H&E Equipment Services, Inc., 8.375%, 7/15/2016 | 110,000 | 113,437 | |||||||
Huntington Ingalls Industries, Inc.: | |||||||||
6.875%, 3/15/2018 | 50,000 | 52,125 | |||||||
7.125%, 3/15/2021 | 10,000 | 10,450 | |||||||
Interline Brands, Inc., 7.0%, 11/15/2018 | 50,000 | 52,000 | |||||||
JSC Georgian Railway, 144A, 7.75%, 7/11/2022 (c) | 200,000 | 199,602 | |||||||
Kansas City Southern de Mexico SA de CV, 8.0%, 2/1/2018 | 105,000 | 116,949 | |||||||
Masco Corp., 7.125%, 3/15/2020 | 145,000 | 159,987 | |||||||
Meritor, Inc.: | |||||||||
8.125%, 9/15/2015 | 55,000 | 57,956 | |||||||
10.625%, 3/15/2018 (b) | 60,000 | 63,750 | |||||||
Navios Maritime Holdings, Inc.: | |||||||||
8.125%, 2/15/2019 | 135,000 | 115,425 | |||||||
144A, 8.875%, 11/1/2017 (c) | 35,000 | 35,085 | |||||||
Nortek, Inc., 8.5%, 4/15/2021 | 125,000 | 122,187 | |||||||
Owens Corning, Inc., 9.0%, 6/15/2019 | 167,000 | 208,224 | |||||||
Ply Gem Industries, Inc., 13.125%, 7/15/2014 | 30,000 | 30,375 | |||||||
RBS Global, Inc. & Rexnord Corp., 8.5%, 5/1/2018 | 120,000 | 130,200 | |||||||
Sitel LLC, 11.5%, 4/1/2018 | 95,000 | 67,688 | |||||||
Spirit AeroSystems, Inc., 6.75%, 12/15/2020 | 75,000 | 81,750 | |||||||
Titan International, Inc., 7.875%, 10/1/2017 | 160,000 | 164,800 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
TransDigm, Inc., 7.75%, 12/15/2018 | 65,000 | 71,337 | |||||||
Transnet SOC Ltd., 144A, 4.5%, 2/10/2016 | 200,000 | 208,508 | |||||||
Urbi, Desarrollos Urbanos SAB de CV, 144A, 9.75%, 2/3/2022 | 200,000 | 211,000 | |||||||
3,582,363 | |||||||||
Information Technology 2.3% | |||||||||
Aspect Software, Inc., 10.625%, 5/15/2017 | 60,000 | 63,600 | |||||||
Avaya, Inc., 144A, 7.0%, 4/1/2019 | 145,000 | 134,487 | |||||||
CDW LLC, 8.5%, 4/1/2019 | 45,000 | 47,925 | |||||||
CommScope, Inc., 144A, 8.25%, 1/15/2019 | 85,000 | 89,888 | |||||||
Corning, Inc., 4.75%, 3/15/2042 | 130,000 | 136,226 | |||||||
eAccess Ltd., 144A, 8.25%, 4/1/2018 | 60,000 | 54,600 | |||||||
Equinix, Inc.: | |||||||||
7.0%, 7/15/2021 | 40,000 | 44,000 | |||||||
8.125%, 3/1/2018 | 140,000 | 155,050 | |||||||
Fidelity National Information Services, Inc.: | |||||||||
144A, 5.0%, 3/15/2022 | 15,000 | 15,263 | |||||||
7.625%, 7/15/2017 | 20,000 | 22,050 | |||||||
144A, 7.625%, 7/15/2017 | 10,000 | 10,975 | |||||||
First Data Corp.: | |||||||||
144A, 7.375%, 6/15/2019 | 45,000 | 45,900 | |||||||
144A, 8.875%, 8/15/2020 | 85,000 | 92,012 | |||||||
Freescale Semiconductor, Inc., 144A, 9.25%, 4/15/2018 | 190,000 | 203,300 | |||||||
Hughes Satellite Systems Corp.: | |||||||||
6.5%, 6/15/2019 | 40,000 | 42,500 | |||||||
7.625%, 6/15/2021 | 40,000 | 43,500 | |||||||
Jabil Circuit, Inc., 7.75%, 7/15/2016 | 30,000 | 34,200 | |||||||
MasTec, Inc., 7.625%, 2/1/2017 | 65,000 | 67,438 | |||||||
Sanmina-SCI Corp., 144A, 7.0%, 5/15/2019 | 45,000 | 43,650 | |||||||
Seagate HDD Cayman, 7.0%, 11/1/2021 | 10,000 | 10,775 | |||||||
Sensata Technologies BV, 144A, 6.5%, 5/15/2019 | 50,000 | 51,625 | |||||||
SunGard Data Systems, Inc., 10.25%, 8/15/2015 | 215,000 | 220,912 | |||||||
ViaSat, Inc., 144A, 6.875%, 6/15/2020 | 10,000 | 10,100 | |||||||
1,639,976 | |||||||||
Materials 6.7% | |||||||||
Aleris International, Inc., 7.625%, 2/15/2018 | 40,000 | 40,600 | |||||||
APERAM, 144A, 7.375%, 4/1/2016 | 150,000 | 129,000 | |||||||
Appleton Papers, Inc., 11.25%, 12/15/2015 | 25,000 | 26,688 | |||||||
ArcelorMittal, 4.5%, 2/25/2017 | 140,000 | 137,859 | |||||||
Ball Corp.: | |||||||||
7.125%, 9/1/2016 | 30,000 | 32,663 | |||||||
7.375%, 9/1/2019 | 25,000 | 27,625 | |||||||
Beverage Packaging Holdings Luxembourg II SA, 144A, 8.0%, 12/15/2016 | EUR | 70,000 | 83,270 | ||||||
Principal Amount ($)(a) | Value ($) | ||||||||
BWAY Parent Co., Inc., 10.125%, 11/1/2015 (PIK) | 46,952 | 47,656 | |||||||
Celulosa Arauco y Constitucion SA, 144A, 4.75%, 1/11/2022 | 200,000 | 204,456 | |||||||
China Oriental Group Co., Ltd.: | |||||||||
144A, 7.0%, 11/17/2017 | 100,000 | 76,250 | |||||||
144A, 8.0%, 8/18/2015 | 100,000 | 87,500 | |||||||
Clearwater Paper Corp., 7.125%, 11/1/2018 | 65,000 | 68,575 | |||||||
Clondalkin Acquisition BV, 144A, 2.468%**, 12/15/2013 | 75,000 | 66,750 | |||||||
Corp Nacional del Cobre de Chile, 144A, 3.875%, 11/3/2021 | 200,000 | 210,377 | |||||||
Crown Americas LLC: | |||||||||
6.25%, 2/1/2021 | 10,000 | 10,925 | |||||||
7.625%, 5/15/2017 | 30,000 | 32,400 | |||||||
CSN Resources SA, 144A, 6.5%, 7/21/2020 | 100,000 | 108,330 | |||||||
Essar Steel Algoma, Inc.: | |||||||||
144A, 9.375%, 3/15/2015 | 240,000 | 231,600 | |||||||
144A, 9.875%, 6/15/2015 | 85,000 | 72,037 | |||||||
Evraz Group SA, 144A, 7.4%, 4/24/2017 | 200,000 | 196,036 | |||||||
Exopack Holding Corp., 10.0%, 6/1/2018 | 40,000 | 40,100 | |||||||
FMG Resources (August 2006) Pty Ltd.: | |||||||||
144A, 6.0%, 4/1/2017 | 55,000 | 55,275 | |||||||
144A, 6.875%, 4/1/2022 | 40,000 | 40,300 | |||||||
144A, 7.0%, 11/1/2015 | 25,000 | 25,500 | |||||||
144A, 8.25%, 11/1/2019 | 90,000 | 95,400 | |||||||
GEO Specialty Chemicals, Inc.: | |||||||||
144A, 7.5%, 3/31/2015 (PIK) | 120,175 | 111,150 | |||||||
10.0%, 3/31/2015 | 119,040 | 117,290 | |||||||
Graphic Packaging International, Inc.: | |||||||||
7.875%, 10/1/2018 | 10,000 | 11,000 | |||||||
9.5%, 6/15/2017 | 130,000 | 143,000 | |||||||
Greif, Inc., 7.75%, 8/1/2019 | 195,000 | 222,300 | |||||||
Huntsman International LLC: | |||||||||
8.625%, 3/15/2020 | 60,000 | 67,350 | |||||||
8.625%, 3/15/2021 | 25,000 | 28,188 | |||||||
International Paper Co., 7.95%, 6/15/2018 | 145,000 | 182,719 | |||||||
JMC Steel Group, 144A, 8.25%, 3/15/2018 | 60,000 | 59,550 | |||||||
Kaiser Aluminum Corp., 144A, 8.25%, 6/1/2020 | 40,000 | 40,800 | |||||||
Kraton Polymers LLC, 6.75%, 3/1/2019 | 35,000 | 36,487 | |||||||
Longview Fibre Paper & Packaging, Inc., 144A, 8.0%, 6/1/2016 (b) | 60,000 | 60,000 | |||||||
LyondellBasell Industries NV, 144A, 6.0%, 11/15/2021 | 15,000 | 16,463 | |||||||
Molycorp, Inc., 144A, 10.0%, 6/1/2020 | 65,000 | 64,350 | |||||||
Novelis, Inc.: | |||||||||
8.375%, 12/15/2017 | 160,000 | 171,200 | |||||||
8.75%, 12/15/2020 | 110,000 | 118,525 | |||||||
Owens-Brockway Glass Container, Inc., 7.375%, 5/15/2016 | 110,000 | 122,650 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
Packaging Dynamics Corp., 144A, 8.75%, 2/1/2016 | 90,000 | 94,500 | |||||||
Polymer Group, Inc., 7.75%, 2/1/2019 | 55,000 | 58,094 | |||||||
Quadra FNX Mining Ltd., 144A, 7.75%, 6/15/2019 | 115,000 | 120,175 | |||||||
Rain CII Carbon LLC, 144A, 8.0%, 12/1/2018 | 45,000 | 45,450 | |||||||
Sealed Air Corp.: | |||||||||
144A, 8.125%, 9/15/2019 | 30,000 | 33,450 | |||||||
144A, 8.375%, 9/15/2021 | 30,000 | 33,900 | |||||||
United States Steel Corp., 7.375%, 4/1/2020 (b) | 80,000 | 77,200 | |||||||
Viskase Companies, Inc., 144A, 9.875%, 1/15/2018 | 145,000 | 150,800 | |||||||
Volcan Cia Minera SAA, 144A, 5.375%, 2/2/2022 | 300,000 | 312,000 | |||||||
Vulcan Materials Co., 6.5%, 12/1/2016 | 105,000 | 110,512 | |||||||
Wolverine Tube, Inc., 6.0%, 6/28/2014 | 17,539 | 16,462 | |||||||
4,772,737 | |||||||||
Telecommunication Services 5.9% | |||||||||
CC Holdings GS V, LLC, 144A, 7.75%, 5/1/2017 | 205,000 | 222,169 | |||||||
Cincinnati Bell, Inc.: | |||||||||
8.25%, 10/15/2017 | 55,000 | 57,200 | |||||||
8.375%, 10/15/2020 | 180,000 | 183,600 | |||||||
8.75%, 3/15/2018 | 170,000 | 163,625 | |||||||
CPI International, Inc., 8.0%, 2/15/2018 | 45,000 | 40,556 | |||||||
Cricket Communications, Inc.: | |||||||||
7.75%, 10/15/2020 | 310,000 | 296,050 | |||||||
10.0%, 7/15/2015 | 100,000 | 103,000 | |||||||
Crown Castle International Corp., 9.0%, 1/15/2015 | 195,000 | 212,794 | |||||||
Digicel Group Ltd., 144A, 10.5%, 4/15/2018 | 100,000 | 104,500 | |||||||
Digicel Ltd., 144A, 8.25%, 9/1/2017 | 300,000 | 305,250 | |||||||
ERC Ireland Preferred Equity Ltd., 144A, 7.69%**, 2/15/2017 (PIK)* | EUR | 88,319 | 34 | ||||||
Frontier Communications Corp.: | |||||||||
7.875%, 4/15/2015 | 7,000 | 7,700 | |||||||
8.25%, 4/15/2017 (b) | 70,000 | 75,250 | |||||||
8.5%, 4/15/2020 | 90,000 | 95,400 | |||||||
8.75%, 4/15/2022 | 10,000 | 10,500 | |||||||
Intelsat Jackson Holdings SA: | |||||||||
7.25%, 10/15/2020 | 120,000 | 126,300 | |||||||
7.5%, 4/1/2021 | 150,000 | 158,625 | |||||||
8.5%, 11/1/2019 | 100,000 | 110,750 | |||||||
Intelsat Luxembourg SA: | |||||||||
11.25%, 2/4/2017 | 145,000 | 149,350 | |||||||
11.5%, 2/4/2017 (PIK) | 304,218 | 314,105 | |||||||
144A, 11.5%, 2/4/2017 (PIK) | 80,000 | 82,600 | |||||||
iPCS, Inc., 2.591%**, 5/1/2013 | 35,000 | 34,563 | |||||||
MetroPCS Wireless, Inc.: | |||||||||
6.625%, 11/15/2020 | 90,000 | 88,650 | |||||||
7.875%, 9/1/2018 (b) | 75,000 | 77,812 | |||||||
Nextel Communications, Inc., Series D, 7.375%, 8/1/2015 | 85,000 | 85,106 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
Qwest Communications International, Inc.: | |||||||||
7.125%, 4/1/2018 | 55,000 | 58,025 | |||||||
8.0%, 10/1/2015 | 60,000 | 63,228 | |||||||
SBA Telecommunications, Inc.: | |||||||||
8.0%, 8/15/2016 | 23,000 | 24,495 | |||||||
8.25%, 8/15/2019 | 16,000 | 17,520 | |||||||
Sprint Nextel Corp.: | |||||||||
6.0%, 12/1/2016 | 240,000 | 229,800 | |||||||
8.375%, 8/15/2017 | 55,000 | 56,375 | |||||||
144A, 9.125%, 3/1/2017 | 50,000 | 52,500 | |||||||
Syniverse Holdings, Inc., 9.125%, 1/15/2019 | 25,000 | 27,125 | |||||||
Telesat Canada, 144A, 6.0%, 5/15/2017 | 40,000 | 40,700 | |||||||
West Corp.: | |||||||||
7.875%, 1/15/2019 | 30,000 | 31,350 | |||||||
8.625%, 10/1/2018 | 15,000 | 15,900 | |||||||
Windstream Corp.: | |||||||||
7.0%, 3/15/2019 | 60,000 | 61,500 | |||||||
7.5%, 4/1/2023 | 60,000 | 61,500 | |||||||
7.75%, 10/15/2020 | 35,000 | 37,100 | |||||||
7.875%, 11/1/2017 | 205,000 | 223,450 | |||||||
8.125%, 9/1/2018 | 70,000 | 75,250 | |||||||
Zayo Group LLC, 144A, 8.125%, 1/1/2020 | 15,000 | 15,675 | |||||||
4,196,982 | |||||||||
Utilities 2.4% | |||||||||
AES Corp.: | |||||||||
8.0%, 10/15/2017 | 10,000 | 11,375 | |||||||
8.0%, 6/1/2020 | 175,000 | 200,812 | |||||||
Calpine Corp.: | |||||||||
144A, 7.5%, 2/15/2021 | 80,000 | 86,400 | |||||||
144A, 7.875%, 7/31/2020 | 60,000 | 66,150 | |||||||
Centrais Eletricas Brasileiras SA, 144A, 5.75%, 10/27/2021 | 200,000 | 218,600 | |||||||
Energy Future Holdings Corp., Series Q, 6.5%, 11/15/2024 (b) | 205,000 | 97,888 | |||||||
IPALCO Enterprises, Inc., 5.0%, 5/1/2018 | 145,000 | 146,812 | |||||||
Korea Gas Corp., 144A, 6.25%, 1/20/2042 | 200,000 | 239,565 | |||||||
NRG Energy, Inc.: | |||||||||
7.375%, 1/15/2017 (b) | 90,000 | 93,600 | |||||||
7.625%, 1/15/2018 | 35,000 | 36,225 | |||||||
8.25%, 9/1/2020 | 15,000 | 15,525 | |||||||
Oncor Electric Delivery Co., LLC, 144A, 4.1%, 6/1/2022 | 160,000 | 163,128 | |||||||
Texas Competitive Electric Holdings Co., LLC, Series A, 10.25%, 11/1/2015 | 50,000 | 12,874 | |||||||
Toledo Edison Co., 7.25%, 5/1/2020 | 230,000 | 294,730 | |||||||
1,683,684 | |||||||||
Total Corporate Bonds (Cost $41,840,308) | 43,036,388 | ||||||||
Principal Amount ($)(a) | Value ($) | ||||||||
Mortgage-Backed Securities Pass-Throughs 1.5% | |||||||||
Government National Mortgage Association, 3.0%, 1/1/2042 (c) (Cost $1,035,273) | 1,000,000 | 1,035,781 | |||||||
Asset-Backed 1.2% | |||||||||
Home Equity Loans 0.5% | |||||||||
CIT Group Home Equity Loan Trust, "AF6", Series 2002-1, 6.2%, 2/25/2030 | 82,665 | 82,427 | |||||||
Citifinancial Mortgage Securities, Inc., "AFS", Series 2003-4, 5.326%, 10/25/2033 | 190,000 | 191,821 | |||||||
Countrywide Home Equity Loan Trust, "2A", Series 2006-I, 0.382%**, 1/15/2037 | 160,346 | 119,255 | |||||||
393,503 | |||||||||
Miscellaneous 0.7% | |||||||||
Arch Bay Asset-Backed Securities, "M", Series 2010-2, 144A, 5.0%, 4/25/2057 | 497,815 | 494,684 | |||||||
Total Asset-Backed (Cost $862,101) | 888,187 | ||||||||
Commercial Mortgage-Backed Securities 2.9% | |||||||||
Banc of America Large Loan, Inc., "HLTN", Series 2010-HLTN, 144A, 1.992%**, 11/15/2015 | 561,407 | 531,942 | |||||||
CS First Boston Mortgage Securities Corp., "H", Series 2002-CKP1, 144A, 7.546%**, 12/15/2035 | 290,000 | 289,371 | |||||||
Greenwich Capital Commercial Funding Corp., "AM", Series 2007-GG11, 5.867%, 12/10/2049 | 290,000 | 284,440 | |||||||
JPMorgan Chase Commercial Mortgage Securities Corp., "A4", Series 2006-LDP7, 6.064%**, 4/15/2045 | 140,000 | 159,763 | |||||||
LB-UBS Commercial Mortgage Trust: | |||||||||
"A3", Series 2006-C7, 5.347%, 11/15/2038 | 440,000 | 495,360 | |||||||
"E", Series 2005-C2, 5.498%**, 4/15/2040 | 300,000 | 120,262 | |||||||
Wachovia Bank Commercial Mortgage Trust, "A4", Series 2005-C22, 5.441%**, 12/15/2044 | 140,000 | 155,386 | |||||||
Total Commercial Mortgage-Backed Securities (Cost $2,085,123) | 2,036,524 | ||||||||
Collateralized Mortgage Obligations 4.0% | |||||||||
Banc of America Mortgage Securities, "2A2", Series 2004-A, 2.966%**, 2/25/2034 | 152,192 | 140,427 | |||||||
Bear Stearns Adjustable Rate Mortgage Trust, "2A1", Series 2005-11, 3.34%**, 12/25/2035 | 207,145 | 198,839 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
Countrywide Home Loans: | |||||||||
"A16", Series 2005-21, 5.0%, 10/25/2035 | 82,841 | 82,723 | |||||||
"2A5", Series 2004-13, 5.75%, 8/25/2034 | 150,108 | 138,281 | |||||||
Federal Home Loan Mortgage Corp.: | |||||||||
"AI", Series 4016, Interest Only, 3.0%, 9/15/2025 | 1,947,689 | 183,967 | |||||||
"JI", Series 3558, Interest Only, 4.5%, 12/15/2023 | 174,678 | 10,181 | |||||||
"PI", Series 3843, Interest Only, 4.5%, 5/15/2038 | 584,924 | 82,511 | |||||||
Federal National Mortgage Association: | |||||||||
"BI", Series 2010-13, Interest Only, 5.0%, 12/25/2038 | 300,963 | 39,032 | |||||||
"JS", Series 2004-59, Interest Only, 6.855%**, 4/25/2023 | 697,119 | 29,727 | |||||||
Government National Mortgage Association: | |||||||||
"XA", Series 2009-118, 5.0%, 12/20/2039 | 60,805 | 60,818 | |||||||
"ID", Series 2003-79, Interest Only, 5.5%, 12/20/2031 | 116,753 | 3,798 | |||||||
"IV", Series 2009-69, Interest Only, 5.5%, 8/20/2039 | 1,012,993 | 150,216 | |||||||
"IN", Series 2009-69, Interest Only, 5.5%, 8/20/2039 | 991,468 | 145,480 | |||||||
"IJ", Series 2009-75, Interest Only, 6.0%, 8/16/2039 | 781,554 | 124,548 | |||||||
JPMorgan Mortgage Trust, "2A1", Series 2006-A2, 5.435%**, 4/25/2036 | 424,506 | 335,912 | |||||||
Merrill Lynch Mortgage Investors Trust, "2A", Series 2003-A6, 2.781%**, 10/25/2033 | 108,437 | 100,347 | |||||||
Morgan Stanley Mortgage Loan Trust, "5A5", Series 2005-4, 5.5%, 8/25/2035 | 78,426 | 78,281 | |||||||
Vericrest Opportunity Loan Transferee: | |||||||||
"A2", Series 2012-NL1A, 144A, 8.112%, 3/25/2049 | 150,000 | 150,888 | |||||||
"A2", Series 2011-NL1A, 144A, 9.077%, 12/26/2050 | 300,000 | 301,992 | |||||||
Washington Mutual Mortgage Pass-Through Certificates Trust, "1A1", Series 2005-AR12, 2.451%**, 10/25/2035 | 55,592 | 53,229 | |||||||
Wells Fargo Mortgage-Backed Securities Trust: | |||||||||
"2A3",Series 2004-EE, 2.623%**, 12/25/2034 | 191,030 | 182,625 | |||||||
"A3", Series 2005-4, 5.0%, 4/25/2035 | 25,083 | 25,062 | |||||||
"B1", Series 2004-1, 5.5%, 2/25/2034 | 234,203 | 218,422 | |||||||
Total Collateralized Mortgage Obligations (Cost $2,815,810) | 2,837,306 | ||||||||
Principal Amount ($)(a) | Value ($) | ||||||||
Government & Agency Obligations 15.3% | |||||||||
Other Government Related (d) 0.6% | |||||||||
JPMorgan Chase & Co., Series 3, FDIC Guaranteed, 0.712%**, 12/26/2012 | 232,000 | 232,646 | |||||||
Penerbangan Malaysia Bhd., 144A, 5.625%, 3/15/2016 | 200,000 | 223,198 | |||||||
455,844 | |||||||||
Sovereign Bonds 7.8% | |||||||||
Dominican Republic, 144A, 7.5%, 5/6/2021 | 100,000 | 106,500 | |||||||
Federative Republic of Brazil, 12.5%, 1/5/2016 | BRL | 250,000 | 151,388 | ||||||
Government of Canada, 0.75%, 5/1/2014 | CAD | 1,400,000 | 1,368,221 | ||||||
Republic of Argentina, 7.0%, 10/3/2015 | 100,000 | 75,669 | |||||||
Republic of Argentina-Inflation Linked Bond, 5.83%, 12/31/2033 | ARS | 464 | 97 | ||||||
Republic of Belarus, REG S, 8.75%, 8/3/2015 | 145,000 | 141,738 | |||||||
Republic of Colombia, 4.375%, 7/12/2021 | 300,000 | 336,900 | |||||||
Republic of Croatia, 144A, 6.25%, 4/27/2017 | 400,000 | 398,923 | |||||||
Republic of Hungary, 4.75%, 2/3/2015 | 100,000 | 96,000 | |||||||
Republic of Indonesia, 144A, 5.25%, 1/17/2042 | 250,000 | 261,562 | |||||||
Republic of Latvia, 144A, 5.25%, 2/22/2017 | 200,000 | 206,500 | |||||||
Republic of Lithuania, 144A, 6.125%, 3/9/2021 | 200,000 | 220,000 | |||||||
Republic of Peru, 5.625%, 11/18/2050 | 100,000 | 121,250 | |||||||
Republic of Poland, 5.0%, 3/23/2022 | 100,000 | 109,150 | |||||||
Republic of Serbia, REG S, 6.75%, 11/1/2024 | 166,667 | 160,000 | |||||||
Republic of South Africa, 4.665%, 1/17/2024 | 250,000 | 270,625 | |||||||
Republic of Turkey: | |||||||||
6.0%, 1/14/2041 | 200,000 | 210,500 | |||||||
6.25%, 9/26/2022 | 200,000 | 226,500 | |||||||
Republic of Uruguay, 7.625%, 3/21/2036 | 60,000 | 86,400 | |||||||
Republic of Venezuela, 7.65%, 4/21/2025 | 580,000 | 400,200 | |||||||
Russian Federation, 144A, 3.25%, 4/4/2017 | 200,000 | 201,248 | |||||||
United Mexican States, 4.75%, 3/8/2044 | 200,000 | 215,500 | |||||||
Vnesheconombank, 144A, 6.025%, 7/5/2022 (c) | 200,000 | 199,502 | |||||||
5,564,373 | |||||||||
U.S. Treasury Obligations 6.9% | |||||||||
U.S. Treasury Bills: | |||||||||
0.13%***, 9/6/2012 (e) | 339,000 | 338,958 | |||||||
0.13%***, 9/6/2012 (e) | 191,000 | 190,976 | |||||||
U.S. Treasury Notes: | |||||||||
0.75%, 6/15/2014 | 500,000 | 504,141 | |||||||
0.875%, 12/31/2016 | 500,000 | 504,492 | |||||||
1.5%, 7/31/2016 | 1,875,000 | 1,942,530 | |||||||
2.0%, 11/15/2021 | 1,299,300 | 1,347,110 | |||||||
Principal Amount ($)(a) | Value ($) | ||||||||
2.0%, 2/15/2022 | 50,000 | 51,684 | |||||||
4,879,891 | |||||||||
Total Government & Agency Obligations (Cost $10,636,621) | 10,900,108 | ||||||||
Loan Participations and Assignments 4.0% | |||||||||
Senior Loans** 2.3% | |||||||||
Buffets, Inc., Letter of Credit, First Lien, LIBOR plus 9.25%, 4/22/2015* | 12,939 | 6,017 | |||||||
Charter Communications Operating LLC, Term Loan C, 3.5%, 9/6/2016 | 158,571 | 157,800 | |||||||
Clear Channel Communication, Inc., Term Loan B, 3.895%, 1/28/2016 | 45,318 | 36,321 | |||||||
Cumulus Media Holdings, Inc., Second Lien Term Loan, 7.5%, 9/16/2019 | 50,000 | 50,532 | |||||||
Dunkin' Brands, Inc., New Term Loan B2, 4.0%, 11/23/2017 | 68,244 | 67,490 | |||||||
First Data Corp., Term Loan B, LIBOR plus 4.0%, 3/23/2018 | 450,000 | 414,029 | |||||||
Kabel Deutschland GmbH, Term Loan F, 4.25%, 2/1/2019 | 385,000 | 383,196 | |||||||
Tomkins LLC, New Term Loan B, 4.25%, 9/29/2016 | 448,967 | 449,584 | |||||||
Tribune Co., Term Loan B, LIBOR plus 3.0%, 6/4/2014* | 88,875 | 59,213 | |||||||
1,624,182 | |||||||||
Sovereign Loans 1.7% | |||||||||
Bank of Moscow, 144A, 6.699%, 3/11/2015 | 250,000 | 258,750 | |||||||
OAO Novatek, 144A, 5.326%, 2/3/2016 | 200,000 | 208,024 | |||||||
Russian Railways, 5.739%, 4/3/2017 | 145,000 | 154,777 | |||||||
Vimpel Communications, 144A, 7.748%, 2/2/2021 | 200,000 | 193,148 | |||||||
Vnesheconombank, 144A, 5.375%, 2/13/2017 | 200,000 | 206,968 | |||||||
VTB Bank OJSC, 144A, 6.0%, 4/12/2017 | 200,000 | 203,000 | |||||||
1,224,667 | |||||||||
Total Loan Participations and Assignments (Cost $2,869,352) | 2,848,849 | ||||||||
Municipal Bonds and Notes 1.4% | |||||||||
Chicago, IL, Airport Revenue, O'Hare International Airport, Series B, 6.0%, 1/1/2041 | 145,000 | 170,012 | |||||||
Massachusetts, State School Building Authority, Sales Tax Revenue, Qualified School Construction Bond, Series A, 4.885%, 7/15/2028 | 300,000 | 350,271 | |||||||
Orlando & Orange County, FL, Expressway Authority Revenue, Series C, 5.0%, 7/1/2040 | 145,000 | 157,487 | |||||||
Port Authority of New York & New Jersey, 4.926%, 10/1/2051 | 260,000 | 289,377 | |||||||
Total Municipal Bonds and Notes (Cost $851,808) | 967,147 | ||||||||
Principal Amount ($)(a) | Value ($) | ||||||||
Convertible Bonds 0.2% | |||||||||
Consumer Discretionary | |||||||||
Group 1 Automotive, Inc., 3.0%, 3/15/2020 | 65,000 | 89,537 | |||||||
Sonic Automotive, Inc., 5.0%, 10/1/2029 | 25,000 | 32,563 | |||||||
Total Convertible Bonds (Cost $90,036) | 122,100 | ||||||||
Preferred Securities 0.3% | |||||||||
Financials 0.2% | |||||||||
USB Capital XIII Trust, 6.625%, 12/15/2039 | 145,000 | 146,185 | |||||||
Materials 0.1% | |||||||||
Hercules, Inc., 6.5%, 6/30/2029 | 95,000 | 77,900 | |||||||
Total Preferred Securities (Cost $202,422) | 224,085 |
Units | Value ($) | |||||||
Other Investments 0.0% | ||||||||
Consumer Discretionary | ||||||||
AOT Bedding Super Holdings LLC* (f) (Cost $4,000) | 4 | 3,870 |
Shares | Value ($) | |||||||
Common Stocks 0.0% | ||||||||
Consumer Discretionary 0.0% | ||||||||
Buffets Restaurants Holdings, Inc.* | 2,318 | 0 | ||||||
Postmedia Network Canada Corp.* | 1,248 | 968 | ||||||
Trump Entertainment Resorts, Inc.* | 6 | 0 | ||||||
Vertis Holdings, Inc.* | 63 | 1 | ||||||
969 | ||||||||
Industrials 0.0% | ||||||||
Congoleum Corp.* | 2,500 | 0 | ||||||
Quad Graphics, Inc. | 6 | 87 | ||||||
87 | ||||||||
Materials 0.0% | ||||||||
GEO Specialty Chemicals, Inc.* | 2,058 | 0 | ||||||
Wolverine Tube, Inc.* | 778 | 19,053 | ||||||
19,053 | ||||||||
Total Common Stocks (Cost $53,987) | 20,109 | |||||||
Warrants 0.0% | ||||||||
Consumer Discretionary 0.0% | ||||||||
Reader's Digest Association, Inc., Expiration Date 2/19/2014* | 159 | 27 | ||||||
Materials 0.0% | ||||||||
Hercules Trust II, Expiration Date 3/31/2029* | 85 | 680 | ||||||
Total Warrants (Cost $17,432) | 707 | |||||||
Exchange-Traded Fund 0.1% | ||||||||
SPDR Barclays Capital Convertible Securities (Cost $51,564) | 1,300 | 48,828 |
Contracts | Value ($) | |||||||
Call Options Purchased 0.3% | ||||||||
Options on Exchange-Traded Futures Contracts 0.0% | ||||||||
10 Year U.S. Treasury Note Future, Expiration Date 8/24/2012, Strike Price $134.0 | 5 | 3,594 |
Contract Amount | Value ($) | |||||||
Options on Interest Rate Swap Contracts 0.3% | ||||||||
Fixed Rate — 3.583% - Floating — LIBOR, Swap Expiration Date 5/11/2026, Option Expiration Date 5/9/2016 | 1,400,000 | 49,814 | ||||||
Fixed Rate — 3.635% - Floating — LIBOR, Swap Expiration Date 4/27/2026, Option Expiration Date 4/25/2016 | 1,300,000 | 44,254 | ||||||
Fixed Rate — 3.72% - Floating — LIBOR, Swap Expiration Date 4/22/2026, Option Expiration Date 4/20/2016 | 1,300,000 | 41,809 | ||||||
Fixed Rate — 4.19% - Floating — LIBOR, Swap Expiration Date 2/3/2027, Option Expiration Date 2/1/2017 | 1,500,000 | 45,293 | ||||||
Fixed Rate — 4.32% - Floating — LIBOR, Swap Expiration Date 2/3/2027, Option Expiration Date 2/1/2017 | 1,400,000 | 39,369 | ||||||
220,539 | ||||||||
Total Call Options Purchased (Cost $326,882) | 224,133 |
Contracts | Value ($) | |||||||
Put Options Purchased 0.2% | ||||||||
Options on Exchange-Traded Futures Contracts 0.0% | ||||||||
10 Year U.S. Treasury Note Future, Expiration Date 8/24/2012, Strike Price $133.0 | 10 | 8,437 |
Contract Amount | Value ($) | |||||||
Options on Interest Rate Swap Contracts 0.2% | ||||||||
Fixed Rate — 2.19% - Floating — LIBOR, Swap Expiration Date 2/3/2027, Option Expiration Date 2/1/2017 | 1,500,000 | 53,801 | ||||||
Fixed Rate — 2.32% - Floating — LIBOR, Swap Expiration Date 2/3/2027, Option Expiration Date 2/1/2017 | 1,400,000 | 56,554 | ||||||
110,355 | ||||||||
Total Put Options Purchased (Cost $107,970) | 118,792 |
Shares | Value ($) | |||||||
Securities Lending Collateral 4.1% | ||||||||
Daily Assets Fund Institutional, 0.24% (g) (h) (Cost $2,947,696) | 2,947,696 | 2,947,696 | ||||||
Cash Equivalents 9.7% | ||||||||
Central Cash Management Fund, 0.14% (g) (Cost $6,871,227) | 6,871,227 | 6,871,227 |
% of Net Assets | Value ($) | |||||||
Total Investment Portfolio (Cost $73,669,612)+ | 105.7 | 75,131,837 | ||||||
Other Assets and Liabilities, Net | (5.7 | ) | (4,020,154 | ) | ||||
Net Assets | 100.0 | 71,111,683 |
The following table represents bonds and senior loans that are in default:
Securities | Coupon | Maturity Date | Principal Amount ($) | Acquisition Cost ($) | Value ($) | |||||||||||||
Buffets, Inc.* | LIBOR plus 9.25 | % | 4/22/2015 | 12,939 | USD | 12,456 | 6,017 | |||||||||||
ERC Ireland Preferred Equity Ltd.* | 7.69 | % | 2/15/2017 | 88,319 | EUR | 120,275 | 34 | |||||||||||
Fontainebleau Las Vegas Holdings LLC* | 11.0 | % | 6/15/2015 | 65,000 | USD | 65,225 | 41 | |||||||||||
Hellas Telecommunications Finance SCA* | 8.985 | % | 7/15/2015 | 109,187 | EUR | 32,169 | 83 | |||||||||||
Tribune Co.* | LIBOR plus 3.0 | % | 6/4/2014 | 88,875 | USD | 88,819 | 59,213 | |||||||||||
318,944 | 65,388 |
* Non-income producing security.
** Floating rate securities' yields vary with a designated market index or market rate, such as the coupon-equivalent of the U.S. Treasury Bill rate. These securities are shown at their current rate as of June 30, 2012.
*** Annualized yield at time of purchase; not a coupon rate.
+ The cost for federal income tax purposes was $73,843,359. At June 30, 2012, net unrealized appreciation for all securities based on tax cost was $1,288,478. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $2,715,781 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $1,427,303.
(a) Principal amount stated in U.S. 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 June 30, 2012 amounted to $2,850,190, which is 4.0% of net assets.
(c) When-issued or delayed delivery security included.
(d) Government-backed debt issued by financial companies or government-sponsored enterprises.
(e) At June 30, 2012, this security has been pledged, in whole or in part, to cover initial margin requirements for open futures contracts.
(f) The Fund may purchase securities that are subject to legal or contractual restrictions on resale ("restricted securities"). Restricted securities are securities which have not been registered with the Securities and Exchange Commission under the Securities Act of 1933. The Fund may be unable to sell a restricted security and it may be more difficult to determine a market value for a restricted security. Moreover, if adverse market conditions were to develop during the period between the Fund's decision to sell a restricted security and the point at which the Fund is permitted or able to sell such security, the Fund might obtain a price less favorable than the price that prevailed when it decided to sell. This investment practice, therefore, could have the effect of increasing the level of illiquidity of the Fund. The future value of these securities is uncertain and there may be changes in the estimated value of these securities.
Schedule of Restricted Securities | Acquisition Date | Cost ($) | Value ($) | Value as % of Net Assets | |||||||||
AOT Bedding Super Holdings LLC* | June 2010 | 4,000 | 3,870 | 0.01 |
(g) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(h) Represents collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates.
144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
FDIC: Federal Deposit Insurance Corp.
Interest Only: Interest Only (IO) bonds represent the "interest only" portion of payments on a pool of underlying mortgages or mortgage-backed securities. IO securities are subject to prepayment risk of the pool of underlying mortgages.
LIBOR: London Interbank Offered Rate
PIK: Denotes that all or a portion of the income is paid in-kind in the form of additional principal.
REG S: Securities sold under Regulation S may not be offered, sold or delivered within the United States or to, or for the account or benefit of, U.S. persons, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933.
REIT: Real Estate Investment Trust
SPDR: Standard & Poor's Depositary Receipt
At June 30, 2012, open futures contracts purchased were as follows:
Futures | Currency | Expiration Date | Contracts | Notional Value ($) | Unrealized Appreciation/ (Depreciation) ($) | |||||||||
10 Year Australian Treasury Bond | AUD | 9/17/2012 | 5 | 642,030 | (118 | ) | ||||||||
10 Year Canadian Government Bond | CAD | 9/19/2012 | 16 | 2,175,818 | 2,276 | |||||||||
10 Year Japanese Government Bond | JPY | 9/10/2012 | 1 | 1,797,586 | 2,237 | |||||||||
Federal Republic of Germany Euro-Bund | EUR | 9/6/2012 | 40 | 7,132,354 | (19,861 | ) | ||||||||
Federal Republic of Germany Euro-Schatz | EUR | 9/6/2012 | 22 | 3,076,289 | (6,879 | ) | ||||||||
United Kingdom Long Gilt Bond | GBP | 9/26/2012 | 16 | 2,984,708 | (6,764 | ) | ||||||||
Total net unrealized depreciation | (29,109 | ) |
At June 30, 2012, open futures contracts sold were as follows:
Futures | Currency | Expiration Date | Contracts | Notional Value ($) | Unrealized Appreciation/ (Depreciation) ($) | |||||||||
10 Year Canadian Government Bond | CAD | 9/19/2012 | 6 | 815,932 | (3,120 | ) | ||||||||
10 Year U.S. Treasury Note | USD | 9/19/2012 | 103 | 13,737,625 | (9,053 | ) | ||||||||
2 Year U.S. Treasury Note | USD | 9/28/2012 | 57 | 12,550,688 | 8,660 | |||||||||
United Kingdom Long Gilt Bond | GBP | 9/26/2012 | 2 | 373,089 | (551 | ) | ||||||||
Total net unrealized depreciation | (4,064 | ) |
At June 30, 2012, open written option contracts were as follows:
Options on Exchange-Traded Futures Contracts | Contract Amount | Expiration Date | Strike Price ($) | Premiums Received ($) | Value ($) (i) | ||||||||||||
Call Options 10 Year U.S. Treasury Note Future | 5 | 8/24/2012 | 136.0 | 614 | (938 | ) | |||||||||||
Put Options 10 Year U.S. Treasury Note Future | 20 | 8/24/2012 | 131.0 | 8,394 | (5,625 | ) | |||||||||||
Total | 9,008 | (6,563 | ) |
(i) Unrealized appreciation on written options on exchange-traded futures contracts at June 30, 2012 was $2,445.
Options on Interest Rate Swap Contracts | Swap Effective/ Expiration Date | Contract Amount | Option Expiration Date | Premiums Received ($) | Value ($) (j) | |||||||||
Call Options Fixed — 3.19% - Floating — LIBOR | 2/3/2017 2/3/2027 | 700,000 | 2/1/2017 | 50,400 | (37,309 | ) | ||||||||
Fixed — 3.32% - Floating — LIBOR | 2/3/2017 2/3/2027 | 700,000 | 2/1/2017 | 50,631 | (34,613 | ) | ||||||||
Fixed — 4.083% - Floating — LIBOR | 5/11/2016 5/11/2026 | 1,400,000 | 5/9/2016 | 47,600 | (36,666 | ) | ||||||||
Fixed — 4.135% - Floating — LIBOR | 4/27/2016 4/27/2026 | 1,300,000 | 4/25/2016 | 48,100 | (32,545 | ) | ||||||||
Fixed — 4.22% - Floating — LIBOR | 4/22/2016 4/22/2026 | 1,300,000 | 4/20/2016 | 46,345 | (30,789 | ) | ||||||||
Total Call Options | 243,076 | (171,922 | ) | |||||||||||
Put Options Fixed — 1.9% - Floating — LIBOR | 4/24/2013 4/24/2023 | 1,300,000 | 4/22/2013 | 17,810 | (29,584 | ) | ||||||||
Fixed — 2.07% - Floating — LIBOR | 5/10/2013 5/10/2043 | 1,400,000 | 5/8/2013 | 22,400 | (36,428 | ) | ||||||||
Fixed — 2.09% - Floating — LIBOR | 4/25/2013 4/25/2043 | 1,300,000 | 4/23/2013 | 24,440 | (33,847 | ) | ||||||||
Fixed — 3.19% - Floating — LIBOR | 2/3/2017 2/3/2027 | 700,000 | 2/1/2017 | 50,400 | (55,455 | ) | ||||||||
Fixed — 3.32% - Floating — LIBOR | 2/3/2017 2/3/2027 | 700,000 | 2/1/2017 | 50,631 | (60,371 | ) | ||||||||
Total Put Options | 165,681 | (215,685 | ) | |||||||||||
Total | 408,757 | (387,607 | ) |
(j) Unrealized appreciation on written options on interest rate swap contracts at June 30, 2012 was $21,150.
At June 30, 2012, open credit default swap contracts sold were as follows:
Effective/ Expiration Date | Notional Amount ($) (l) | Fixed Cash Flows Received | Underlying Debt Obligation/Quality Rating (k) | Value ($) | Upfront Payments Paid/ (Received) ($) | Unrealized Appreciation/ (Depreciation) ($) | |||||||||||||||
9/21/2009 12/20/2014 | 290,000 | 1 | 1.0 | % | Berkshire Hathaway Finance Corp., 4.625%, 10/15/2013, AA+ | 821 | (7,340 | ) | 8,161 | ||||||||||||
12/20/2011 3/20/2017 | 60,000 | 2 | 5.0 | % | CIT Group, Inc., 5.50%, 2/15/2019, BB- | 3,899 | 2,388 | 1,511 | |||||||||||||
6/21/2010 9/20/2013 | 70,000 | 3 | 5.0 | % | Ford Motor Co., 6.5%, 8/1/2018, BB+ | 3,562 | 858 | 2,704 | |||||||||||||
6/21/2010 9/20/2015 | 90,000 | 4 | 5.0 | % | Ford Motor Co., 6.5%, 8/1/2018, BB+ | 8,105 | (1,605 | ) | 9,710 | ||||||||||||
12/20/2010 3/20/2016 | 290,000 | 5 | 1.0 | % | Freeport-McMoRan Copper & Gold, Inc., 3.55%, 3/1/2022, BBB | (5,484 | ) | (100 | ) | (5,384 | ) | ||||||||||
3/21/2011 6/20/2016 | 120,000 | 1 | 5.0 | % | HCA, Inc., 6.375%, 1/15/2015, B- | 4,142 | 3,568 | 574 | |||||||||||||
Total net unrealized appreciation | 17,276 |
(k) The quality ratings represent the higher of Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") credit ratings and are unaudited.
(l) The maximum potential amount of future undiscounted payments that the Fund could be required to make under a credit default swap contract would be the notional amount of the contract. These potential amounts would be partially offset by any recovery values of the referenced debt obligation or net amounts received from the settlement of buy protection credit default swap contracts entered into by the Fund for the same referenced debt obligation.
At June 30, 2012, open interest rate swap contracts were as follows:
Effective/ Expiration Date | Notional Amount ($) | Cash Flows Paid by the Fund | Cash Flows Received by the Fund | Value ($) | Upfront Payments Paid/ (Received) ($) | Unrealized Appreciation/ (Depreciation) ($) | ||||||||||||
4/13/2012 4/13/2016 | 1,500,000 | 6 | Floating — LIBOR | Fixed — 1.22% | 29,181 | — | 29,181 | |||||||||||
10/1/2012 10/1/2021 | 2,000,000 | 7 | Fixed — 2.375% | Floating — LIBOR | (110,095 | ) | 528 | (110,623 | ) | |||||||||
10/1/2012 10/1/2042 | 1,200,000 | 7 | Floating — LIBOR | Fixed — 2.96% | 108,330 | — | 108,330 | |||||||||||
Total net unrealized appreciation | 26,888 |
Counterparties:
1 JPMorgan Chase Securities, Inc.
2 Credit Suisse
3 Citigroup, Inc.
4 Bank of America, N.A.
5 Morgan Stanley
6 BNP Paribas
7 The Goldman Sachs & Co.
At June 30, 2012, the Fund had the following open forward foreign currency exchange contracts:
Contracts to Deliver | In Exchange For | Settlement Date | Unrealized Appreciation ($) | Counterparty | |||||||||||
USD | 746,569 | EUR | 600,000 | 7/6/2012 | 13,528 | Bank of America | |||||||||
EUR | 750,000 | USD | 981,644 | 7/11/2012 | 31,485 | UBS AG | |||||||||
USD | 1,262,122 | NZD | 1,600,000 | 7/16/2012 | 20,930 | Bank of America | |||||||||
CHF | 1,561,264 | EUR | 1,300,000 | 7/16/2012 | 479 | Bank of America | |||||||||
USD | 1,759,415 | EUR | 1,400,000 | 7/23/2012 | 14,384 | UBS AG | |||||||||
EUR | 1,400,000 | USD | 1,775,838 | 7/23/2012 | 2,039 | Bank of America | |||||||||
USD | 677,416 | NZD | 850,000 | 7/25/2012 | 1,812 | UBS AG | |||||||||
USD | 375,413 | AUD | 370,000 | 7/25/2012 | 2,356 | UBS AG | |||||||||
NOK | 410,000 | USD | 69,236 | 7/25/2012 | 376 | UBS AG | |||||||||
CHF | 250,000 | USD | 263,897 | 7/25/2012 | 348 | UBS AG | |||||||||
GBP | 290,000 | USD | 455,242 | 7/25/2012 | 1,087 | UBS AG | |||||||||
USD | 999,131 | EUR | 800,000 | 7/27/2012 | 14,500 | Bank of America | |||||||||
USD | 1,390,021 | BRL | 2,900,000 | 7/30/2012 | 45,031 | BNP Paribas | |||||||||
USD | 712,973 | TRY | 1,300,000 | 8/2/2012 | 1,120 | UBS AG | |||||||||
Total unrealized appreciation | 149,475 |
Contracts to Deliver | In Exchange For | Settlement Date | Unrealized Depreciation ($) | Counterparty | |||||||||||
EUR | 600,000 | USD | 752,295 | 7/6/2012 | (7,803 | ) | UBS AG | ||||||||
AUD | 515,000 | USD | 525,094 | 7/11/2012 | (1,738 | ) | Morgan Stanley | ||||||||
NZD | 1,600,000 | USD | 1,236,904 | 7/16/2012 | (46,147 | ) | BNP Paribas | ||||||||
SEK | 670,000 | USD | 95,925 | 7/25/2012 | (839 | ) | UBS AG | ||||||||
CAD | 60,000 | USD | 58,728 | 7/25/2012 | (172 | ) | UBS AG | ||||||||
JPY | 19,130,000 | USD | 239,086 | 7/25/2012 | (321 | ) | UBS AG | ||||||||
EUR | 450,000 | USD | 569,580 | 7/25/2012 | (11 | ) | UBS AG | ||||||||
BRL | 2,900,000 | USD | 1,381,281 | 7/30/2012 | (53,770 | ) | Nomura International PLC | ||||||||
USD | 1,388,780 | JPY | 110,000,000 | 8/2/2012 | (10,084 | ) | Nomura International PLC | ||||||||
JPY | 110,000,000 | USD | 1,373,952 | 8/2/2012 | (4,744 | ) | Nomura International PLC | ||||||||
EUR | 1,500 | USD | 1,867 | 8/2/2012 | (32 | ) | JPMorgan Chase Securities, Inc. | ||||||||
EUR | 327,700 | USD | 413,084 | 8/2/2012 | (1,731 | ) | Citigroup, Inc. | ||||||||
EUR | 800,000 | USD | 1,012,797 | 8/2/2012 | (883 | ) | UBS AG | ||||||||
USD | 671,286 | MXN | 9,000,000 | 8/3/2012 | (2,300 | ) | Bank of America | ||||||||
Total unrealized depreciation | (130,575 | ) |
Currency Abbreviations |
ARS Argentine Peso AUD Australian Dollar BRL Brazilian Real CAD Canadian Dollar CHF Swiss Franc EUR Euro GBP British Pound JPY Japanese Yen MXN Mexican Peso NOK Norwegian Krone NZD New Zealand Dollar SEK Swedish Krona TRY Turkish Lira USD United States Dollar |
For information on the Fund's policy and additional disclosures regarding options purchased, futures contracts, credit default swap contracts, interest rate swap contracts, forward foreign currency exchange contracts and written option 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 June 30, 2012 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 (m) | ||||||||||||||||
Corporate Bonds | $ | — | $ | 42,791,486 | $ | 244,902 | $ | 43,036,388 | ||||||||
Mortgage-Backed Securities Pass-Throughs | — | 1,035,781 | — | 1,035,781 | ||||||||||||
Asset-Backed | — | 888,187 | — | 888,187 | ||||||||||||
Commercial Mortgage-Backed Securities | — | 2,036,524 | — | 2,036,524 | ||||||||||||
Collateralized Mortgage Obligations | — | 2,837,306 | — | 2,837,306 | ||||||||||||
Government & Agency Obligations | — | 10,900,108 | — | 10,900,108 | ||||||||||||
Loan Participations and Assignments | — | 2,848,849 | — | 2,848,849 | ||||||||||||
Municipal Bonds and Notes | — | 967,147 | — | 967,147 | ||||||||||||
Convertible Bonds | — | 122,100 | — | 122,100 | ||||||||||||
Preferred Securities | — | 224,085 | — | 224,085 | ||||||||||||
Other Investments | — | — | 3,870 | 3,870 | ||||||||||||
Common Stocks (m) | 1,055 | — | 19,054 | 20,109 | ||||||||||||
Warrants (m) | — | — | 707 | 707 | ||||||||||||
Exchange-Traded Fund | 48,828 | — | — | 48,828 | ||||||||||||
Short-Term Investments (m) | 9,818,923 | — | — | 9,818,923 | ||||||||||||
Derivatives (n) | 25,204 | 640,540 | — | 665,744 | ||||||||||||
Total | $ | 9,894,010 | $ | 65,292,113 | $ | 268,533 | $ | 75,454,656 | ||||||||
Liabilities | ||||||||||||||||
Derivatives (n) | $ | (52,909 | ) | $ | (634,189 | ) | $ | — | $ | (687,098 | ) | |||||
Total | $ | (52,909 | ) | $ | (634,189 | ) | $ | — | $ | (687,098 | ) |
There have been no transfers between Level 1 and Level 2 fair value measurements during the period ended June 30, 2012.
(m) See Investment Portfolio for additional detailed categorizations.
(n) Derivatives include value of options purchased, written options, at value, and unrealized appreciation (depreciation) on futures contracts, credit default swap contracts, interest rate swap contracts and forward foreign currency exchange contracts.
The accompanying notes are an integral part of the financial statements.
as of June 30, 2012 (Unaudited) | ||||
Assets | ||||
Investments: Investments in non-affiliated securities, at value (cost $63,850,689) — including $2,850,190 of securities loaned | $ | 65,312,914 | ||
Investment in Daily Assets Fund Institutional (cost $2,947,696)* | 2,947,696 | |||
Investment in Central Cash Management Fund (cost $6,871,227) | 6,871,227 | |||
Total investments in securities, at value (cost $73,669,612) | 75,131,837 | |||
Cash | 40,776 | |||
Foreign currency, at value (cost $228,937) | 231,042 | |||
Deposit with broker for futures contracts | 126,961 | |||
Receivable for investments sold | 267,959 | |||
Receivable for investments sold — when-issued/delayed delivery securities | 1,039,625 | |||
Interest receivable | 1,006,474 | |||
Receivable for variation margin on futures contracts | 42,056 | |||
Unrealized appreciation on swap contracts | 160,171 | |||
Unrealized appreciation on forward foreign currency exchange contracts | 149,475 | |||
Upfront payments paid on swap contracts | 7,342 | |||
Total assets | 78,203,718 | |||
Liabilities | ||||
Payable upon return of securities loaned | 2,947,696 | |||
Payable for investments purchased | 686,217 | |||
Payable for investments purchased — when-issued/delayed delivery securities | 2,665,455 | |||
Payable for Fund shares redeemed | 66,016 | |||
Options written, at value (premium received $417,765) | 394,170 | |||
Unrealized depreciation on swap contracts | 116,007 | |||
Unrealized depreciation on forward foreign currency exchange contracts | 130,575 | |||
Upfront payments received on swap contracts | 9,045 | |||
Accrued management fee | 19,558 | |||
Other accrued expenses and payables | 57,296 | |||
Total liabilities | 7,092,035 | |||
Net assets, at value | $ | 71,111,683 | ||
Net Assets Consist of | ||||
Undistributed net investment income | $ | 1,307,243 | ||
Net unrealized appreciation (depreciation) on: Investments | 1,462,225 | |||
Swap contracts | 44,164 | |||
Futures | (33,173 | ) | ||
Foreign currency | 29,890 | |||
Written options | 23,595 | |||
Accumulated net realized gain (loss) | 1,126,182 | |||
Paid-in-capital | 67,151,557 | |||
Net assets, at value | $ | 71,111,683 | ||
Class A Net Asset Value, offering and redemption price per share ($71,111,683 ÷ 6,034,255 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | $ | 11.78 |
* Represents collateral on securities loaned.
The accompanying notes are an integral part of the financial statements.
Statement of Operations
for the six months ended June 30, 2012 (Unaudited) | ||||
Investment Income | ||||
Income: Interest | $ | 2,016,791 | ||
Dividends | 989 | |||
Income distributions — Central Cash Management Fund | 2,967 | |||
Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates | 5,874 | |||
Total income | 2,026,621 | |||
Expenses: Management fee | 192,668 | |||
Administration fee | 35,031 | |||
Services to shareholders | 522 | |||
Custodian fee | 32,271 | |||
Audit and tax fees | 32,913 | |||
Legal fees | 7,316 | |||
Reports to shareholders | 16,983 | |||
Trustees' fees and expenses | 2,565 | |||
Interest expense | 2,145 | |||
Other | 22,206 | |||
Total expenses before expense reductions | 344,620 | |||
Expense reductions | (69,139 | ) | ||
Total expenses after expense reductions | 275,481 | |||
Net investment income (loss) | 1,751,140 | |||
Realized and Unrealized Gain (Loss) | ||||
Net realized gain (loss) from: Investments | 663,996 | |||
Swap contracts | (45,742 | ) | ||
Futures | 283,931 | |||
Written options | 8,794 | |||
Foreign currency | 384,773 | |||
1,295,752 | ||||
Change in net unrealized appreciation (depreciation) on: Investments | 1,295,051 | |||
Swap contracts | (13,159 | ) | ||
Futures | (60,690 | ) | ||
Written options | 19,262 | |||
Foreign currency | (389,525 | ) | ||
850,939 | ||||
Net gain (loss) | 2,146,691 | |||
Net increase (decrease) in net assets resulting from operations | $ | 3,897,831 |
The accompanying notes are an integral part of the financial statements.
Increase (Decrease) in Net Assets | Six Months Ended June 30, 2012 (Unaudited) | Year Ended December 31, 2011 | ||||||
Operations: Net investment income | $ | 1,751,140 | $ | 3,881,224 | ||||
Operations: Net investment income | $ | 1,751,140 | $ | 3,881,224 | ||||
Net realized gain (loss) | 1,295,752 | 920,963 | ||||||
Change in net unrealized appreciation (depreciation) | 850,939 | (1,145,151 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 3,897,831 | 3,657,036 | ||||||
Distributions to shareholders from: Net investment income: Class A | (4,311,037 | ) | (4,074,552 | ) | ||||
Net realized gains: Class A | (143,246 | ) | — | |||||
Total distributions | (4,454,283 | ) | (4,074,552 | ) | ||||
Fund share transactions: Class A Proceeds from shares sold | 5,046,969 | 6,939,450 | ||||||
Reinvestment of distributions | 4,454,283 | 4,074,552 | ||||||
Payments for shares redeemed | (6,935,883 | ) | (17,200,574 | ) | ||||
Net increase (decrease) in net assets from Class A share transactions | 2,565,369 | (6,186,572 | ) | |||||
Increase (decrease) in net assets | 2,008,917 | (6,604,088 | ) | |||||
Net assets at beginning of period | 69,102,766 | 75,706,854 | ||||||
Net assets at end of period (including undistributed net investment income of $1,307,243 and $3,867,140, respectively) | $ | 71,111,683 | $ | 69,102,766 | ||||
Other Information | ||||||||
Class A Shares outstanding at beginning of period | 5,808,640 | 6,329,747 | ||||||
Shares sold | 421,135 | 592,646 | ||||||
Shares issued to shareholders in reinvestment of distributions | 381,360 | 348,849 | ||||||
Shares redeemed | (576,880 | ) | (1,462,602 | ) | ||||
Net increase (decrease) in Class A shares | 225,615 | (521,107 | ) | |||||
Shares outstanding at end of period | 6,034,255 | 5,808,640 |
The accompanying notes are an integral part of the financial statements.
Years Ended December 31, | ||||||||||||||||||||||||
Class A | Six Months Ended 6/30/12 (Unaudited) | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Selected Per Share Data | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.90 | $ | 11.96 | $ | 11.61 | $ | 10.03 | $ | 11.70 | $ | 11.80 | ||||||||||||
Income (loss) from investment operations: Net investment incomea | .30 | .63 | .66 | .63 | .55 | .63 | ||||||||||||||||||
Net realized and unrealized gain (loss) | .37 | (.01 | ) | .47 | 1.50 | (1.38 | ) | (.01 | ) | |||||||||||||||
Total from investment operations | .67 | .62 | 1.13 | 2.13 | (.83 | ) | .62 | |||||||||||||||||
Less distributions from: Net investment income | (.76 | ) | (.68 | ) | (.78 | ) | (.55 | ) | (.69 | ) | (.72 | ) | ||||||||||||
Net realized gains | (.03 | ) | — | — | — | (.15 | ) | — | ||||||||||||||||
Total distributions | (.79 | ) | (.68 | ) | (.78 | ) | (.55 | ) | (.84 | ) | (.72 | ) | ||||||||||||
Net asset value, end of period | $ | 11.78 | $ | 11.90 | $ | 11.96 | $ | 11.61 | $ | 10.03 | $ | 11.70 | ||||||||||||
Total Return (%)b | 5.63 | ** | 5.31 | 10.05 | 22.73 | (7.75 | ) | 5.43 | ||||||||||||||||
Ratios to Average Net Assets and Supplemental Data | ||||||||||||||||||||||||
Net assets, end of period ($ millions) | 71 | 69 | 76 | 74 | 73 | 100 | ||||||||||||||||||
Ratio of expenses before expense reductions (%) | .98 | * | .99 | .95 | .86 | .89 | .84 | |||||||||||||||||
Ratio of expenses after expense reductions (%) | .79 | * | .79 | .86 | .80 | .87 | .83 | |||||||||||||||||
Ratio of net investment income (%) | 5.00 | * | 5.38 | 5.62 | 5.96 | 5.06 | 5.50 | |||||||||||||||||
Portfolio turnover rate (%) | 62 | ** | 144 | 167 | 370 | 234 | 147 | |||||||||||||||||
a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. * Annualized ** Not annualized |
A. Organization and Significant Accounting Policies
DWS Unconstrained Income VIP (formerly DWS Strategic Income VIP) (the "Fund") is a diversified series of DWS Variable Series II (the "Trust"), which 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 Fund'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 Fund 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 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.
Debt securities and loan participations and assignments are valued at prices supplied by independent pricing services approved by the Fund's 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.
Equity securities and exchange-traded funds ("ETFs") are valued at the most recent sale price or official closing price reported on the exchange (U.S. 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.
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.
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 at the price provided by the broker-dealer with which the option was traded and are generally categorized as Level 2.
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 the 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 Fund's Investment Portfolio.
Foreign Currency Translations. The books and records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing exchange rates at period end. Purchases and sales of investment securities, income and expenses are translated into U.S. 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 acquisition and disposition of foreign currencies, and the difference between the amount of net investment income accrued and the U.S. 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.
Securities Lending. The Fund 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 under 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.
Loan Participations and Assignments. Loan participations and assignments are portions of loans originated by banks and sold in pieces to investors. These U.S. 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 contractual relationship with the borrower, and the Fund may enforce compliance by the borrower with the terms of the loan agreement. Senior loans held by the Fund generally are in the form of Assignments but the Fund may also invest in Participations. All Loan Participations and Assignments involve interest rate risk, liquidity risk and credit risk, including the potential default or insolvency of the borrower.
When-Issued/Delayed Delivery Securities. The Fund may purchase or sell 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 or sell a security, the transaction is recorded and the value of the transaction 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. At the time the Fund enters into this type 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 transactions 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. The 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 Fund's understanding of the tax rules and rates related to income, gains and transactions for the foreign jurisdictions in which it invests, the Fund will provide for foreign taxes, and where appropriate, deferred foreign taxes.
Under the Regulated Investment Company Modernization Act of 2010, net capital losses may be carried forward indefinitely, and their character is retained as short-term and/or long-term. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
The Fund has reviewed the tax positions for the open tax years as of December 31, 2011 and has determined that no provision for income tax is required in the Fund's financial statements. The Fund's federal tax returns for the prior three fiscal years remain open subject to examination by the Internal Revenue Service.
Distribution of Income and Gains. Distributions of net investment income of the Fund, if any, are made annually. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed and, therefore, will be distributed to shareholders at least annually. The Fund may also make additional distributions for tax purposes if necessary.
The timing and characterization of certain income and capital gain 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 investments in foreign denominated investments, forward currency contracts, futures contracts, swap contracts 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, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.
The tax character of current year distributions will be determined at the end of the current fiscal year.
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, the Fund may enter into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet been made. However, based on experience, the Fund expects the risk of loss to be remote.
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. Realized gains and losses from investment transactions are recorded on an identified cost basis and may include proceeds from litigation. All discounts and premiums are accreted/amortized for both tax and financial reporting purposes for the Fund, with the exception of securities in default of principal.
B. Derivative Instruments
Interest Rate Swap Contracts. For the six months ended June 30, 2012, the Fund entered into interest rate swap transactions to gain exposure to different parts of the yield curve while managing overall duration and to enhance potential gains. The value of the Fund's underlying bond investments is subject to interest rate risk. As interest rates increase, the value of the Fund's fixed rate bonds may fall. The longer the duration of the Fund's securities, the more sensitive the Fund will be to interest rate changes. To help mitigate this interest rate risk, the Fund invests in interest rate swap contracts to reduce the duration of the Investment Portfolio. 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. In addition, both the Fund and counterparty may agree to exchange variable rate payments based on different indices. 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, if any, made by the Fund is recorded as an asset in the Statement of Assets and Liabilities. An upfront payment, if any, 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 June 30, 2012 is included in a table following the Fund's Investment Portfolio. For the six months ended June 30, 2012, the investment in interest rate swap contracts had a total notional amount generally indicative of a range from $4,700,000 to $9,390,000.
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 six months ended June 30, 2012, the Fund sold credit default swap contracts to gain exposure to an underlying issuer's credit quality characteristics without directly investing in that issuer. 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 U.S. or foreign corporate issuer, on the reference entity, which 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, if any, made by the Fund is recorded as an asset in the Statement of Assets and Liabilities. An upfront payment, if any, 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 gains or losses in the Statement of Operations.
A summary of the open credit default swap contracts as of June 30, 2012 is included in a table following the Fund's Investment Portfolio. For the six months ended June 30, 2012, the investment in credit default swap contracts sold had a total notional value generally indicative of a range from $860,000 to $920,000.
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 six months ended June 30, 2012, the Fund entered into total return swap transactions to enhance potential gains. 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 or 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, if any, made by the Fund is recorded as an asset in the Statement of Assets and Liabilities. An upfront payment, if any, 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.
There were no open total return swap contracts as of June 30, 2012. For the six months ended June 30, 2012, the investment in total return swap contracts had a total notional amount generally indicative of a range from $0 to $3,900,000.
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 will require cash settlement by the Fund if the option is exercised. For the six months ended June 30, 2012, the Fund entered into options on interest rate futures and on interest rates swaps in order to hedge against potential adverse interest rate movements of portfolio assets.
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 purchased option contracts as of June 30, 2012 is included in the Fund's Investment Portfolio. A summary of open written option contracts is included in a table following the Fund's Investment Portfolio. For the six months ended June 30, 2012, the investment in written option contracts had a total value generally indicative of a range from approximately $8,000 to $394,000, and purchased option contracts had a total value generally indicative of a range from approximately $15,000 to $343,000.
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 six months ended June 30, 2012, the Fund entered into interest rate futures to gain exposure to different parts of the yield curve while managing overall duration. In addition, the Fund seeks to enhance returns by employing a global tactical asset allocation overlay strategy. The Fund enters into futures contracts on global bonds, including indices, as part of its global tactical asset allocation overlay strategy. For the six months ended June 30, 2012, as part of this strategy, the Fund used futures contracts to attempt to take advantage of inefficiencies within the global bond markets.
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 the risk that the futures contract is not well correlated with the security, index or currency to which it relates. Risk of loss may exceed amounts disclosed in the Statement of Assets and Liabilities.
A summary of the open futures contracts as of June 30, 2012 is included in a table following the Fund's Investment Portfolio. For the six months ended June 30, 2012, the investment in futures contracts purchased had a total notional value generally indicative of a range from approximately $4,511,000 to $17,809,000, and the investment in futures contracts sold had a total notional value generally indicative of a range from approximately $10,705,000 to $27,477,000.
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 six months ended June 30, 2012, the Fund entered into forward currency contracts in order to hedge against anticipated currency market changes and for non-hedging purposes to seek to enhance potential gains. In addition, the Fund seeks to enhance returns by employing a global tactical asset allocation overlay strategy. For the six months ended June 30, 2012, as part of this strategy, the Fund used forward currency contracts to gain exposure to changes in the value of foreign currencies to attempt to take advantage of 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 June 30, 2012 is included in a table following the Fund's Investment Portfolio. For the six months ended June 30, 2012, the investment in forward currency contracts short vs. U.S. dollars had a total contract value generally indicative of a range from approximately $11,206,000 to $24,173,000, and the investment in forward currency contracts long vs. U.S. dollars had a total contract value generally indicative of a range from approximately $9,983,000 to $21,423,000. The investment in forward currency contracts long vs. other foreign currencies sold had a total contract value generally indicative of a range from $0 to approximately $2,656,000.
The following tables summarize the value of the Fund's derivative instruments held as of June 30, 2012 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 | Futures Contracts | Total | |||||||||||||||
Interest Rate Contracts (a) (b) | $ | 342,925 | $ | — | $ | 137,511 | $ | 13,173 | $ | 493,609 | ||||||||||
Credit Contracts (a) | — | — | 22,660 | — | 22,660 | |||||||||||||||
Foreign Exchange Contracts (c) | — | 149,475 | — | — | 149,475 | |||||||||||||||
$ | 342,925 | $ | 149,475 | $ | 160,171 | $ | 13,173 | $ | 665,744 |
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 swap contracts
(b) Includes cumulative appreciation of futures contracts as disclosed in the Investment Portfolio. Unsettled variation margin is disclosed separately within the Statement of Assets and Liabilities.
(c) Unrealized appreciation on forward foreign currency exchange contracts
Liability Derivatives | Written Options | Forward Contracts | Swap Contracts | Futures Contracts | Total | |||||||||||||||
Interest Rate Contracts (a) (b) | $ | (394,170 | ) | $ | — | $ | (110,623 | ) | $ | (46,346 | ) | $ | (551,139 | ) | ||||||
Credit Contracts (a) | — | — | (5,384 | ) | — | (5,384 | ) | |||||||||||||
Foreign Exchange Contracts (c) | — | (130,575 | ) | — | — | (130,575 | ) | |||||||||||||
$ | (394,170 | ) | $ | (130,575 | ) | $ | (116,007 | ) | $ | (46,346 | ) | $ | (687,098 | ) |
Each of the above derivatives is located in the following Statement of Assets and Liabilities accounts:
(a) Options written, at value and unrealized depreciation on swap contracts
(b) Includes cumulative depreciation of futures contracts as disclosed in the Investment Portfolio. Unsettled variation margin is disclosed separately within the Statement of Assets and Liabilities.
(c) Unrealized depreciation on forward foreign currency exchange contracts
Additionally, the amount of unrealized and realized gains and losses on derivative instruments recognized in Fund earnings during the six months ended June 30, 2012 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 | Forward Contracts | Swap Contracts | Futures Contracts | Total | ||||||||||||||||||
Interest Rate Contracts (a) | $ | (10,398 | ) | $ | 8,794 | $ | — | $ | (56,616 | ) | $ | 283,931 | $ | 225,711 | ||||||||||
Credit Contracts (a) | — | — | — | 10,874 | — | 10,874 | ||||||||||||||||||
Foreign Exchange Contracts (b) | — | — | 366,997 | — | — | 366,997 | ||||||||||||||||||
$ | (10,398 | ) | $ | 8,794 | $ | 366,997 | $ | (45,742 | ) | $ | 283,931 | $ | 603,582 |
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
(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 | ||||||||||||||||||
Interest Rate Contracts (a) | $ | (84,384 | ) | $ | 19,262 | $ | — | $ | (31,074 | ) | $ | (60,690 | ) | $ | (156,886 | ) | ||||||||
Credit Contracts (a) | — | — | — | 17,915 | — | 17,915 | ||||||||||||||||||
Foreign Exchange Contracts (b) | — | — | (393,387 | ) | — | — | (393,387 | ) | ||||||||||||||||
$ | (84,384 | ) | $ | 19,262 | $ | (393,387 | ) | $ | (13,159 | ) | $ | (60,690 | ) | $ | (532,358 | ) |
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 six months ended June 30, 2012, purchases and sales of investment transactions (excluding short-term investments and U.S. Treasury obligations) aggregated $37,480,958 and $37,850,796, respectively. Purchases and sales of U.S. Treasury obligations aggregated $3,695,114 and $1,960,666, respectively.
For the six months ended June 30, 2012, transactions for written options on futures contracts and interest rate swap contracts were as follows:
Contracts/ Contract Amount | Premium | |||||||
Outstanding, beginning of period | 100 | $ | 12,458 | |||||
Options expired | (100 | ) | (12,458 | ) | ||||
Options written | 10,800,030 | 420,042 | ||||||
Options closed | (30 | ) | (2,277 | ) | ||||
Outstanding, end of period | 10,800,000 | $ | 417,765 |
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 the 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 the Fund or delegates such responsibility to the Fund's subadvisor.
QS Investors, LLC ("QS Investors") acts as an investment subadvisor to the Fund and manages the portion of assets allocated to the Fund's global tactical asset allocation overlay strategy. QS Investors is paid by the Advisor for the services QS Investors provides to the Fund.
Pursuant to the Investment Management Agreement with the Advisor, the Fund pays a monthly management fee based on the Fund's average daily net assets, computed and accrued daily and payable monthly, at the following annual rates:
First $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 | % |
For the period from January 1, 2012 through April 30, 2013, 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) at 0.78%.
Accordingly, for the six months ended June 30, 2012, the Advisor waived a portion of its management fee pursuant to the Investment Management Agreement aggregating $69,078, and the amount charged aggregated $123,590, which was equivalent to an annualized effective rate of 0.35% of the Fund's average daily net assets.
Administration Fee. Pursuant to an Administrative Services Agreement, DIMA provides most administrative services to the Fund. For all services provided under the Administrative Services Agreement, the Fund pays DIMA an annual fee ("Administration Fee") of 0.10% of the Fund's average daily net assets, computed and accrued daily and payable monthly. For the six months ended June 30, 2012, the Administration Fee was $35,031, of which $5,826 is unpaid.
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 the 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 the Fund. For the six months ended June 30, 2012, the amounts charged to the Fund by DISC aggregated $61, all of which was waived.
Typesetting and Filing Service Fees. Under an agreement with DIMA, DIMA is compensated for providing typesetting and certain regulatory filing services to the Fund. For the six months ended June 30, 2012, the amount charged to the Fund by DIMA included in the Statement of Operations under "reports to shareholders" aggregated $11,496, of which $1,567 is unpaid.
Trustees' Fees and Expenses. The Fund paid retainer fees to each Trustee not affiliated with the Advisor, plus specified amounts to the Board Chairperson and to each committee Chairperson.
Affiliated Cash Management Vehicle. The Fund may invest uninvested cash balances in Central Cash Management Fund, which is managed by the Advisor. The Fund indirectly bears its proportionate share of the expenses of Central Cash Management Fund. 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.
Security Lending Fees. Effective January 27, 2012, Deutsche Bank AG serves as lending agent for the Fund. For the period from January 27, 2012 through June 30, 2012, the Fund incurred lending agent fees to Deutsche Bank AG for the amount of $646.
E. Investing in High-Yield Securities
The Fund's 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 risk of loss from default by the issuer is significantly greater. Prices and yields of high-yield securities will fluctuate over time and, during periods of economic uncertainty, volatility of high-yield securities may adversely affect a fund's net asset value. Because the Fund 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 Fund
At June 30, 2012, two Participating Insurance Companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 62% and 35%.
H. Line of Credit
The Fund and other affiliated funds (the "Participants") share in a $375 million revolving credit facility provided by a syndication of banks. The Fund 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 Fund may borrow up to a maximum of 33 percent of its net assets under the agreement. The Fund had no outstanding loans at June 30, 2012.
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 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 (January 1, 2012 to June 30, 2012).
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 June 30, 2012 | ||||
Actual Fund Return | Class A | |||
Beginning Account Value 1/1/12 | $ | 1,000.00 | ||
Ending Account Value 6/30/12 | $ | 1,056.30 | ||
Expenses Paid per $1,000* | $ | 4.04 | ||
Hypothetical 5% Fund Return | Class A | |||
Beginning Account Value 1/1/12 | $ | 1,000.00 | ||
Ending Account Value 6/30/12 | $ | 1,020.93 | ||
Expenses Paid per $1,000* | $ | 3.97 |
* Expenses are equal to the Fund's annualized expense ratio, multiplied by the average account value over the period, multiplied by 182 (the number of days in the most recent six-month period), then divided by 366.
Annualized Expense Ratio | Class A | |
DWS Variable Series II — DWS Unconstrained Income VIP | .79% |
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 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.
September 26, 2011
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 report summarizes my evaluation for 2011, 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, 2009 and 2010.
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 109 mutual 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
President, Thomas H. Mack & Co., Inc.
DWS Investments Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606
(800) 621-1148
VS2UI-3 (R-028389-1 8/12)
ITEM 2. | CODE OF ETHICS | |
Not applicable. | ||
ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT | |
Not applicable | ||
ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES | |
Not applicable | ||
ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS | |
Not applicable | ||
ITEM 6. | SCHEDULE OF INVESTMENTS | |
Not applicable | ||
ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES | |
Not applicable | ||
ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES | |
Not applicable | ||
ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS | |
Not applicable | ||
ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | |
There were no material changes to the procedures by which shareholders may recommend nominees to the Fund’s Board. The primary function of the Nominating and Governance Committee is to identify and recommend individuals for membership on the Board and oversee the administration of the Board Governance Guidelines. Shareholders may recommend candidates for Board positions by forwarding their correspondence by U.S. mail or courier service to Paul K. Freeman, Independent Chairman, DWS Funds, P.O. Box 101833, Denver, CO 80250-1833. | ||
ITEM 11. | CONTROLS AND PROCEDURES | |
(a) | The Chief Executive and Financial Officers concluded that the Registrant’s Disclosure Controls and Procedures are effective based on the evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report. | |
(b) | There have been no changes in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controls over financial reporting. | |
ITEM 12. | EXHIBITS | |
(a)(1) | Certification pursuant to Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit 99.CERT. | |
(b) | Certification pursuant to Rule 30a-2(b) under the Investment Company Act of 1940 (17 CFR 270.30a-2(b)) is furnished and attached hereto as Exhibit 99.906CERT. |
Form N-CSRS Item F
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: | DWS Variable Series II |
By: | /s/W. Douglas Beck W. Douglas Beck President |
Date: | August 20, 2012 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: | /s/W. Douglas Beck W. Douglas Beck President |
Date: | August 20, 2012 |
By: | /s/Paul Schubert Paul Schubert Chief Financial Officer and Treasurer |
Date: | August 20, 2012 |