UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-CSR
Investment Company Act file number: 811-05002
Deutsche DWS Variable Series II
(Exact Name of Registrant as Specified in Charter)
875 Third Avenue
New York, NY 10022-6225
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, including Area Code: (212) 454-4500
Diane Kenneally
100 Summer Street
Boston, MA 02110
(Name and Address of Agent for Service)
| Date of fiscal year end: | 12/31 |
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| Date of reporting period: | 12/31/2022 |
| ITEM 1. | REPORT TO STOCKHOLDERS |
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| | (a) |
December 31, 2022
Annual Report
Deutsche DWS Variable Series II
DWS Alternative Asset Allocation VIP
Contents
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, portfolio 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; the political, general economic, liquidity and currency risks of foreign investments, which may be particularly significant for emerging markets; credit and interest rate risk; floating rate loan risk; volatility, infrastructure and high-yield debt securities. Because Exchange Traded Funds (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. The Fund may use derivatives, including as part of its currency and interest-rate strategies. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. The success of the Fund’s currency and interest-rate strategies are dependent, in part, on the effectiveness and implementation of portfolio management’s proprietary models. As part of these strategies, the Fund’s exposure to foreign currencies could cause lower returns or even losses because foreign currency rates may fluctuate significantly over short periods of time for a number of reasons. The risk of loss is heightened during periods of rapid rises in interest rates. In addition, the notional amount of the Fund’s aggregate currency and interest-rate exposure resulting from these strategies may significantly exceed the net assets of the Fund. Please read the prospectus for additional risks and specific details regarding the Fund's risk profile.
War, terrorism, sanctions, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and, in the future, may lead to significant disruptions in U.S. and world economies and markets, which may lead to increased market volatility and may have significant adverse effects on the Fund and its investments.
The brand DWS represents DWS Group GmbH & Co. KGaA and any of its subsidiaries such as DWS Distributors, Inc. which offers investment products or DWS Investment Management Americas, Inc. and RREEF America L.L.C. which offer advisory services.
DWS Distributors, Inc., 222 South Riverside Plaza, Chicago, IL 60606, (800) 621-1148
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
| Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP |
Performance SummaryDecember 31, 2022 (Unaudited)
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 does 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. 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, 2022 are 0.88% and 1.26% 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.
Generally accepted accounting principles require adjustments to be made to the net assets of the Fund at period end for financial reporting purposes only, and as such, the total return based on the unadjusted net asset value per share may differ from the total return reported in the financial highlights.
Growth of an Assumed $10,000 Investment
Yearly periods ended December 31
MSCI World Index is an unmanaged index representing large and mid-cap equity performance across 23 developed markets countries. It covers approximately 85% of the free float-adjusted market capitalization in each country.
Bloomberg 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.
The Blended Index consists of 70% MSCI World Index and 30% Bloomberg U.S. Aggregate Bond Index.
Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index.
The Advisor believes that the MSCI World Index, Bloomberg U.S. Aggregate Bond Index, and the blend of each of these indexes, reflect the different components of the Fund’s typical asset allocations.
Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP | |
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DWS Alternative Asset Allocation VIP | | | | |
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Average annual total return | | | | |
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Average annual total return | | | | |
Bloomberg U.S. Aggregate Bond Index | | | | | |
Average annual total return | | | | |
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Average annual total return | | | | |
DWS Alternative Asset Allocation VIP | | | | |
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Average annual total return | | | | |
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Average annual total return | | | | |
Bloomberg U.S. Aggregate Bond Index | | | | | |
Average annual total return | | | | |
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Average annual total return | | | | |
The growth of $10,000 is cumulative. |
| Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP |
Management Summary December 31, 2022 (Unaudited)
The Fund returned –7.42% (Class A shares, unadjusted for contract charges) during the 12-month period ended December 31, 2022, outpacing the –18.36% return of the MSCI World Index and the –16.28% return of the Blended Index. Since the MSCI World Index captures the performance of traditional assets and not alternative assets, we measure performance relative to the Blended Index. With that said, the Fund’s positive relative performance helps illustrate the broader strength in alternative asset classes in comparison to traditional asset categories in 2022. Whereas stocks and bonds were both hurt by the backdrop of high inflation and rising interest rates, a number of categories in the alternative space in fact benefited from these conditions. In our view, this underscores the potential for alternatives to act as a source of meaningful portfolio diversification.
The best results occurred in the Fund’s Real Assets portfolio, which includes investments that typically perform well in times of rising inflation. An allocation to commodities, one of the few major segments of the financial markets to post positive returns in 2022, was particularly helpful. The category was boosted by the combination of steady demand and a reduction in supply caused, in part, by Russia’s invasion of Ukraine. Infrastructure stocks also held up well in relative terms thanks to their necessity-based assets, stable growth profiles, and ability to benefit from inflation. On the other hand, real estate investment trusts posted sizable losses as rising rates pressured economic growth and led to higher costs of capital for companies in the sector.
The Alternative Fixed Income portfolio, which was helped by its holdings in funds that invest in floating-rate securities, was the second-best performer. Since these securities have yields that adjusted upward as rates rise, they benefited from high demand fueled by the U.S. Federal Reserve’s decision to tighten monetary policy aggressively. The Fund’s allocation to emerging-markets debt detracted. In addition to being hurt by the broader decline in investors’ appetite for risk, the category was affected by slowing growth in China and the effect of the Ukraine invasion on the Eastern European markets.
The Alternative Equity portfolio, which holds exchange-traded funds that invest in convertible securities and preferred stocks, underperformed in 2022. Convertibles were pressured by the high representation of growth companies among the category’s issuers, while preferreds were hurt by the broader decline in equities.
The Absolute Return portfolio is intended to act as a source of ballast during times of market turbulence, and that indeed proved to be the case in 2022. Its position in DWS Global Macro Fund, while posting a loss, exceeded the returns of the Blended Index thanks in part to its defensive posture. DWS ESG Liquidity Fund, which strives to provide current income consistent with the preservation of capital, registered a positive return and also contributed to performance.
In terms of activity, we focused on reducing portfolio risk throughout 2022. We accomplished this in several ways. First, we decreased the allocation to the Real Assets portfolio by trimming holdings in commodities and real estate investment trusts. We redeployed the proceeds into the Absolute Return portfolio due to its lower sensitivity to broader market movements. We also lowered the weighting in convertible securities within the Alternative Equity category, and we increased the Fund’s position in cash.
We maintained a conservative stance at the end of the period given the wide range of risks that continued to hang over the market. Among these were the possibility of slower growth, continued policy tightening by the Fed, and the chance that earnings expectations are still too high. With that said, we remained alert for the opportunity to add risk back to the portfolio if conditions become more favorable. We believe this helps illustrate the potential merits of our high level of flexibility and broad-based investment universe.
Dokyoung Lee, CFA, Regional Head of Multi Asset & Solutions
Darwei Kung, Head of Investment Strategy Liquid Real Assets
Fabian Degen, CFA, Senior Portfolio Manager Multi Asset & Solutions
Portfolio Managers
The views expressed reflect those of the portfolio management team only through the end of the period of the report as stated on the cover. The management team’s views are subject to change at any time based on market and other conditions and should not be construed as a recommendation. Past performance is no guarantee of future results. Current and future portfolio holdings are subject to risk.
Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP | |
Terms to Know
The Blended Index consists of 70% MSCI World Index and 30% Bloomberg U.S. Aggregate Bond Index. The MSCI World Index is an unmanaged index representing large and mid-cap equity performance across 23 developed markets countries. It covers approximately 85% of the free float-adjusted market capitalization in each country. Bloomberg 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 fees or expenses and it is not possible to invest directly into an index.
Convertible securities are bonds that can be exchanged for equity at a pre-stated price. Convertibles generally offer higher income than is available from a common stock, but more appreciation potential than bonds.
Preferred stocks are hybrid securities that offer some of the features of both stocks and bonds.
| Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP |
Portfolio Summary(Unaudited)
Asset Allocation* (As a % of Investment Portfolio) | | |
| | |
DWS RREEF Global Infrastructure Fund | | |
DWS Enhanced Commodity Strategy Fund | | |
DWS RREEF Real Estate Securities Fund | | |
iShares Global Infrastructure ETF | | |
SPDR S&P Global Natural Resources ETF | | |
DWS RREEF Global Real Estate Securities Fund | | |
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iShares JP Morgan USD Emerging Markets Bond ETF | | |
DWS Emerging Markets Fixed Income Fund | | |
SPDR Blackstone Senior Loan ETF | | |
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SPDR Bloomberg Convertible Securities ETF | | |
iShares Preferred & Income Securities ETF | | |
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DWS Central Cash Management Government Fund | | |
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| During the periods indicated, asset categories and investment strategies represented in the Fund’s portfolio fell into the following categories: Real Assets, Alternative Fixed Income, Alternative Equity, and Absolute Return. Real Asset investments have a tangible or physical aspect such as real estate or commodities. Alternative Fixed Income investments seek to offer exposure to categories generally not included in investors’ allocations and to foreign investments, many of which are not denominated in US dollars. Alternative Equity investments are investments primarily in convertible and preferred instruments that offer equity exposure. Absolute Return investments seek positive returns in all market environments or seek to increase the diversification or liquidity of the Fund’s portfolio. |
Portfolio holdings and characteristics are subject to change.
For more complete details about the Fund’s investment portfolio, see page 8.
Following the Fund’s fiscal first and third quarter-end, a complete portfolio holdings listing is posted on dws.com, and is available free of charge by contacting your financial intermediary, or if you are a direct investor, by calling (800) 728-3337. In addition, the portfolio holdings listing is filed with the SEC on the Fund’s Form N-PORT and will be available on the SEC’s Web site at sec.gov. Additional portfolio holdings for the Fund are also posted on dws.com from time to time. Please see the Fund’s current prospectus for more information.
Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP | |
Investment Portfolioas of December 31, 2022
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DWS Emerging Markets Fixed Income Fund "Institutional" (a) | | | |
DWS Enhanced Commodity Strategy Fund "Institutional" (a) | | | |
DWS Floating Rate Fund "Institutional" (a) | | | |
DWS Global Macro Fund "Institutional" (a) | | | |
DWS RREEF Global Infrastructure Fund "Institutional" (a) | | | |
DWS RREEF Real Estate Securities Fund "Institutional" (a) | | | |
Total Mutual Funds (Cost $254,105,315) | |
Exchange-Traded Funds 21.0% |
iShares Global Infrastructure ETF | | | |
iShares JP Morgan USD Emerging Markets Bond ETF | | | |
iShares Preferred & Income Securities ETF | | | |
| | |
SPDR Blackstone Senior Loan ETF | | | |
SPDR Bloomberg Convertible Securities ETF | | | |
SPDR S&P Global Natural Resources ETF | | | |
Total Exchange-Traded Funds (Cost $88,136,271) | |
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DWS Central Cash Management Government Fund, 4.2% (a) (b) | | | |
DWS ESG Liquidity Fund "Institutional", 4.47% (a) (b) | | | |
Total Cash Equivalents (Cost $103,200,442) | |
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Total Investment Portfolio (Cost $445,442,028) | | | |
Other Assets and Liabilities, Net | | | |
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A summary of the Fund’s transactions with affiliated Underlying DWS Funds during the year ended December 31, 2022 are as follows:
| | | Net Realized
Gain/
(Loss) ($) | Net Change in
Unrealized
Appreciation
(Depreciation) ($) | | Capital Gain
Distributions ($) | Number
of Shares
at
12/31/2022 | |
|
DWS Emerging Markets Fixed Income Fund (a) |
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DWS Enhanced Commodity Strategy Fund (a) |
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DWS Floating Rate Fund (a) |
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|
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DWS RREEF Global Infrastructure Fund (a) |
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DWS RREEF Global Real Estate Securities Fund (a) |
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DWS RREEF Real Estate Securities Fund (a) |
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|
DWS Central Cash Management Government Fund, 4.2% (a) (b) |
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The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP |
| | | Net Realized Gain/ (Loss) ($) | Net Change in Unrealized Appreciation (Depreciation) ($) | | Capital Gain Distributions ($) | Number of Shares at 12/31/2022 | |
DWS ESG Liquidity Fund, 4.47% (a) (b) |
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| Affiliated fund managed by DWS Investment Management Americas, Inc. |
| The rate shown is the annualized seven-day yield at period end. |
|
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 level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2022 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.
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP | |
Statement of
Assets and Liabilities
as of December 31, 2022
| |
Investments in non-affiliated Underlying Funds, at value (cost $88,136,271) | |
Investments in affiliated Underlying Funds, at value (cost $357,305,757) | |
Receivable for Fund shares sold | |
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Payable for Fund shares redeemed | |
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Other accrued expenses and payables | |
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Distributable earnings (loss) | |
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Net Asset Value, offering and redemption price per share ($46,226,514 ÷ 3,557,543 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | |
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Net Asset Value, offering and redemption price per share ($376,296,785 ÷ 28,995,732 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | |
for the year ended December 31, 2022
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Income distributions from affiliated Underlying Funds | |
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Record keeping fee (Class B) | |
Distribution service fee (Class B) | |
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Trustees' fees and expenses | |
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Realized and Unrealized Gain (Loss) | |
Net realized gain (loss) from: | |
Sale of affiliated Underlying Funds | |
Sale of non-affiliated Underlying Funds | |
Capital gain distributions from affiliated Underlying Funds | |
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Change in net unrealized appreciation (depreciation) on: | |
Affiliated Underlying Funds | |
Non-affiliated Underlying Funds | |
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Net increase (decrease) in net assets resulting from operations | |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP |
Statements of Changes in Net Assets
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Increase (Decrease) in Net Assets | | |
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Change in net unrealized appreciation
(depreciation) | | |
Net increase (decrease) in net assets resulting from operations | | |
Distributions to shareholders: | | |
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Proceeds from shares sold | | |
Reinvestment of distributions | | |
Payments for shares redeemed | | |
Net increase (decrease) in net assets from Class A share transactions | | |
| | |
Proceeds from shares sold | | |
Reinvestment of distributions | | |
Payments for shares redeemed | | |
Net increase (decrease) in net assets from Class B share transactions | | |
Increase (decrease) in net assets | | |
Net assets at beginning of period | | |
Net assets at end of period | | |
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Shares outstanding at beginning of period | | |
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Shares issued to shareholders in reinvestment of distributions | | |
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Net increase (decrease) in Class A shares | | |
Shares outstanding at end of period | | |
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Shares outstanding at beginning of period | | |
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Shares issued to shareholders in reinvestment of distributions | | |
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Net increase (decrease) in Class B shares | | |
Shares outstanding at end of period | | |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP | |
Financial Highlights
DWS Alternative Asset Allocation VIP — Class A |
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Net asset value, beginning of period | | | | | |
Income (loss) from investment operations: | | | | | |
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Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
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Net asset value, end of period | | | | | |
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Ratios to Average Net Assets and Supplemental Data |
Net assets, end of period ($ millions) | | | | | |
Ratio of expenses before expense reductions (%)d,e | | | | | |
Ratio of expenses after expense reductions (%)d,e | | | | | |
Ratio of net investment income (%) | | | | | |
Portfolio turnover rate (%) | | | | | |
| Based on average shares outstanding during the period. |
| Total return would have been lower if the Advisor had not reduced some Underlying DWS Funds’ expenses. |
| Total return would have been lower had certain expenses not been reduced. |
| 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. |
| Expense ratio does not reflect charges and fees 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 accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP |
DWS Alternative Asset Allocation VIP — Class B |
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Net asset value, beginning of period | | | | | |
Income (loss) from investment operations: | | | | | |
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Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
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Net asset value, end of period | | | | | |
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Ratios to Average Net Assets and Supplemental Data |
Net assets, end of period ($ millions) | | | | | |
Ratio of expenses before expense reductions (%)d,e | | | | | |
Ratio of expenses after expense reductions (%)d,e | | | | | |
Ratio of net investment income (%) | | | | | |
Portfolio turnover rate (%) | | | | | |
| Based on average shares outstanding during the period. |
| Total return would have been lower if the Advisor had not reduced some Underlying DWS Funds’ expenses. |
| Total return would have been lower had certain expenses not been reduced. |
| 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. |
| Expense ratio does not reflect charges and fees 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 accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP | |
Notes to Financial Statements
A.
Organization and Significant Accounting Policies
DWS Alternative Asset Allocation VIP (the “Fund”) is a diversified series of Deutsche 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 mainly invests in other affiliated DWS funds (i.e., mutual funds, exchange-traded funds and other pooled investment vehicles managed by DWS Investment Management Americas, Inc. or one of its affiliates, together the “Underlying DWS Funds”), non-affiliated exchange-traded funds (“Non-affiliated ETFs”), non-affiliated exchange-traded notes (“Non-affiliated ETNs”) and derivative investments. Non-affiliated ETFs, Non-affiliated ETNs and Underlying DWS Funds are collectively referred to as “Underlying Funds.” During the year ended December 31, 2022, the Fund primarily invested in Underlying DWS Funds and non-affiliated ETFs. 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). Class B shares are subject to Rule 12b-1 distribution fees under the 1940 Act and recordkeeping fees equal to an annual rate of up to 0.25% and of up to 0.15%, respectively, 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 12b-1 distribution fees 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 (“U.S. GAAP”) which require the use of management estimates. Actual results could differ from those estimates. The Fund qualifies as an investment company under Topic 946 of Accounting Standards Codification of U.S. GAAP. 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.
The Fund’s Board has designated DWS Investment Management Americas, Inc. (the “Advisor”) as the valuation designee for the Fund pursuant to Rule 2a-5 under the 1940 Act. The Advisor's Pricing Committee (the “Pricing Committee”) typically values securities using readily available market quotations or prices supplied by independent pricing services (which are considered fair values under Rule 2a-5). The Advisor has adopted fair valuation procedures that provide methodologies for fair valuing securities.
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 level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities.
Investments in mutual 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 and ETNs 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. ETFs and ETNs 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. ETFs and ETNs securities are generally categorized as Level 1.
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.
| Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP |
The Fund has reviewed the tax positions for the open tax years as of December 31, 2022 and has determined that no provision for income tax and/or uncertain tax positions 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 from net investment income of the Fund, if any, are 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 and the realized tax character on distributions from certain securities. 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.
At December 31, 2022, the Fund's components of distributable earnings (accumulated losses) on a net tax basis were as follows:
Undistributed ordinary income* | |
Undistributed long-term capital gains | |
Net unrealized appreciation (depreciation) on investments | |
At December 31, 2022, the aggregate cost of investments for federal income tax purposes was $450,196,930. The net unrealized depreciation for all investments based on tax cost was $27,518,255. This consisted of aggregate gross unrealized appreciation for all investments for which there was an excess of value over tax cost of $13,398,366 and aggregate gross unrealized depreciation for all investments for which there was an excess of tax cost over value of $40,916,621.
In addition, the tax character of distributions paid to shareholders by the Fund is summarized as follows:
| |
| | |
Distributions from ordinary income* | | |
Distributions from long-term capital gains | | |
| For tax purposes, short-term capital gain distributions are considered ordinary income distributions. |
Expenses. Expenses of the Trust arising in connection with a specific fund are allocated to that fund. Other Trust expenses which cannot be directly attributed to a fund are apportioned among the funds in the Trust based upon the relative net assets or other appropriate measures.
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 year ended December 31, 2022, purchases and sales of affiliated Underlying Funds (excluding short-term investments) aggregated $40,768,962 and $62,876,537, respectively. Purchases and sales of Non-affiliated ETFs aggregated $4,252,585 and $45,622,849, respectively.
Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP | |
Management Agreement. Under the Investment Management Agreement with DWS Investment Management Americas, Inc. (“DIMA” or the “Advisor”), an indirect, wholly owned subsidiary of DWS Group GmbH & Co. KGaA (“DWS Group”), 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 subadvisor.
RREEF America L.L.C. (“RREEF”), an indirect, wholly owned subsidiary of DWS Group, acts as an investment subadvisor to the Fund. As an investment subadvisor to the Fund, 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 Funds.
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:
On assets invested in exchange-traded funds and mutual funds | |
On assets invested in all other assets not considered exchange-traded funds and mutual funds | |
Accordingly, for the year ended December 31, 2022, the fee pursuant to the Investment Management Agreement was equivalent to an annual rate (exclusive of any applicable waivers/reimbursements) of 0.10% of the Fund’s average daily net assets.
In addition, the Advisor will receive management fees from managing the Underlying DWS Funds in which the Fund invests.
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 December 31, 2022, the Fund held approximately 6% of DWS Central Cash Management Government Fund, 32% of DWS Emerging Markets Fixed Income Fund, 11% of DWS ESG Liquidity Fund, 30% of DWS Floating Rate Fund, 16% of DWS Global Macro Fund and 5% of DWS RREEF Global Infrastructure Fund.
For the period from January 1, 2022 through September 30, 2022, the Advisor had contractually agreed to waive its fees and/or reimburse Fund expenses to the extent necessary to maintain the total annual operating expenses (including indirect expenses of Underlying Funds and excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of each class as follows:
Effective October 1, 2022 through September 30, 2023, the Advisor has contractually agreed to waive its fees and/or reimburse Fund expenses to the extent necessary to maintain the total annual operating expenses (including indirect expenses of Underlying Funds and excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of each class as follows:
The Fund indirectly bears its proportionate share of fees and expenses, including the management fee paid to DIMA or other investment advisor, 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 the Advisor an annual fee (“Administration Fee”) of 0.097% of the Fund’s average daily net assets, computed and accrued daily and payable monthly. For the year ended December 31, 2022, the Administration Fee was $436,592, of which $34,975 is unpaid.
Service Provider Fees. DWS Service Company (“DSC”), 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
| Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP |
agreement between DSC and SS&C GIDS, Inc. (“SS&C”) (name changed from DST Systems, Inc. effective January 1, 2023), DSC has delegated certain transfer agent, dividend-paying agent and shareholder service agent functions to SS&C. DSC compensates SS&C out of the shareholder servicing fee it receives from the Fund. For the year ended December 31, 2022, the amounts charged to the Fund by DSC were as follows:
| | Unpaid at
December 31, 2022 |
| | |
| | |
| | |
Distribution Service Agreement. Under the Fund’s Class B 12b-1 plan, DWS Distributors, Inc. (“DDI”) received a fee (“Distribution Service Fee”) of up to 0.25% of the average daily net assets of Class B shares. For the year ended December 31, 2022, the Distribution Service Fee aggregated $1,009,762, of which $80,320 is unpaid.
Other Service Fees. Under an agreement with the Fund, DIMA is compensated for providing regulatory filing services to the Fund. For the year ended December 31, 2022, the amount charged to the Fund by DIMA included in the Statement of Operations under “Reports to shareholders” aggregated $1,132, of which $30 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 Vehicles. The Fund may invest uninvested cash balances in DWS Central Cash Management Government Fund and DWS ESG Liquidity Fund, affiliated money market funds which are managed by the Advisor. Each affiliated money market fund is managed in accordance with Rule 2a-7 under the 1940 Act, which governs the quality, maturity, diversity and liquidity of instruments in which a money market fund may invest. DWS Central Cash Management Government Fund seeks to maintain a stable net asset value, and DWS ESG Liquidity Fund maintains a floating net asset value. The Fund indirectly bears its proportionate share of the expenses of each affiliated money market fund in which it invests. DWS Central Cash Management Government Fund does not pay the Advisor an investment management fee.
At December 31, 2022, two participating insurance companies were owners of record of 10% or more of the total outstanding Class A shares of the Fund, each owning 77% and 19%, respectively. Two participating insurance companies were the owners of record of 10% or more of the total outstanding Class B shares of the Fund, each owning 81% and 11%, respectively.
Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP | |
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Deutsche DWS Variable Series II and Shareholders of DWS Alternative Asset Allocation VIP:
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities of DWS Alternative Asset Allocation VIP (the “Fund”) (one of the funds constituting Deutsche DWS Variable Series II) (the “Trust”), including the investment portfolio, as of December 31, 2022, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund (one of the funds constituting Deutsche DWS Variable Series II) at December 31, 2022, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and its financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Trust is not required to have, nor were we engaged to perform, an audit of the Trust’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2022, by correspondence with the custodian, brokers and others; when replies were not received from brokers and others, we performed other auditing procedures. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the auditor of one or more investment companies in the DWS family of funds since at least 1979, but we are unable to determine the specific year.
Boston, Massachusetts
February 13, 2023
| Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP |
Information About Your Fund’s Expenses (Unaudited)
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, 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. The examples in the table are based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2022 to December 31, 2022).
The tables illustrate your Fund’s expenses in two ways:
—
Actual Fund Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Fund using the Fund’s actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the “Expenses Paid per $1,000” line under the share class you hold.
—
Hypothetical 5% Fund Return. This helps you to compare your Fund’s ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund’s actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The “Expenses Paid per $1,000” line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
Expenses and Value of a $1,000 Investment for the six months ended December 31, 2022
| | |
Beginning Account Value 7/1/22 | | |
Ending Account Value 12/31/22 | | |
Expenses Paid per $1,000* | | |
Hypothetical 5% Fund Return | | |
Beginning Account Value 7/1/22 | | |
Ending Account Value 12/31/22 | | |
Expenses Paid per $1,000* | | |
| 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 184 (the number of days in the most recent six-month period), then divided by 365. |
Annualized Expense Ratios** | | |
Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP | | |
| 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.
For an analysis of the fees associated with an investment in the Fund or similar funds, please refer to the current and hypothetical expense calculators for Variable Insurance Products which can be found at dws.com/calculators.
Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP | |
Tax Information (Unaudited)
The Fund paid distributions of $0.01 per share from net long-term capital gains during its year ended December 31, 2022.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates $4,192,000 as capital gain dividends for its year ended December 31, 2022.
For corporate shareholders, 2% of the ordinary dividends (i.e., income dividends plus short-term capital gains) paid during the Fund’s fiscal year ended December 31, 2022, qualified for the dividends received deduction.
Please consult a tax advisor if you have questions about federal or state income tax laws, or on how to prepare your tax returns. If you have specific questions about your account, please contact your insurance provider.
Proxy Voting
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 most recent 12-month period ended June 30 are available on our Web site — dws.com/en-us/resources/proxy-voting — or on the SEC’s Web site — 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.
| Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP |
Advisory Agreement Board Considerations and Fee Evaluation
The Board of Trustees (hereinafter referred to as the “Board” or “Trustees”) approved the renewal of DWS Alternative Asset Allocation VIP's (the “Fund”) investment management agreement (the “Agreement”) with DWS Investment Management Americas, Inc. (“DIMA”) and sub-advisory agreement (the “Sub-Advisory Agreement” and together with the Agreement, the “Agreements”) between DIMA and RREEF America L.L.C. (“RREEF”), an affiliate of DIMA, in September 2022.
In terms of the process that the Board followed prior to approving the Agreements, shareholders should know that:
—
During the entire process, all of the Fund's Trustees were independent of DIMA and its affiliates (the “Independent Trustees”).
—
The Board met frequently during the past year to discuss fund matters and dedicated a substantial amount of time to contract review matters. Over the course of several months, the Board reviewed extensive materials received from DIMA, independent third parties and independent counsel. These materials included an analysis of the Fund’s performance, fees and expenses, and profitability from a fee consultant retained by the Fund’s Independent Trustees (the “Fee Consultant”).
—
The Board also received extensive information throughout the year regarding performance of the Fund.
—
The Independent Trustees regularly met privately with counsel to discuss contract review and other matters. In addition, the Independent Trustees were advised by the Fee Consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the Fee Consultant in connection with their deliberations.
—
In connection with reviewing the Agreements, the Board also reviewed the terms of the Fund's Rule 12b-1 plan, distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
In connection with the contract review process, the Board considered the factors discussed below, among others. The Board also considered that DIMA has managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DIMA managed the Fund. DIMA and RREEF are part of DWS Group GmbH & Co. KGaA (“DWS Group”). DWS Group is a global asset management business that offers a wide range of investing expertise and resources, including research capabilities in many countries throughout the world. In 2018, approximately 20% of DWS Group’s shares were sold in an initial public offering, with Deutsche Bank AG owning the remaining shares.
As part of the contract review process, the Board carefully considered the fees and expenses of each DWS fund overseen by the Board in light of the fund’s performance. In many cases, this led to the negotiation and implementation of expense caps.
While shareholders may focus primarily on fund performance and fees, the Fund’s Board considers these and many other factors, including the quality and integrity of DIMA’s and RREEF's personnel and administrative support services provided by DIMA, such as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreements, including the scope of advisory services provided under the Agreements. The Board noted that, under the Agreements, DIMA and RREEF provide portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DIMA provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel and the resources made available to such personnel. The Board also considered the risks to DIMA in sponsoring or managing the Fund, including financial, operational and reputational risks, the potential economic impact to DIMA from such risks and DIMA’s approach to addressing such risks. Throughout the course of the year, the Board also received information regarding DIMA’s oversight of fund sub-advisors, including RREEF. The Board reviewed the Fund’s performance over short-term and long-term periods and compared those returns to various agreed-upon performance measures, including market index(es) and a peer universe compiled using information supplied by Morningstar Direct (“Morningstar”), an independent fund data service. The Board also noted that it has put into place a process of identifying “Funds in Review” (e.g., funds performing poorly relative to a peer universe), and receives additional reporting from DIMA regarding such funds and, where appropriate, DIMA’s plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board
Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP | |
noted that, for the one-, three- and five-year periods ended December 31, 2021, the Fund’s performance (Class A shares) was in the 1st quartile of the applicable Morningstar universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has underperformed its benchmark in the one-, three- and five-year periods ended December 31, 2021.
Fees and Expenses. The Board considered the Fund’s investment management fee schedule, sub-advisory fee schedule, operating expenses and total expense ratios, and comparative information provided by Broadridge Financial Solutions, Inc. (“Broadridge”) and the Fee Consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include a 0.097% fee paid to DIMA under the Fund’s administrative services agreement, were equal to the median of the applicable Broadridge peer group (based on Broadridge data provided as of December 31, 2021). With respect to any sub-advisory fee paid to RREEF, the Board noted that the fee is paid by DIMA out of its fee and not directly by the Fund. The Board noted that the Fund’s Class A shares total (net) operating expenses were expected to be lower than the median (1st quartile) of the applicable Broadridge expense universe (based on Broadridge data provided as of December 31, 2021), and analyzing Broadridge expense universe Class A (net) expenses less any applicable 12b-1 fees, but inclusive of acquired fund fees and expenses) (“Broadridge Universe Expenses”). The Board also reviewed data comparing each other operational share class’s total (net) operating expenses to the applicable Broadridge Universe Expenses. The Board noted that the expense limitations agreed to by DIMA were expected to help the Fund’s total (net) operating expenses remain competitive. The Board considered the Fund’s management fee rate as compared to fees charged by DIMA to comparable DWS U.S. registered funds (“DWS Funds”) and considered differences between the Fund and the comparable DWS Funds. The information requested by the Board as part of its review of fees and expenses also included information about institutional accounts (including any sub-advised funds and accounts) and funds offered primarily to European investors (“DWS Europe Funds”) managed by DWS Group. The Board noted that DIMA indicated that DWS Group does not manage any institutional accounts or DWS Europe Funds comparable to the Fund.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DIMA and RREEF.
Profitability. The Board reviewed detailed information regarding revenues received by DIMA under the Agreement. The Board considered the estimated costs to DIMA, and pre-tax profits realized by DIMA, from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DIMA and its affiliates with respect to all fund services in totality and by fund. The Board and the Fee Consultant reviewed DIMA’s methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DIMA in connection with the management of the Fund were not unreasonable. The Board also reviewed certain publicly available information regarding the profitability of certain similar investment management firms. The Board noted that, while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DIMA and its affiliates’ overall profitability with respect to the DWS Funds (after taking into account distribution and other services provided to the funds by DIMA and its affiliates) was lower than the overall profitability levels of most comparable firms for which such data was available.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. In this regard, the Board observed that while the Fund’s current investment management fee schedule does not include breakpoints, the Fund’s fee schedule represents an appropriate sharing between the Fund and DIMA of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DIMA and Its Affiliates. The Board also considered the character and amount of other incidental or “fall-out” benefits received by DIMA and its affiliates, including any fees received by DIMA for administrative services provided to the Fund, any fees received by an affiliate of DIMA for transfer agency services provided to the Fund and any fees received by an affiliate of DIMA for distribution services. The Board also considered benefits to DIMA related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities. In addition, the Board considered the incidental public relations benefits to DIMA related to DWS Funds advertising and cross-selling opportunities among DIMA products and services. The Board considered these benefits in reaching its conclusion that the Fund’s management fees were reasonable.
| Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP |
Compliance. The Board considered the significant attention and resources dedicated by DIMA to its compliance processes in recent years. The Board noted in particular (i) the experience, seniority and time commitment of the individuals serving as DIMA’s and the Fund’s chief compliance officers and (ii) the substantial commitment of resources by DIMA and its affiliates to compliance matters, including the retention of compliance personnel.
Based on all of the information considered and the conclusions reached, the Board determined that the continuation of the Agreements is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and counsel present. It is possible that individual Independent Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreements.
Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP | |
Board Members and Officers
The following table presents certain information regarding the Board Members and Officers of the Trust/Corporation. Each Board Member’s year of birth is set forth in parentheses after his or her name. Unless otherwise noted, (i) each Board Member has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity; and (ii) the address of each Independent Board Member is c/o Keith R. Fox, DWS Funds Board Chair, c/o Thomas R. Hiller, Ropes & Gray LLP, Prudential Tower, 800 Boylston Street, Boston, MA 02199-3600. Except as otherwise noted below, the term of office for each Board Member is until the election and qualification of a successor, or until such Board Member sooner dies, resigns, is removed or as otherwise provided in the governing documents of the Trust/Corporation. Because the Fund does not hold an annual meeting of shareholders, each Board Member will hold office for an indeterminate period.
The Board Members may also serve in similar capacities with other funds in the fund complex. The number of funds in the DWS fund complex shown in the table below includes all registered open- and closed-end funds (including all of their portfolios) advised by the Advisor and any registered funds that have an investment advisor that is an affiliated person of the Advisor.
Independent Board Members/Independent Advisory Board Members
Name, Year of
Birth, Position
with the Trust/
Corporation
and Length of
| Business Experience and Directorships
During the Past Five Years | Number of
Funds in
DWS Fund
Complex
Overseen | Other
Directorships
Held by Board
Member |
Keith R. Fox, CFA (1954) Chairperson since 2017, and Board Member since 1996 | Managing General Partner, Exeter Capital Partners (a series of private investment funds) (since 1986). Directorships: Progressive International Corporation (kitchen goods designer and distributor); former Chairman, National Association of Small Business Investment Companies; Former Directorships: ICI Mutual Insurance Company; BoxTop Media Inc. (advertising); Sun Capital Advisers Trust (mutual funds) | | |
John W. Ballantine (1946) Board Member since 1999 | Retired; formerly, Executive Vice President and Chief Risk Management Officer, First Chicago NBD Corporation/The First National Bank of Chicago (1996–1998); Executive Vice President and Head of International Banking (1995–1996); Not-for-Profit Directorships: Window to the World Communications (public media); Life Director of Harris Theater for Music and Dance (Chicago); Life Director of Hubbard Street Dance Chicago; Former Directorships: Director and Chairman of the Board, Healthways, Inc.2 (population wellbeing and wellness services) (2003–2014); Stockwell Capital Investments PLC (private equity); Enron Corporation; FNB Corporation; Tokheim Corporation; First Oak Brook Bancshares, Inc.; Oak Brook Bank; Portland General Electric2 (utility company (2003–2021); and Prisma Energy International; Former Not-for-Profit Directorships: Public Radio International; Palm Beach Civic Assn. | | |
Dawn-Marie Driscoll (1946) Board Member since 1987 | Advisory Board and former Executive Fellow, Hoffman Center for Business Ethics, Bentley University; formerly: Partner, Palmer & Dodge (law firm) (1988–1990); Vice President of Corporate Affairs and General Counsel, Filene’s (retail) (1978–1988); Directorships: Trustee and former Chairman of the Board, Southwest Florida Community Foundation (charitable organization); Former Directorships: ICI Mutual Insurance Company (2007–2015); Sun Capital Advisers Trust (mutual funds) (2007–2012), Investment Company Institute (audit, executive, nominating committees) and Independent Directors Council (governance, executive committees) | | |
Richard J. Herring (1946) Board Member since 1990 | Jacob Safra Professor of International Banking and Professor of Finance, The Wharton School, University of Pennsylvania (since July 1972); formerly: Director, The Wharton Financial Institutions Center (1994–2020); Vice Dean and Director, Wharton Undergraduate Division (1995–2000) and Director, The Lauder Institute of International Management Studies (2000–2006); Member FDIC Systemic Risk Advisory Committee since 2011, member Systemic Risk Council since 2012 and member of the Advisory Board at the Yale Program on Financial Stability since 2013; Former Directorships: Co-Chair of the Shadow Financial Regulatory Committee (2003–2015), Executive Director of The Financial Economists Roundtable (2008–2015), Director of The Thai Capital Fund (2007–2013), Director of The Aberdeen Singapore Fund (2007–2018), Director, The Aberdeen Japan Fund (2007-2021) and Nonexecutive Director of Barclays Bank DE (2010–2018) | | |
| Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP |
Name, Year of Birth, Position with the Trust/ Corporation and Length of Time Served1 | Business Experience and Directorships During the Past Five Years | Number of Funds in DWS Fund Complex Overseen | Other Directorships Held by Board Member |
Chad D. Perry (1972) Board Member or Advisory | Executive Vice President, General Counsel and Secretary, Tanger Factory Outlet Centers, Inc.2 (since 2011); formerly Executive Vice President and Deputy General Counsel, LPL Financial Holdings Inc.2 (2006–2011); Senior Corporate Counsel, EMC Corporation (2005–2006); Associate, Ropes & Gray LLP (1997–2005) | | Director - Great Elm Capital Corp. (business development company) (since 2022) |
Rebecca W. Rimel (1951) Board Member since 1995 | Director, The Bridgespan Group (nonprofit organization) (since October 2020); formerly: Executive Vice President, The Glenmede Trust Company (investment trust and wealth management) (1983–2004); Board Member, Investor Education (charitable organization) (2004–2005); Former Directorships: Trustee, Executive Committee, Philadelphia Chamber of Commerce (2001–2007); Director, Viasys Health Care2 (January 2007–June 2007); Trustee, Thomas Jefferson Foundation (charitable organization) (1994–2012); President, Chief Executive Officer and Director (1994–2020) and Senior Advisor (2020-2021), The Pew Charitable Trusts (charitable organization); Director, BioTelemetry Inc.2 (acquired by Royal Philips in 2021) (healthcare) (2009–2021); Director, Becton Dickinson and Company2 (medical technology company) (2012-2022) | | |
Catherine Schrand (1964) Board Member since 2021* | Celia Z. Moh Professor of Accounting (since 2016) and Professor of Accounting (since 1994), The Wharton School, University of Pennsylvania; formerly Vice Dean, Wharton Doctoral Programs (2016–2019) | | |
William N. Searcy, Jr. (1946) Board Member since 1993 | Private investor since October 2003; formerly: Pension & Savings Trust Officer, Sprint Corporation2 (telecommunications) (November 1989–September 2003); Former Directorships: Trustee, Sun Capital Advisers Trust (mutual funds) (1998–2012) | | |
Officers5
Name, Year of Birth, Position
with the Trust/Corporation
and Length of Time Served6 | Business Experience and Directorships During the
Past Five Years |
Hepsen Uzcan7 (1974) President and Chief Executive Officer, 2017–present | Fund Administration (Head since 2017), DWS; Secretary, DWS USA Corporation (2018–present); Assistant Secretary, DWS Distributors, Inc. (2018–present); Director and Vice President, DWS Service Company (2018–present); Assistant Secretary, DWS Investment Management Americas, Inc. (2018–present); Director and President, DB Investment Managers, Inc. (2018–present); President and Chief Executive Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2017–present); formerly: Vice President for the Deutsche funds (2016–2017); Assistant Secretary for the DWS funds (2013–2019); Assistant Secretary, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2013–2020); Directorships: Interested Director, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (since June 25, 2020); ICI Mutual Insurance Company (since October 16, 2020); and Episcopalian Charities of New York (2018–present) |
John Millette8 (1962) Vice President and Secretary, 1999–present | Legal (Associate General Counsel), DWS; Chief Legal Officer, DWS Investment Management Americas, Inc. (2015–present); Director and Vice President, DWS Trust Company (2016–present); Secretary, DBX ETF Trust (2020–present); Vice President, DBX Advisors LLC (2021–present); Secretary, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. 2011–present); formerly: Secretary, Deutsche Investment Management Americas Inc. (2015–2017); and Assistant Secretary, DBX ETF Trust (2019–2020) |
Ciara Crawford9 (1984) Assistant Secretary, 2019–present | Fund Administration (Specialist), DWS (2015–present); formerly, Legal Assistant at Accelerated Tax Solutions |
Diane Kenneally8 (1966) Chief Financial Officer and Treasurer, 2018–present | Fund Administration Treasurer's Office (Co-Head since 2018), DWS; Treasurer, Chief Financial Officer and Controller, DBX ETF Trust (2019–present); Treasurer and Chief Financial Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2018–present); formerly: Assistant Treasurer for the DWS funds (2007–2018) |
Paul Antosca8 (1957) Assistant Treasurer, 2007–present | Fund Administration Tax (Head), DWS; and Assistant Treasurer, DBX ETF Trust (2019–present) |
Sheila Cadogan8 (1966) Assistant Treasurer, 2017–present | Fund Administration Treasurer's Office (Co-Head since 2018), DWS; Director and Vice President, DWS Trust Company (2018–present); Assistant Treasurer, DBX ETF Trust (2019–present); Assistant Treasurer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2018–present) |
Scott D. Hogan8 (1970) Chief Compliance Officer, 2016–present | Anti-Financial Crime & Compliance US (Senior Team Lead), DWS; Chief Compliance Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2016–present) |
Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP | |
Name, Year of Birth, Position with the Trust/Corporation and Length of Time Served6 | Business Experience and Directorships During the Past Five Years |
Caroline Pearson8 (1962) Chief Legal Officer, 2010–present | Legal (Senior Team Lead), DWS; Assistant Secretary, DBX ETF Trust (2020–present); Chief Legal Officer, DBX Advisors LLC (2020–present); Chief Legal Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2012–present); formerly: Secretary, Deutsche AM Distributors, Inc. (2002–2017); Secretary, Deutsche AM Service Company (2010–2017); and Chief Legal Officer, DBX Strategic Advisors LLC (2020–2021) |
Christian Rijs7 (1980) Anti-Money Laundering
Compliance Officer,
since October 6, 2021 | Senior Team Lead Anti-Financial Crime and Compliance, DWS; AML Officer, DWS Trust Company (since November 2, 2021); AML Officer, DBX ETF Trust (since October 21, 2021); AML Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (since November 12, 2021); formerly: DWS UK & Ireland Head of Anti-Financial Crime and MLRO |
| Ms. Schrand was an Advisory Board Member for certain funds in the DWS Fund Complex for the period from November 18, 2021 to December 31, 2022 and was elected as a Full Board Member as of January 1, 2023 for all funds in the DWS Fund Complex. |
| The length of time served represents the year in which the Board Member joined the board of one or more DWS funds currently overseen by the Board. |
| A publicly held company with securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. |
| Mr. Perry is an Advisory Board Member of Deutsche DWS Asset Allocation Trust, Deutsche DWS Equity 500 Index Portfolio, Deutsche DWS Global/International Fund, Inc., Deutsche DWS Income Trust, Deutsche DWS Institutional Funds, Deutsche DWS International Fund, Inc., Deutsche DWS Investment Trust, Deutsche DWS Investments VIT Funds, Deutsche DWS Money Market Trust, Deutsche DWS Municipal Trust, Deutsche DWS Portfolio Trust, Deutsche DWS Securities Trust, Deutsche DWS Tax Free Trust, Deutsche DWS Variable Series I and Government Cash Management Portfolio. Mr. Perry is a Board Member of each other Trust. |
| Mr. Perry oversees 21 funds in the DWS Fund Complex as a Board Member of various Trusts. Mr. Perry is an Advisory Board Member of various Trusts/Corporations comprised of 48 funds in the DWS Fund Complex. |
| As a result of their respective positions held with the Advisor or its affiliates, these individuals are considered “interested persons” of the Advisor within the meaning of the 1940 Act. Interested persons receive no compensation from the Fund. |
| The length of time served represents the year in which the officer was first elected in such capacity for one or more DWS funds. |
| Address: 875 Third Avenue, New York, NY 10022. |
| Address: 100 Summer Street, Boston, MA 02110. |
| Address: 5201 Gate Parkway, Jacksonville, FL 32256. |
Certain officers hold similar positions for other investment companies for which DIMA or an affiliate serves as the Advisor.
The Fund’s Statement of Additional Information (“SAI”) includes additional information about the Board Members. The SAI is available, without charge, upon request. If you would like to request a copy of the SAI, you may do so by calling the following toll-free number: (800) 728-3337.
| Deutsche DWS Variable Series II — DWS Alternative Asset Allocation VIP |
VS2AAA-2 (R-025824-12 2/23)
December 31, 2022
Annual Report
Deutsche DWS Variable Series II
Contents
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.
Stocks may decline in value. The Fund will be managed using the CROCI® Investment Process which is based on portfolio management’s belief that, over time, stocks which display more favorable financial metrics (for example, the CROCI® Economic P/E Ratio) as generated by this process may outperform stocks which display less favorable metrics. This premise may not prove to be correct and prospective investors should evaluate this assumption prior to investing in the Fund. The Fund may lend securities to approved institutions. Please read the prospectus for details.
War, terrorism, sanctions, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and, in the future, may lead to significant disruptions in U.S. and world economies and markets, which may lead to increased market volatility and may have significant adverse effects on the Fund and its investments.
The brand DWS represents DWS Group GmbH & Co. KGaA and any of its subsidiaries such as DWS Distributors, Inc. which offers investment products or DWS Investment Management Americas, Inc. and RREEF America L.L.C. which offer advisory services.
DWS Distributors, Inc., 222 South Riverside Plaza, Chicago, IL 60606, (800) 621-1148
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
| Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP |
Performance SummaryDecember 31, 2022 (Unaudited)
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 does 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. 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, 2022 are 0.78% 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.
Generally accepted accounting principles require adjustments to be made to the net assets of the Fund at period end for financial reporting purposes only, and as such, the total return based on the unadjusted net asset value per share may differ from the total return reported in the financial highlights.
Growth of an Assumed $10,000 Investment
Yearly periods ended December 31
Russell 1000® Value Index is an unmanaged market capitalization-weighted index of value-oriented stocks of the largest U.S. domiciled companies that are included in the Russell 1000 Index. Value-oriented stocks tend to have lower price-to-book ratios and lower forecasted growth values. 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.
Prior to May 1, 2017, the Fund operated with a different investment strategy. Prior to October 3, 2016, the Fund had a team that operated with a different investment strategy. Performance would have been different if the Fund’s current strategy had been in effect.
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Average annual total return | | | | |
Russell 1000® Value Index | | | | | |
Average annual total return | | | | |
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Average annual total return | | | | |
Russell 1000® Value Index | | | | | |
Average annual total return | | | | |
The growth of $10,000 is cumulative. |
Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP | |
Management Summary December 31, 2022 (Unaudited)
The Fund returned –15.40% (Class A shares, unadjusted for contract charges) in 2022 and underperformed the –7.54% return of its benchmark, the Russell 1000® Value Index.
The U.S. equity market suffered weak performance in 2022. Rising inflation prompted the U.S. Federal Reserve to raise interest rates aggressively, weighing on investor sentiment and drawing money out of stocks and into bonds. In addition, the rapid increase in the fed funds rate — from a range of 0.0%–0.25% at the start of 2022 to 4.25%–4.50% at year-end — fostered concerns that economic growth and corporate earnings could turn lower in 2023. Russia’s invasion of Ukraine also weighed on performance, as did a slowdown in China’s economy.
The Fund’s sector allocations were the primary reason for its underperformance. The portfolio was positioned with more of a growth orientation than the value benchmark, which detracted given that growth stocks lagged considerably. A large overweight in the information technology sector, the market’s worst-performing sector, cost the Fund over four percentage points of relative performance versus the index. The Fund was also hurt by an overweight in the consumer discretionary sector, where many stocks underperformed on expectations for slowing economic growth. A sizable underweight in energy was an additional detractor. Energy stocks produced a gain of approximately 66% and outperformed the benchmark by more than 70 percentage points on the strength of rising oil and natural gas prices. A zero weighting in Chevron Corp. and an underweight in Exxon Mobil Corp. were particularly large detractors.
Stock selection was also a net detractor, with the weakest results occurring in financials and communication services. Capital One Financial Corp. and Synchrony Financial, both of which were hurt by worries that slowing economic growth would pressure their credit card businesses, were the leading detractors in financials. Meta Platforms, Inc.* (formerly Facebook) was the largest detractor in both the communication services sector and the Fund as a whole. The shares sold off sharply after it became evident that the effects of Apple’s iOS privacy changes were more severe than expected. Concerns about weaker internet advertising and questions about Meta Platform’s shifting business strategy were additional headwinds for the stock. The prospect of slower ad spending also weighed on returns for our position in Alphabet, Inc. (parent of Google).
Stock selection in information technology contributed positively. The communications software company Amdocs Ltd., which was boosted by higher enterprise spending on 5G and cloud initiatives, was the leading contributor. Underweights or zero weightings in a number of the sector’s weakest performers was a further plus. Selection in healthcare also contributed, led by holdings in large-cap pharmaceutical stocks seen as being less vulnerable to economic trends. Bristol-Myers Squibb Co. and AbbVie, Inc. were key contributors in this regard. A position in the biotechnology company Regeneron Pharmaceuticals, Inc., which was boosted by high expectations regarding the trials for its retinal disease treatment, was another top contributor in healthcare.
U.S. equities suffered poor absolute returns and relative underperformance in 2022, and the outlook remained very murky at the close of the period. Still, valuations have fallen considerably this year as a large amount of negative news has been factored into market prices. We think this could set the stage for potential positive surprises in 2023 if central banks begin to slow their pace of monetary tightening or the downturn in economic growth proves smaller than expected. For our part, we continue to use a disciplined, systematic approach to stock selection. We believe focusing on individual stock picking, rather than trying to construct a portfolio on the basis of short-term developments, is the most effective way to add value over time.
Di Kumble, CFA, Senior Portfolio Manager Equity
John Moody, Portfolio Manager Equity
Portfolio Managers
The views expressed reflect those of the portfolio management team only through the end of the period of the report as stated on the cover. The management team’s views are subject to change at any time based on market and other conditions and should not be construed as a recommendation. Past performance is no guarantee of future results. Current and future portfolio holdings are subject to risk.
| Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP |
Terms to Know
Russell 1000 Value Index is an unmanaged market capitalization-weighted index of value-oriented stocks of the largest U.S. domiciled companies that are included in the Russell 1000® Index. Value-oriented stocks tend to have lower price-to-book ratios and lower forecasted growth values. 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.
Stock selection refers to the performance of the Fund’s holdings in a given sector relative to the sector as a whole.
Contribution and detraction incorporate both an investment’s total return and its weighting in the Fund.
Overweight means that a fund holds a higher weighting in a given sector or security than its benchmark index. Underweight means that a fund holds a lower weighting.
*
Not held at December 31, 2022.
Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP | |
Portfolio Summary(Unaudited)
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | | |
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Sector Diversification
(As a % of Investment Portfolio excluding Securities Lending Collateral and Cash Equivalents) | | |
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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 posted on dws.com, and is available free of charge by contacting your financial intermediary, or if you are a direct investor, by calling (800) 728-3337. In addition, the portfolio holdings listing is filed with the SEC on the Fund’s Form N-PORT and will be available on the SEC’s Web site at sec.gov. Additional portfolio holdings for the Fund are also posted on dws.com from time to time. Please see the Fund’s current prospectus for more information.
| Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP |
Investment Portfolioas of December 31, 2022
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Communication Services 8.1% | |
Interactive Media & Services 4.6% | |
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Consumer Discretionary 10.3% | |
Hotels, Restaurants & Leisure 1.1% | |
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Textiles, Apparel & Luxury Goods 1.4% | |
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Food & Staples Retailing 0.5% | |
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Oil, Gas & Consumable Fuels | |
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Pioneer Natural Resources Co. | | | |
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Capital One Financial Corp. | | | |
Discover Financial Services | | | |
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Regeneron Pharmaceuticals, Inc.* | | | |
Vertex Pharmaceuticals, Inc.* | | | |
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Health Care Equipment & Supplies 2.9% | |
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Health Care Providers & Services 2.2% | |
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Laboratory Corp. of America Holdings | | | |
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Air Freight & Logistics 2.8% | |
C.H. Robinson Worldwide, Inc. | | | |
Expeditors International of Washington, Inc. | | | |
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Professional Services 1.8% | |
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Robert Half International, Inc. | | | |
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The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP | |
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Information Technology 27.6% | |
Communications Equipment 2.6% | |
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Electronic Equipment, Instruments & Components 1.6% | |
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Cognizant Technology Solutions Corp. "A" | | | |
Fidelity National Information Services, Inc. | | | |
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SS&C Technologies Holdings, Inc. | | | |
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Semiconductors & Semiconductor Equipment 5.8% | |
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Technology Hardware, Storage & Peripherals 3.9% | |
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Hewlett Packard Enterprise Co. | | | |
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LyondellBasell Industries NV "A" | | | |
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Containers & Packaging 0.3% | |
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Total Common Stocks (Cost $121,153,793) | |
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DWS Central Cash Management Government Fund, 4.2% (a) (Cost $1,132,870) | | | |
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Total Investment Portfolio (Cost $122,286,663) | | | |
Other Assets and Liabilities, Net | | | |
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A summary of the Fund’s transactions with affiliated investments during the year ended December 31, 2022 are as follows:
| | | Net Realized
Gain/
(Loss) ($) | Net Change in
Unrealized
Appreciation
(Depreciation) ($) | | Capital Gain
Distributions ($) | Number
of Shares
at
12/31/2022 | |
Securities Lending Collateral 0.0% |
DWS Government & Agency Securities Portfolio "DWS Government Cash Institutional Shares", 4.07% (a) (b) |
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DWS Central Cash Management Government Fund, 4.2% (a) |
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| Non-income producing security. |
| Affiliated fund managed by DWS Investment Management Americas, Inc. The rate shown is the annualized seven-day yield at period end. |
| Represents cash collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates. |
| Represents the net increase (purchase cost) or decrease (sales proceeds) in the amount invested in cash collateral for the year ended December 31, 2022. |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP |
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 level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2022 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.
| See Investment Portfolio for additional detailed categorizations. |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP | |
Statement of
Assets and Liabilities
as of December 31, 2022
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Investments in non-affiliated securities, at value (cost $121,153,793) | |
Investment in DWS Central Cash Management Government Fund (cost $1,132,870) | |
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Receivable for Fund shares sold | |
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Payable for Fund shares redeemed | |
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Other accrued expenses and payables | |
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Distributable earnings (loss) | |
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Net Asset Value, offering and redemption price per share ($116,471,284 ÷ 8,866,757 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | |
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Net Asset Value, offering and redemption price per share ($2,460,715 ÷ 186,623 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | |
for the year ended December 31, 2022
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Income distributions — DWS Central Cash Management Government Fund | |
Securities lending income, net of borrower rebates | |
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Record keeping fee (Class B) | |
Distribution service fee (Class B) | |
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Trustees' fees and expenses | |
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Total expenses before expense reductions | |
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Total expenses after expense reductions | |
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Realized and Unrealized Gain (Loss) | |
Net realized gain (loss) from investments | |
Change in net unrealized appreciation (depreciation) on investments | |
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Net increase (decrease) in net assets resulting from operations | |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP |
Statements of Changes in Net Assets
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Increase (Decrease) in Net Assets | | |
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Change in net unrealized appreciation
(depreciation) | | |
Net increase (decrease) in net assets resulting from operations | | |
Distributions to shareholders: | | |
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Proceeds from shares sold | | |
Reinvestment of distributions | | |
Payments for shares redeemed | | |
Net increase (decrease) in net assets from Class A share transactions | | |
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Proceeds from shares sold | | |
Reinvestment of distributions | | |
Payments for shares redeemed | | |
Net increase (decrease) in net assets from Class B share transactions | | |
Increase (decrease) in net assets | | |
Net assets at beginning of period | | |
Net assets at end of period | | |
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Shares outstanding at beginning of period | | |
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Shares issued to shareholders in reinvestment of distributions | | |
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Net increase (decrease) in Class A shares | | |
Shares outstanding at end of period | | |
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Shares outstanding at beginning of period | | |
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Shares issued to shareholders in reinvestment of distributions | | |
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Net increase (decrease) in Class B shares | | |
Shares outstanding at end of period | | |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP | |
Financial Highlights
DWS CROCI® U.S. VIP — Class A |
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Net asset value, beginning of period | | | | | |
Income (loss) from investment operations: | | | | | |
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Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
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Net asset value, end of period | | | | | |
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Ratios to Average Net Assets and Supplemental Data |
Net assets, end of period ($ millions) | | | | | |
Ratio of expenses before expense reductions (%)c | | | | | |
Ratio of expenses after expense reductions (%)c | | | | | |
Ratio of net investment income (%) | | | | | |
Portfolio turnover rate (%) | | | | | |
| Based on average shares outstanding during the period. |
| Total return would have been lower had certain expenses not been reduced. |
| Expense ratio does not reflect charges and fees 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 accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP |
DWS CROCI® U.S. VIP — Class B |
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Net asset value, beginning of period | | | | | |
Income (loss) from investment operations: | | | | | |
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Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
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Net asset value, end of period | | | | | |
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Ratios to Average Net Assets and Supplemental Data |
Net assets, end of period ($ millions) | | | | | |
Ratio of expenses before expense reductions (%)c | | | | | |
Ratio of expenses after expense reductions (%)c | | | | | |
Ratio of net investment income (%) | | | | | |
Portfolio turnover rate (%) | | | | | |
| Based on average shares outstanding during the period. |
| Total return would have been lower had certain expenses not been reduced. |
| Expense ratio does not reflect charges and fees 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 accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP | |
Notes to Financial Statements
A.
Organization and Significant Accounting Policies
DWS CROCI® U.S. VIP (the “Fund”) is a diversified series of Deutsche 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). Class B shares are subject to Rule 12b-1 distribution fees under the 1940 Act and recordkeeping fees equal to an annual rate of up to 0.25% and of up to 0.15%, respectively, 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 12b-1 distribution fees 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 (“U.S. GAAP”) which require the use of management estimates. Actual results could differ from those estimates. The Fund qualifies as an investment company under Topic 946 of Accounting Standards Codification of U.S. GAAP. 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.
The Fund’s Board has designated DWS Investment Management Americas, Inc. (the “Advisor”) as the valuation designee for the Fund pursuant to Rule 2a-5 under the 1940 Act. The Advisor's Pricing Committee (the “Pricing Committee”) typically values securities using readily available market quotations or prices supplied by independent pricing services (which are considered fair values under Rule 2a-5). The Advisor has adopted fair valuation procedures that provide methodologies for fair valuing securities.
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 level assigned to the securities valuations may not be an indication of the risk or liquidity 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. 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. Equity securities are generally 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 Pricing Committee and are generally categorized as Level 3. In accordance with the Fund’s valuation procedures, factors considered 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.
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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. The 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. Deutsche Bank AG, as lending agent, lends securities of the Fund to certain financial institutions under the terms of its securities lending agreement. During the term of the loans, the Fund continues to receive interest and dividends generated by the 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 efforts to obtain additional collateral on the next business day to meet required amounts under the securities lending agreement. As of period end, any securities on loan were collateralized by cash. During the year ended December 31, 2022, the Fund invested the cash collateral into a joint trading account in DWS Government & Agency Securities Portfolio, an affiliated money market fund managed by DWS Investment Management Americas, Inc. DWS Investment Management Americas, Inc. receives a management/administration fee (0.07% annualized effective rate as of December 31, 2022) on the cash collateral invested in DWS Government & Agency Securities Portfolio. 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 at any time, and the borrower, after notice, is required to return borrowed securities within a standard time period. 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. If the Fund is not able to recover securities lent, the Fund may sell the collateral and purchase a replacement investment in the market, incurring the risk that the value of the replacement security is greater than the value of the collateral. 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.
As of December 31, 2022, the Fund had no securities on loan.
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.
At December 31, 2022, the Fund had net tax basis capital loss carryforwards of approximately $1,311,000 of short-term losses, which may be applied against realized net taxable capital gains indefinitely.
The Fund has reviewed the tax positions for the open tax years as of December 31, 2022 and has determined that no provision for income tax and/or uncertain tax positions 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 from net investment income of the Fund, if any, are 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
Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP | |
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.
At December 31, 2022, the Fund's components of distributable earnings (accumulated losses) on a net tax basis were as follows:
Undistributed ordinary income* | |
Capital loss carryforwards | |
Net unrealized appreciation (depreciation) on investments | |
At December 31, 2022, the aggregate cost of investments for federal income tax purposes was $122,549,564. The net unrealized depreciation for all investments based on tax cost was $3,430,841. This consisted of aggregate gross unrealized appreciation for all investments for which there was an excess of value over tax cost of $8,848,959 and aggregate gross unrealized depreciation for all investments for which there was an excess of tax cost over value of $12,279,800.
In addition, the tax character of distributions paid to shareholders by the Fund is summarized as follows:
| |
| | |
Distributions from ordinary income* | | |
Distributions from long-term capital gains | | |
| For tax purposes, short-term capital gain distributions are considered ordinary income distributions. |
Expenses. Expenses of the Trust arising in connection with a specific fund are allocated to that fund. Other Trust expenses which cannot be directly attributed to a fund are apportioned among the funds in the Trust based upon the relative net assets or other appropriate measures.
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. Proceeds from litigation payments, if any, are included in net realized gain (loss) from investments.
B.
Purchases and Sales of Securities
During the year ended December 31, 2022, purchases and sales of investment securities (excluding short-term investments) aggregated $76,919,066 and $85,213,999, respectively.
Management Agreement. Under the Investment Management Agreement with DWS Investment Management Americas, Inc. (“DIMA” or the “Advisor”), an indirect, wholly owned subsidiary of DWS Group GmbH & Co. KGaA (“DWS Group”), 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.
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Under the Investment Management Agreement with the Advisor, the Fund pays a monthly management fee based on the average daily net assets of the Fund, computed and accrued daily and payable monthly, at the following annual rates:
First $250 million of the Fund’s average daily net assets | |
Next $750 million of such net assets | |
Next $1.5 billion of such net assets | |
Next $2.5 billion of such net assets | |
Next $2.5 billion of such net assets | |
Next $2.5 billion of such net assets | |
Next $2.5 billion of such net assets | |
Over $12.5 billion of such net assets | |
Accordingly, for the year ended December 31, 2022, the fee pursuant to the Investment Management Agreement was equivalent to an annual rate (exclusive of any applicable waivers/reimbursements) of 0.60% of the Fund’s average daily net assets.
For the period from January 1, 2022 through April 30, 2023, the Advisor has contractually agreed to waive its fees and/or reimburse certain operating expenses of the Fund to the extent necessary to maintain the total annual operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of each class as follows:
For the year ended December 31, 2022, fees waived and/or expenses reimbursed for each class are as follows:
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 the Advisor an annual fee (“Administration Fee”) of 0.097% of the Fund’s average daily net assets, computed and accrued daily and payable monthly. For the year ended December 31, 2022, the Administration Fee was $125,312, of which $10,012 is unpaid.
Service Provider Fees. DWS Service Company (“DSC”), 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 DSC and SS&C GIDS, Inc. (“SS&C”) (name changed from DST Systems, Inc. effective January 1, 2023), DSC has delegated certain transfer agent, dividend-paying agent and shareholder service agent functions to SS&C. DSC compensates SS&C out of the shareholder servicing fee it receives from the Fund. For the year ended December 31, 2022, the amounts charged to the Fund by DSC were as follows:
| | Unpaid at
December 31, 2022 |
| | |
| | |
| | |
Distribution Service Agreement. Under the Fund’s Class B 12b-1 plan, DWS Distributors, Inc. (“DDI”) received a fee (“Distribution Service Fee”) of up to 0.25% of average daily net assets of Class B shares. For the year ended December 31, 2022, the Distribution Service Fee aggregated $6,905, of which $536 is unpaid.
Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP | |
Other Service Fees. Under an agreement with the Fund, DIMA is compensated for providing regulatory filing services to the Fund. For the year ended December 31, 2022, the amount charged to the Fund by DIMA included in the Statement of Operations under “Reports to shareholders” aggregated $1,214, of which $108 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 Vehicles. The Fund may invest uninvested cash balances in DWS Central Cash Management Government Fund and DWS ESG Liquidity Fund, affiliated money market funds which are managed by the Advisor. Each affiliated money market fund is managed in accordance with Rule 2a-7 under the 1940 Act, which governs the quality, maturity, diversity and liquidity of instruments in which a money market fund may invest. DWS Central Cash Management Government Fund seeks to maintain a stable net asset value, and DWS ESG Liquidity Fund maintains a floating net asset value. The Fund indirectly bears its proportionate share of the expenses of each affiliated money market fund in which it invests. DWS Central Cash Management Government Fund does not pay the Advisor an investment management fee. To the extent that DWS ESG Liquidity Fund pays an investment management fee to the Advisor, the Advisor will waive an amount of the investment management fee payable to the Advisor by the Fund equal to the amount of the investment management fee payable on the Fund’s assets invested in DWS ESG Liquidity Fund.
Securities Lending Agent Fees. Deutsche Bank AG serves as securities lending agent for the Fund. For the year ended December 31, 2022, the Fund incurred securities lending agent fees to Deutsche Bank AG in the amount of $7.
At December 31, 2022, one participating insurance company was owner of record of 10% or more of the
total outstanding Class A shares of the Fund, owning 95%. Two participating insurance companies were owners of record of 10% or more of the total outstanding Class B shares of the Fund, each owning 60% and 18%, respectively.
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 daily fluctuating rate per annum equal to the sum of 0.10% plus the higher of the Federal Funds Effective Rate and the Overnight Bank Funding Rate, plus 1.25%. 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 December 31, 2022.
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Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Deutsche DWS Variable Series II and Shareholders of DWS CROCI® U.S. VIP:
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities of DWS CROCI® U.S. VIP (the “Fund”) (one of the funds constituting Deutsche DWS Variable Series II) (the “Trust”), including the investment portfolio, as of December 31, 2022, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund (one of the funds constituting Deutsche DWS Variable Series II) at December 31, 2022, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and its financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Trust is not required to have, nor were we engaged to perform, an audit of the Trust’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2022, by correspondence with the custodian, brokers and others; when replies were not received from brokers and others, we performed other auditing procedures. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the auditor of one or more investment companies in the DWS family of funds since at least 1979, but we are unable to determine the specific year.
Boston, Massachusetts
February 13, 2023
Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP | |
Information About Your Fund’s Expenses (Unaudited)
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, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Fund limited these expenses; had it not done so, expenses would have
been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2022 to December 31, 2022).
The tables illustrate your Fund’s expenses in two ways:
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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.
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Hypothetical 5% Fund Return. This helps you to compare your Fund’s ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund’s actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The “Expenses Paid per $1,000” line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
Expenses and Value of a $1,000 Investment for the six months ended December 31, 2022
| | |
Beginning Account Value 7/1/22 | | |
Ending Account Value 12/31/22 | | |
Expenses Paid per $1,000* | | |
Hypothetical 5% Fund Return | | |
Beginning Account Value 7/1/22 | | |
Ending Account Value 12/31/22 | | |
Expenses Paid per $1,000* | | |
| 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 184 (the number of days in the most recent six-month period), then divided by 365. |
Annualized Expense Ratios | | |
Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP | | |
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.
For an analysis of the fees associated with an investment in the Fund or similar funds, please refer to the current and hypothetical expense calculators for Variable Insurance Products which can be found at dws.com/calculators.
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Tax Information (Unaudited)
The Fund paid distributions of $0.16 per share from net long-term capital gains during its year ended December 31, 2022.
For corporate shareholders, 100% of the ordinary dividends (i.e., income dividends plus short-term capital gains) paid during the Fund’s fiscal year ended December 31, 2022, qualified for the dividends received deduction.
Please consult a tax advisor if you have questions about federal or state income tax laws, or on how to prepare your tax returns. If you have specific questions about your account, please contact your insurance provider.
Proxy Voting
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 most recent 12-month period ended June 30 are available on our Web site — dws.com/en-us/resources/proxy-voting — or on the SEC’s Web site — 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.
Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP | |
Advisory Agreement Board Considerations and Fee Evaluation
The Board of Trustees (hereinafter referred to as the “Board” or “Trustees”) approved the renewal of DWS CROCI® U.S. VIP's (the “Fund”) investment management agreement (the “Agreement”) with DWS Investment Management Americas, Inc. (“DIMA”) in September 2022.
In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:
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During the entire process, all of the Fund's Trustees were independent of DIMA and its affiliates (the “Independent Trustees”).
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The Board met frequently during the past year to discuss fund matters and dedicated a substantial amount of time to contract review matters. Over the course of several months, the Board reviewed extensive materials received from DIMA, independent third parties and independent counsel. These materials included an analysis of the Fund’s performance, fees and expenses, and profitability from a fee consultant retained by the Fund’s Independent Trustees (the “Fee Consultant”).
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The Board also received extensive information throughout the year regarding performance of the Fund.
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The Independent Trustees regularly met privately with counsel to discuss contract review and other matters. In addition, the Independent Trustees were advised by the Fee Consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the Fee Consultant in connection with their deliberations.
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In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's Rule 12b-1 plan, distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
In connection with the contract review process, the Board considered the factors discussed below, among others. The Board also considered that DIMA and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DIMA managed the Fund. DIMA is part of DWS Group GmbH & Co. KGaA (“DWS Group”). DWS Group is a global asset management business that offers a wide range of investing expertise and resources, including research capabilities in many countries throughout the world. In 2018, approximately 20% of DWS Group’s shares were sold in an initial public offering, with Deutsche Bank AG owning the remaining shares.
As part of the contract review process, the Board carefully considered the fees and expenses of each DWS fund overseen by the Board in light of the fund’s performance. In many cases, this led to the negotiation and implementation of expense caps.
While shareholders may focus primarily on fund performance and fees, the Fund’s Board considers these and many other factors, including the quality and integrity of DIMA’s personnel and administrative support services provided by DIMA, such as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DIMA provides portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DIMA provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel and the resources made available to such personnel. The Board also considered the risks to DIMA in sponsoring or managing the Fund, including financial, operational and reputational risks, the potential economic impact to DIMA from such risks and DIMA’s approach to addressing such risks. The Board reviewed the Fund’s performance over short-term and long-term periods and compared those returns to various agreed-upon performance measures, including market index(es) and a peer universe compiled using information supplied by Morningstar Direct (“Morningstar”), an independent fund data service. The Board also noted that it has put into place a process of identifying “Funds in Review” (e.g., funds performing poorly relative to a peer universe), and receives additional reporting from DIMA regarding such funds and, where appropriate, DIMA’s plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that, for the one-, three- and five-year periods ended December 31, 2021, the Fund’s performance (Class A shares) was in the 2nd quartile, 4th quartile and 4th quartile, respectively, of the applicable Morningstar universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the
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Fund has outperformed its benchmark in the one-year period and has underperformed its benchmark in the three- and five-year periods ended December 31, 2021.
Fees and Expenses. The Board considered the Fund’s investment management fee schedule, operating expenses and total expense ratios, and comparative information provided by Broadridge Financial Solutions, Inc. (“Broadridge”) and the Fee Consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include a 0.097% fee paid to DIMA under the Fund’s administrative services agreement, were equal to the median of the applicable Broadridge peer group (based on Broadridge data provided as of December 31, 2021). The Board noted that, effective October 1, 2020, in connection with the 2020 contract renewal process, DIMA agreed to reduce the Fund’s contractual management fee at each breakpoint by 0.05%. The Board noted that the Fund’s Class A shares total (net) operating expenses were expected to be higher than the median (3rd quartile) of the applicable Broadridge expense universe (based on Broadridge data provided as of December 31, 2021, and analyzing Broadridge expense universe Class A (net) expenses less any applicable 12b-1 fees) (“Broadridge Universe Expenses”). The Board also reviewed data comparing each other operational share class’s total (net) operating expenses to the applicable Broadridge Universe Expenses. The Board noted that the expense limitations agreed to by DIMA were expected to help the Fund’s total (net) operating expenses remain competitive. The Board considered the Fund’s management fee rate as compared to fees charged by DIMA to comparable DWS U.S. registered funds (“DWS Funds”) and considered differences between the Fund and the comparable DWS Funds. The information requested by the Board as part of its review of fees and expenses also included information about institutional accounts (including any sub-advised funds and accounts) and funds offered primarily to European investors (“DWS Europe Funds”) managed by DWS Group. The Board noted that DIMA indicated that DWS Group does not manage any institutional accounts or DWS Europe Funds comparable to the Fund.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DIMA.
Profitability. The Board reviewed detailed information regarding revenues received by DIMA under the Agreement. The Board considered the estimated costs to DIMA, and pre-tax profits realized by DIMA, from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DIMA and its affiliates with respect to all fund services in totality and by fund. The Board and the Fee Consultant reviewed DIMA’s methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DIMA in connection with the management of the Fund were not unreasonable. The Board also reviewed certain publicly available information regarding the profitability of certain similar investment management firms. The Board noted that, while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DIMA and its affiliates’ overall profitability with respect to the DWS Funds (after taking into account distribution and other services provided to the funds by DIMA and its affiliates) was lower than the overall profitability levels of most comparable firms for which such data was available.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund’s investment management fee schedule includes fee breakpoints. The Board concluded that the Fund’s fee schedule represents an appropriate sharing between the Fund and DIMA of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DIMA and Its Affiliates. The Board also considered the character and amount of other incidental or “fall-out” benefits received by DIMA and its affiliates, including any fees received by DIMA for administrative services provided to the Fund, any fees received by an affiliate of DIMA for transfer agency services provided to the Fund and any fees received by an affiliate of DIMA for distribution services. The Board noted that DIMA pays a licensing fee to an affiliate related to the Fund’s use of the CROCI® strategy. The Board also considered benefits to DIMA related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities. In addition, the Board considered the incidental public relations benefits to DIMA related to DWS Funds advertising and cross-selling opportunities among DIMA products and services. The Board considered these benefits in reaching its conclusion that the Fund’s management fees were reasonable.
Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP | |
Compliance. The Board considered the significant attention and resources dedicated by DIMA to its compliance processes in recent years. The Board noted in particular (i) the experience, seniority and time commitment of the individuals serving as DIMA’s and the Fund’s chief compliance officers and (ii) the substantial commitment of resources by DIMA and its affiliates to compliance matters, including the retention of compliance personnel.
Based on all of the information considered and the conclusions reached, the Board determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and counsel present. It is possible that individual Independent Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.
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Board Members and Officers
The following table presents certain information regarding the Board Members and Officers of the Trust/Corporation. Each Board Member’s year of birth is set forth in parentheses after his or her name. Unless otherwise noted, (i) each Board Member has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity; and (ii) the address of each Independent Board Member is c/o Keith R. Fox, DWS Funds Board Chair, c/o Thomas R. Hiller, Ropes & Gray LLP, Prudential Tower, 800 Boylston Street, Boston, MA 02199-3600. Except as otherwise noted below, the term of office for each Board Member is until the election and qualification of a successor, or until such Board Member sooner dies, resigns, is removed or as otherwise provided in the governing documents of the Trust/Corporation. Because the Fund does not hold an annual meeting of shareholders, each Board Member will hold office for an indeterminate period.
The Board Members may also serve in similar capacities with other funds in the fund complex. The number of funds in the DWS fund complex shown in the table below includes all registered open- and closed-end funds (including all of their portfolios) advised by the Advisor and any registered funds that have an investment advisor that is an affiliated person of the Advisor.
Independent Board Members/Independent Advisory Board Members
Name, Year of
Birth, Position
with the Trust/
Corporation
and Length of
| Business Experience and Directorships
During the Past Five Years | Number of
Funds in
DWS Fund
Complex
Overseen | Other
Directorships
Held by Board
Member |
Keith R. Fox, CFA (1954) Chairperson since 2017, and Board Member since 1996 | Managing General Partner, Exeter Capital Partners (a series of private investment funds) (since 1986). Directorships: Progressive International Corporation (kitchen goods designer and distributor); former Chairman, National Association of Small Business Investment Companies; Former Directorships: ICI Mutual Insurance Company; BoxTop Media Inc. (advertising); Sun Capital Advisers Trust (mutual funds) | | |
John W. Ballantine (1946) Board Member since 1999 | Retired; formerly, Executive Vice President and Chief Risk Management Officer, First Chicago NBD Corporation/The First National Bank of Chicago (1996–1998); Executive Vice President and Head of International Banking (1995–1996); Not-for-Profit Directorships: Window to the World Communications (public media); Life Director of Harris Theater for Music and Dance (Chicago); Life Director of Hubbard Street Dance Chicago; Former Directorships: Director and Chairman of the Board, Healthways, Inc.2 (population wellbeing and wellness services) (2003–2014); Stockwell Capital Investments PLC (private equity); Enron Corporation; FNB Corporation; Tokheim Corporation; First Oak Brook Bancshares, Inc.; Oak Brook Bank; Portland General Electric2 (utility company (2003–2021); and Prisma Energy International; Former Not-for-Profit Directorships: Public Radio International; Palm Beach Civic Assn. | | |
Dawn-Marie Driscoll (1946) Board Member since 1987 | Advisory Board and former Executive Fellow, Hoffman Center for Business Ethics, Bentley University; formerly: Partner, Palmer & Dodge (law firm) (1988–1990); Vice President of Corporate Affairs and General Counsel, Filene’s (retail) (1978–1988); Directorships: Trustee and former Chairman of the Board, Southwest Florida Community Foundation (charitable organization); Former Directorships: ICI Mutual Insurance Company (2007–2015); Sun Capital Advisers Trust (mutual funds) (2007–2012), Investment Company Institute (audit, executive, nominating committees) and Independent Directors Council (governance, executive committees) | | |
Richard J. Herring (1946) Board Member since 1990 | Jacob Safra Professor of International Banking and Professor of Finance, The Wharton School, University of Pennsylvania (since July 1972); formerly: Director, The Wharton Financial Institutions Center (1994–2020); Vice Dean and Director, Wharton Undergraduate Division (1995–2000) and Director, The Lauder Institute of International Management Studies (2000–2006); Member FDIC Systemic Risk Advisory Committee since 2011, member Systemic Risk Council since 2012 and member of the Advisory Board at the Yale Program on Financial Stability since 2013; Former Directorships: Co-Chair of the Shadow Financial Regulatory Committee (2003–2015), Executive Director of The Financial Economists Roundtable (2008–2015), Director of The Thai Capital Fund (2007–2013), Director of The Aberdeen Singapore Fund (2007–2018), Director, The Aberdeen Japan Fund (2007-2021) and Nonexecutive Director of Barclays Bank DE (2010–2018) | | |
Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP | |
Name, Year of Birth, Position with the Trust/ Corporation and Length of Time Served1 | Business Experience and Directorships During the Past Five Years | Number of Funds in DWS Fund Complex Overseen | Other Directorships Held by Board Member |
Chad D. Perry (1972) Board Member or Advisory | Executive Vice President, General Counsel and Secretary, Tanger Factory Outlet Centers, Inc.2 (since 2011); formerly Executive Vice President and Deputy General Counsel, LPL Financial Holdings Inc.2 (2006–2011); Senior Corporate Counsel, EMC Corporation (2005–2006); Associate, Ropes & Gray LLP (1997–2005) | | Director - Great Elm Capital Corp. (business development company) (since 2022) |
Rebecca W. Rimel (1951) Board Member since 1995 | Director, The Bridgespan Group (nonprofit organization) (since October 2020); formerly: Executive Vice President, The Glenmede Trust Company (investment trust and wealth management) (1983–2004); Board Member, Investor Education (charitable organization) (2004–2005); Former Directorships: Trustee, Executive Committee, Philadelphia Chamber of Commerce (2001–2007); Director, Viasys Health Care2 (January 2007–June 2007); Trustee, Thomas Jefferson Foundation (charitable organization) (1994–2012); President, Chief Executive Officer and Director (1994–2020) and Senior Advisor (2020-2021), The Pew Charitable Trusts (charitable organization); Director, BioTelemetry Inc.2 (acquired by Royal Philips in 2021) (healthcare) (2009–2021); Director, Becton Dickinson and Company2 (medical technology company) (2012-2022) | | |
Catherine Schrand (1964) Board Member since 2021* | Celia Z. Moh Professor of Accounting (since 2016) and Professor of Accounting (since 1994), The Wharton School, University of Pennsylvania; formerly Vice Dean, Wharton Doctoral Programs (2016–2019) | | |
William N. Searcy, Jr. (1946) Board Member since 1993 | Private investor since October 2003; formerly: Pension & Savings Trust Officer, Sprint Corporation2 (telecommunications) (November 1989–September 2003); Former Directorships: Trustee, Sun Capital Advisers Trust (mutual funds) (1998–2012) | | |
Officers5
Name, Year of Birth, Position
with the Trust/Corporation
and Length of Time Served6 | Business Experience and Directorships During the
Past Five Years |
Hepsen Uzcan7 (1974) President and Chief Executive Officer, 2017–present | Fund Administration (Head since 2017), DWS; Secretary, DWS USA Corporation (2018–present); Assistant Secretary, DWS Distributors, Inc. (2018–present); Director and Vice President, DWS Service Company (2018–present); Assistant Secretary, DWS Investment Management Americas, Inc. (2018–present); Director and President, DB Investment Managers, Inc. (2018–present); President and Chief Executive Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2017–present); formerly: Vice President for the Deutsche funds (2016–2017); Assistant Secretary for the DWS funds (2013–2019); Assistant Secretary, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2013–2020); Directorships: Interested Director, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (since June 25, 2020); ICI Mutual Insurance Company (since October 16, 2020); and Episcopalian Charities of New York (2018–present) |
John Millette8 (1962) Vice President and Secretary, 1999–present | Legal (Associate General Counsel), DWS; Chief Legal Officer, DWS Investment Management Americas, Inc. (2015–present); Director and Vice President, DWS Trust Company (2016–present); Secretary, DBX ETF Trust (2020–present); Vice President, DBX Advisors LLC (2021–present); Secretary, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. 2011–present); formerly: Secretary, Deutsche Investment Management Americas Inc. (2015–2017); and Assistant Secretary, DBX ETF Trust (2019–2020) |
Ciara Crawford9 (1984) Assistant Secretary, 2019–present | Fund Administration (Specialist), DWS (2015–present); formerly, Legal Assistant at Accelerated Tax Solutions |
Diane Kenneally8 (1966) Chief Financial Officer and Treasurer, 2018–present | Fund Administration Treasurer's Office (Co-Head since 2018), DWS; Treasurer, Chief Financial Officer and Controller, DBX ETF Trust (2019–present); Treasurer and Chief Financial Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2018–present); formerly: Assistant Treasurer for the DWS funds (2007–2018) |
Paul Antosca8 (1957) Assistant Treasurer, 2007–present | Fund Administration Tax (Head), DWS; and Assistant Treasurer, DBX ETF Trust (2019–present) |
Sheila Cadogan8 (1966) Assistant Treasurer, 2017–present | Fund Administration Treasurer's Office (Co-Head since 2018), DWS; Director and Vice President, DWS Trust Company (2018–present); Assistant Treasurer, DBX ETF Trust (2019–present); Assistant Treasurer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2018–present) |
Scott D. Hogan8 (1970) Chief Compliance Officer, 2016–present | Anti-Financial Crime & Compliance US (Senior Team Lead), DWS; Chief Compliance Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2016–present) |
| Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP |
Name, Year of Birth, Position with the Trust/Corporation and Length of Time Served6 | Business Experience and Directorships During the Past Five Years |
Caroline Pearson8 (1962) Chief Legal Officer, 2010–present | Legal (Senior Team Lead), DWS; Assistant Secretary, DBX ETF Trust (2020–present); Chief Legal Officer, DBX Advisors LLC (2020–present); Chief Legal Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2012–present); formerly: Secretary, Deutsche AM Distributors, Inc. (2002–2017); Secretary, Deutsche AM Service Company (2010–2017); and Chief Legal Officer, DBX Strategic Advisors LLC (2020–2021) |
Christian Rijs7 (1980) Anti-Money Laundering
Compliance Officer,
since October 6, 2021 | Senior Team Lead Anti-Financial Crime and Compliance, DWS; AML Officer, DWS Trust Company (since November 2, 2021); AML Officer, DBX ETF Trust (since October 21, 2021); AML Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (since November 12, 2021); formerly: DWS UK & Ireland Head of Anti-Financial Crime and MLRO |
| Ms. Schrand was an Advisory Board Member for certain funds in the DWS Fund Complex for the period from November 18, 2021 to December 31, 2022 and was elected as a Full Board Member as of January 1, 2023 for all funds in the DWS Fund Complex. |
| The length of time served represents the year in which the Board Member joined the board of one or more DWS funds currently overseen by the Board. |
| A publicly held company with securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. |
| Mr. Perry is an Advisory Board Member of Deutsche DWS Asset Allocation Trust, Deutsche DWS Equity 500 Index Portfolio, Deutsche DWS Global/International Fund, Inc., Deutsche DWS Income Trust, Deutsche DWS Institutional Funds, Deutsche DWS International Fund, Inc., Deutsche DWS Investment Trust, Deutsche DWS Investments VIT Funds, Deutsche DWS Money Market Trust, Deutsche DWS Municipal Trust, Deutsche DWS Portfolio Trust, Deutsche DWS Securities Trust, Deutsche DWS Tax Free Trust, Deutsche DWS Variable Series I and Government Cash Management Portfolio. Mr. Perry is a Board Member of each other Trust. |
| Mr. Perry oversees 21 funds in the DWS Fund Complex as a Board Member of various Trusts. Mr. Perry is an Advisory Board Member of various Trusts/Corporations comprised of 48 funds in the DWS Fund Complex. |
| As a result of their respective positions held with the Advisor or its affiliates, these individuals are considered “interested persons” of the Advisor within the meaning of the 1940 Act. Interested persons receive no compensation from the Fund. |
| The length of time served represents the year in which the officer was first elected in such capacity for one or more DWS funds. |
| Address: 875 Third Avenue, New York, NY 10022. |
| Address: 100 Summer Street, Boston, MA 02110. |
| Address: 5201 Gate Parkway, Jacksonville, FL 32256. |
Certain officers hold similar positions for other investment companies for which DIMA or an affiliate serves as the Advisor.
The Fund’s Statement of Additional Information (“SAI”) includes additional information about the Board Members. The SAI is available, without charge, upon request. If you would like to request a copy of the SAI, you may do so by calling the following toll-free number: (800) 728-3337.
Deutsche DWS Variable Series II — DWS CROCI® U.S. VIP | |
VS2CUS-2 (R-025833-12 2/23)
December 31, 2022
Annual Report
Deutsche DWS Variable Series II
DWS Global Income Builder VIP
Contents
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. Stocks may decline in value. Investing in foreign securities, particularly those of emerging markets, presents certain risks, such as currency fluctuations, political and economic changes, and market risks. Emerging markets tend to be more volatile and less liquid than the markets of more mature economies, and generally have less diverse and less mature economic structures and less stable political systems than those of developed countries. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. Bond investments are subject to interest-rate, credit, liquidity and market risks to varying degrees. 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. Please read the prospectus for details.
War, terrorism, sanctions, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and, in the future, may lead to significant disruptions in U.S. and world economies and markets, which may lead to increased market volatility and may have significant adverse effects on the Fund and its investments.
The brand DWS represents DWS Group GmbH & Co. KGaA and any of its subsidiaries such as DWS Distributors, Inc. which offers investment products or DWS Investment Management Americas, Inc. and RREEF America L.L.C. which offer advisory services.
DWS Distributors, Inc., 222 South Riverside Plaza, Chicago, IL 60606, (800) 621-1148
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
Performance SummaryDecember 31, 2022 (Unaudited)
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 does 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. These charges and fees will reduce returns.
The gross expense ratios of the Fund, as stated in the fee table of the prospectus dated May 1, 2022 are 0.62% and 1.06% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Generally accepted accounting principles require adjustments to be made to the net assets of the Fund at period end for financial reporting purposes only, and as such, the total return based on the unadjusted net asset value per share may differ from the total return reported in the financial highlights.
Growth of an Assumed $10,000 Investment
Yearly periods ended December 31
MSCI All Country World Index is an unmanaged equity index which captures large and mid-capitalization representation across 23 developed markets and 24 emerging markets countries. It covers approximately 85% of the global investable equity opportunity set.
The Blended Index 60/40 consists of a blend of 60% MSCI All Country World Index and 40% Bloomberg U.S. Universal Index.
Bloomberg U.S. Universal Index measures the performance of U.S. dollar-denominated taxable bonds that are rated either investment grade or high yield. The index includes U.S. Treasury bonds, investment-grade and high yield U.S. corporate bonds, mortgage-backed securities, and Eurodollar bonds.
Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index.
The Advisor believes the additional Blended Index 60/40 and Bloomberg U.S. Universal Index, collectively, reflect the Fund’s asset allocations and generally represent the Fund’s overall investment process.
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
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DWS Global Income Builder VIP | | | | |
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Average annual total return | | | | |
MSCI All Country World Index | | | | | |
Average annual total return | | | | |
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Average annual total return | | | | |
Bloomberg U.S. Universal Index | | | | | |
Average annual total return | | | | |
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DWS Global Income Builder VIP | | | |
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Average annual total return | | | |
MSCI All Country World Index | | | | |
Average annual total return | | | |
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Average annual total return | | | |
Bloomberg U.S. Universal Index | | | | |
Average annual total return | | | |
The growth of $10,000 is cumulative. |
| Class B commenced operations on May 1, 2018. |
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
Management Summary December 31, 2022 (Unaudited)
The Fund returned -14.98% during the 12 months ended December 31, 2022 (Class A shares, unadjusted for contract charges), outperforming the -15.91% return of the Blended Index 60/40. The index consists of a blend of 60% MSCI All Country World Index and 40% Bloomberg U.S. Universal Index. The two indexes returned -18.36% and -12.99%, respectively. Since the Fund invests in stocks, bonds, and alternative assets and the MSCI All Country World Index and Bloomberg U.S. Universal Index invest entirely in stocks and bonds, respectively, we measure our performance relative to the Blended Index 60/40.
The financial markets experienced broad-based weakness in 2022 in response to a wide range of unfavorable headlines. Persistent inflation prompted the U.S. Federal Reserve and other major central banks to tighten monetary policy by ending their quantitative easing programs and raising interest rates aggressively. The sharp increase in rates, in turn, fueled worries that economic growth and corporate earnings could slow. Investor sentiment was also pressured by events overseas, including Russia’s invasion of Ukraine and the Chinese government’s growth-restricting policies. These developments weighed heavily on asset prices, with equities and bonds both suffering sizable losses.
Consistent with this environment, the Fund posted a negative return in 2022. It outperformed the Blended Index 60/40, however, due largely to relative strength in the stock portfolio versus the MSCI World Index. Sector allocation, particularly an overweight in energy and an underweight in consumer discretionary, added value in equities. Country allocation was also a plus, led by an overweight in Canada. Stock selection was a further contributor, as our emphasis on higher-quality, dividend-paying companies proved helpful in the challenging environment. Our hedging activity in equities also contributed due to short positions in U.S. and European equity futures. (The value of a short position rises when the price of the underlying asset declines.) However, the contribution was partially offset by the adverse effect of a long position in the emerging markets.
The Fund’s bond portfolio lost ground in absolute terms and trailed the Bloomberg U.S. Universal Index. We maintained overweights in investment-grade corporates, high-yield bonds, and emerging-market debt, all of which underperformed at a time of elevated investor risk aversion. On the other hand, an underweight to duration (interest-rate sensitivity) contributed positively. The portfolio’s yield curve positioning, which favored short-term debt over longer-term issues, was a further plus. We achieved the Fund’s duration and yield curve positioning partially through the use of derivatives.
We maintained an allocation to convertible securities and preferred stocks in lieu of bonds, with the goal of providing an additional source of yield with a lower degree of interest rate sensitivity than traditional fixed-income assets. This aspect of our strategy detracted from performance in 2022. Convertibles were pressured by the high representation of growth companies among the category’s issuers, while preferreds were hurt by the broader decline in the equity market.
We remained in a defensive posture at year-end. Although sentiment improved somewhat in the fourth quarter, a wide range of risks continued to hang over the market. Among these were the possibility of slower growth, continued policy tightening by the Fed, and the chance that earnings expectations are still too high. With that said, we have a very flexible approach and will be on the lookout to add risk back to the portfolio if inflation falls more quickly than expected, or if China’s reopening helps forestall a potential global recession. While we think adaptability is always a favorable attribute, we believe it’s particularly important now given the wide range of possible outcomes for the world economy in the year ahead.
Dokyoung Lee, CFA, Regional Head of Multi Asset & Solutions
Di Kumble, CFA, Senior Portfolio Manager Equity
Thomas M. Farina, CFA, Head of Investment Strategy Fixed Income
Darwei Kung, Head of Investment Strategy Liquid Real Assets
Portfolio Managers
The views expressed reflect those of the portfolio management team only through the end of the period of the report as stated on the cover. The management team’s views are subject to change at any time based on market and other conditions and should not be construed as a recommendation. Past performance is no guarantee of future results. Current and future portfolio holdings are subject to risk.
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
Terms to Know
Blended Index 60/40 consists of a blend of 60% MSCI All Country World Index and 40% Bloomberg Barclays U.S. Universal Index.
MSCI All Country World Index is an unmanaged equity index which captures large and mid-capitalization representation across 23 developed markets and 24 emerging markets countries. It covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Universal Index measures the performance of U.S. dollar-denominated taxable bonds that are rated either investment grade or high yield. The index includes U.S. Treasury bonds, investment-grade and high yield U.S. corporate bonds, mortgage-backed securities, and Eurodollar bonds.
Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index.
Contribution and detraction incorporate both an investment's total return and its weighting in the Fund.
Overweight means that a fund holds a higher weighting in a given sector or security than its benchmark index. Underweight means that a fund holds a lower weighting.
Derivatives are contracts whose values can be based on a variety of instruments including indices, currencies or securities. They can be utilized for a variety of reasons including for hedging purposes; for risk management; for non-hedging purposes to seek to enhance potential gains; or as a substitute for direct investment in a particular asset class or to keep cash on hand to meet shareholder redemptions. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility.
Duration, which is expressed in years, measures the sensitivity of the price of a bond or bond fund to a change in interest rates.
Convertible securities are bonds that can be exchanged for equity at a pre-stated price. Convertibles generally offer higher income than is available from a common stock, but more appreciation potential than bonds.
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
Portfolio Summary(Unaudited)
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | | |
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Government & Agency Obligations | | |
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Commercial Mortgage-Backed Securities | | |
Short-Term U.S. Treasury Obligation | | |
Collateralized Mortgage Obligations | | |
Mortgage-Backed Securities Pass-Throughs | | |
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Sector Diversification (As a % of Equities, Preferred Securities, Warrants and Corporate Bonds) | | |
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Geographical Diversification (As a % of Investment Portfolio excluding Securities Lending Collateral and Cash Equivalents) | | |
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Portfolio holdings and characteristics are subject to change.
For more complete details about the Fund’s investment portfolio, see page 8.
Following the Fund’s fiscal first and third quarter-end, a complete portfolio holdings listing is posted on dws.com, and is available free of charge by contacting your financial intermediary, or if you are a direct investor, by calling (800) 728-3337. In addition, the portfolio holdings listing is filed with the SEC on the Fund’s Form N-PORT and will be available on the SEC’s Web site at sec.gov. Additional portfolio holdings for the Fund are also posted on dws.com from time to time. Please see the Fund’s current prospectus for more information.
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
Investment Portfolioas of December 31, 2022
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Communication Services 5.0% | |
Diversified Telecommunication Services 1.4% | |
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Deutsche Telekom AG (Registered) | | | |
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Telkom Indonesia Persero Tbk PT (ADR) | | | |
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Verizon Communications, Inc. | | | |
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Tencent Music Entertainment Group (ADR)* | | | |
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Interactive Media & Services 1.5% | |
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Meta Platforms, Inc. "A"* | | | |
ZoomInfo Technologies, Inc.* | | | |
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Interpublic Group of Companies, Inc. | | | |
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Wireless Telecommunication Services 1.0% | |
America Movil SAB de CV "L" (ADR) | | | |
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Consumer Discretionary 4.6% | |
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Bayerische Motoren Werke AG | | | |
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Volkswagen AG (Preference) | | | |
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Hotels, Restaurants & Leisure 0.7% | |
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La Francaise des Jeux SAEM 144A | | | |
Restaurant Brands International, Inc. | | | |
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Internet & Direct Marketing Retail 1.2% | |
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Chow Tai Fook Jewellery Group Ltd. | | | |
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Industria de Diseno Textil SA | | | |
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Textiles, Apparel & Luxury Goods 0.3% | |
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LVMH Moet Hennessy Louis Vuitton SE | | | |
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The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
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Coca-Cola Europacific Partners PLC | | | |
Coca-Cola Femsa SAB de CV (ADR) | | | |
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Food & Staples Retailing 1.1% | |
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Koninklijke Ahold Delhaize NV | | | |
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Walgreens Boots Alliance, Inc. | | | |
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British American Tobacco PLC | | | |
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Philip Morris International, Inc. | | | |
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Oil, Gas & Consumable Fuels | |
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Canadian Natural Resources Ltd. | | | |
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Ultrapar Participacoes SA (ADR) | | | |
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Banco Bilbao Vizcaya Argentaria SA | | | |
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Banco Santander Chile (ADR) | | | |
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Canadian Imperial Bank of Commerce | | | |
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Citizens Financial Group, Inc. | | | |
Commonwealth Bank of Australia | | | |
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FinecoBank Banca Fineco SpA | | | |
Huntington Bancshares, Inc. | | | |
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Mizrahi Tefahot Bank Ltd. | | | |
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Oversea-Chinese Banking Corp., Ltd. | | | |
PNC Financial Services Group, Inc. | | | |
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Shinhan Financial Group Co., Ltd. (ADR) | | | |
Skandinaviska Enskilda Banken AB "A" | | | |
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Partners Group Holding AG | | | |
T. Rowe Price Group, Inc. | | | |
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The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
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Diversified Financial Services 0.3% | |
Apollo Global Management, Inc. | | | |
| | | |
| | | |
| |
| | | |
| | | |
| | | |
| | | |
Ping An Insurance Group Co. of China Ltd. (ADR) | | | |
| | | |
Zurich Insurance Group AG | | | |
| | | |
| |
| |
| | | |
| | | |
| | | |
Contra Abiomed, Inc.* (a) | | | |
| | | |
| | | |
| | | |
| | | |
Health Care Equipment & Supplies 0.6% | |
| | | |
| | | |
| | | |
| | | |
Intuitive Surgical, Inc.* | | | |
| | | |
| | | |
Health Care Providers & Services 0.9% | |
| | | |
| | | |
| | | |
| | | |
| | | |
Health Care Technology 0.0% | |
| | | |
Life Sciences Tools & Services 0.1% | |
| | | |
| |
| | | |
Chugai Pharmaceutical Co., Ltd. | | | |
| | | |
| | | |
| | | |
| | |
Hikma Pharmaceuticals PLC | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Recordati Industria Chimica E Farmaceutica SpA | | | |
Roche Holding AG (Genusschein) | | | |
| | | |
Takeda Pharmaceutical Co., Ltd. | | | |
| | | |
| |
| |
| | | |
| | | |
| | | |
Air Freight & Logistics 0.7% | |
Deutsche Post AG (Registered) | | | |
United Parcel Service, Inc. "B" | | | |
| | | |
Commercial Services & Supplies 0.0% | |
| | | |
Construction & Engineering 0.0% | |
| | | |
Electrical Equipment 0.4% | |
| | | |
| | | |
Rockwell Automation, Inc. | | | |
| | | |
Industrial Conglomerates 0.8% | |
| | | |
CK Hutchison Holdings Ltd. | | | |
Honeywell International, Inc. | | | |
| | | |
| | | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
Illinois Tool Works, Inc. | | | |
| | | |
Techtronic Industries Co., Ltd. | | | |
| | | |
| |
Kuehne & Nagel International AG (Registered) | | | |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
| | |
Professional Services 0.2% | |
Nihon M&A Center Holdings, Inc. | | | |
| | | |
| | | |
| | | |
| |
| | | |
Canadian National Railway Co. | | | |
| | | |
Old Dominion Freight Line, Inc. | | | |
| | | |
| | | |
Trading Companies & Distributors 0.5% | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Information Technology 12.6% | |
Communications Equipment 0.7% | |
| | | |
Electronic Equipment, Instruments & Components 0.2% | |
| | | |
| |
| | | |
| | | |
Automatic Data Processing, Inc. | | | |
| | | |
| | | |
| | | |
| | | |
International Business Machines Corp. | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Semiconductors & Semiconductor Equipment 3.3% | |
Advanced Micro Devices, Inc.* | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Microchip Technology, Inc. | | | |
Monolithic Power Systems, Inc. | | | |
| | | |
| | | |
Taiwan Semiconductor Manufacturing Co., Ltd. (ADR) | | | |
| | | |
| | | |
| | | |
| |
| | | |
| | | |
Cadence Design Systems, Inc.* | | | |
Crowdstrike Holdings, Inc. "A"* | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Technology Hardware, Storage & Peripherals 2.2% | |
| | | |
| | | |
| | | |
| |
| |
Air Products & Chemicals, Inc. | | | |
| | | |
| | | |
LyondellBasell Industries NV "A" | | | |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
| | |
Shin-Etsu Chemical Co., Ltd. | | | |
Sociedad Quimica y Minera de Chile SA (ADR) | | | |
| | | |
Containers & Packaging 0.2% | |
| | | |
| | | |
| | | |
| |
| | | |
| | | |
| | | |
| | | |
POSCO Holdings, Inc. (ADR) | | | |
| | | |
Sumitomo Metal Mining Co., Ltd. | | | |
| | | |
Paper & Forest Products 0.1% | |
| | | |
| |
Equity Real Estate Investment Trusts (REITs) 1.9% | |
Ascendas Real Estate Investment Trust | | | |
| | | |
Gaming and Leisure Properties, Inc. | | | |
| | | |
| | | |
Simon Property Group, Inc. | | | |
| | | |
| | | |
Real Estate Management & Development 0.3% | |
Daito Trust Construction Co., Ltd. | | | |
| | | |
| | | |
| | | |
| | | |
| |
| |
American Electric Power Co., Inc. | | | |
| | | |
| | | |
| | | |
| | | |
| |
| | | |
| |
| | | |
| | |
| | | |
| | | |
| | | |
Total Common Stocks (Cost $53,580,483) | |
| |
| |
AGNC Investment Corp., Series C, 7.0% | | | |
Fifth Third Bancorp., Series I, 6.625% | | | |
KeyCorp., Series E, 6.125% | | | |
Morgan Stanley, Series K, 5.85% | | | |
The Goldman Sachs Group, Inc., Series J, 5.5% | | | |
Wells Fargo & Co., Series Y, 5.625% | | | |
| | | |
| |
Kimco Realty Corp., Series L, 5.125% | | | |
Prologis, Inc., Series Q, 8.54% | | | |
Simon Property Group, Inc., Series J, 8.375% | | | |
| | | |
Total Preferred Stocks (Cost $3,039,895) | |
| |
| |
Hercules Trust II, Expiration Date 3/31/2029* (a) (Cost $30,283) | | | |
| | |
| |
Communication Services 1.8% | |
America Movil SAB de CV, 4.375%, 4/22/2049 | | | |
| | | |
| | | |
| | | |
Charter Communications Operating LLC: | | | |
| | | |
| | | |
| | | |
Discovery Communications LLC, 4.0%, 9/15/2055 | | | |
Grupo Televisa SAB, 5.25%, 5/24/2049 | | | |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
| | |
Netflix, Inc., 5.875%, 11/15/2028 | | | |
Rogers Communications, Inc., 144A, 3.8%, 3/15/2032 | | | |
Tencent Holdings Ltd., REG S, 2.39%, 6/3/2030 | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Verizon Communications, Inc.: | | | |
| | | |
| | | |
| | | |
Consumer Discretionary 1.0% | |
Ford Motor Co., 3.25%, 2/12/2032 | | | |
Ford Motor Credit Co. LLC: | | | |
| | | |
| | | |
General Motors Co., 5.6%, 10/15/2032 | | | |
General Motors Financial Co., Inc.: | | | |
| | | |
| | | |
Newell Brands, Inc., 6.375%, 9/15/2027 | | | |
Warnermedia Holdings, Inc., 144A, 5.05%, 3/15/2042 | | | |
| | | |
| |
Anheuser-Busch Companies LLC, 4.9%, 2/1/2046 | | | |
Anheuser-Busch InBev Worldwide, Inc., 5.55%, 1/23/2049 | | | |
| | | |
| | | |
| | | |
| | | |
| |
Cheniere Corpus Christi Holdings LLC, 5.875%, 3/31/2025 | | | |
Cheniere Energy Partners LP, 4.5%, 10/1/2029 | | | |
Ecopetrol SA, 6.875%, 4/29/2030 | | | |
| | | |
| | | |
| | |
| | | |
Enterprise Products Operating LLC: | | | |
| | | |
| | | |
Oneok, Inc., 6.1%, 11/15/2032 | | | |
Petroleos Mexicanos, 6.7%, 2/16/2032 | | | |
Plains All American Pipeline LP, 3.8%, 9/15/2030 | | | |
Saudi Arabian Oil Co., 144A, 2.25%, 11/24/2030 | | | |
Williams Companies, Inc., 4.65%, 8/15/2032 | | | |
| | | |
| |
AerCap Ireland Capital DAC: | | | |
| | | |
| | | |
Air Lease Corp., 4.125%, Perpetual (c) | | | |
Aircastle Ltd., 144A, 5.25%, Perpetual (c) | | | |
Ally Financial, Inc., 4.7%, Perpetual (c) | | | |
Ares Capital Corp., 2.875%, 6/15/2027 | | | |
Banco Nacional de Panama, 144A, 2.5%, 8/11/2030 | | | |
Banco Santander SA, 5.294%, 8/18/2027 | | | |
| | | |
| | | |
| | | |
Bank of New York Mellon Corp.: | | | |
| | | |
| | | |
Blackstone Secured Lending Fund: | | | |
| | | |
| | | |
Capital One Financial Corp., 3.95% (d), Perpetual (c) | | | |
| | | |
| | | |
| | | |
Enstar Finance LLC, 5.5%, 1/15/2042 | | | |
HSBC Holdings PLC, 7.39%, 11/3/2028 | | | |
JPMorgan Chase & Co., 3.328%, 4/22/2052 | | | |
KKR Group Finance Co., XII LLC, 144A, 4.85%, 5/17/2032 | | | |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
| | |
Liberty Mutual Group, Inc., 144A, 5.5%, 6/15/2052 | | | |
Lloyds Banking Group PLC, 4.716%, 8/11/2026 | | | |
Morgan Stanley, 2.484%, 9/16/2036 | | | |
PNC Financial Services Group, Inc., 3.4%, Perpetual (c) | | | |
REC Ltd., 144A, 4.75%, 5/19/2023 | | | |
Societe Generale, 144A, 9.375%, 11/22/2027 | | | |
| | | |
144A, 5.375%, Perpetual (c) | | | |
| | | |
State Street Corp., 4.164%, 8/4/2033 | | | |
Synchrony Bank, 5.625%, 8/23/2027 | | | |
The Charles Schwab Corp., Series I, 4.0%, Perpetual (c) | | | |
The Goldman Sachs Group, Inc.: | | | |
| | | |
| | | |
Truist Financial Corp., 4.8%, Perpetual (c) | | | |
U.S. Bancorp., 5.85%, 10/21/2033 | | | |
UBS Group AG, 144A, 4.375%, Perpetual (c) | | | |
Westpac Banking Corp., 5.0%, Perpetual (c) | | | |
| | | |
| |
| | | |
| | | |
| | | |
Charles River Laboratories International, Inc., 144A, 3.75%, 3/15/2029 | | | |
CVS Health Corp., 5.05%, 3/25/2048 | | | |
Elevance Health, Inc., 6.1%, 10/15/2052 | | | |
HCA, Inc., 5.25%, 6/15/2026 | | | |
Teva Pharmaceutical Finance Netherlands III BV, 3.15%, 10/1/2026 | | | |
| | | |
| |
Adani Ports & Special Economic Zone Ltd., 144A, 4.2%, 8/4/2027 | | | |
| | |
American Airlines, Inc., 144A, 5.5%, 4/20/2026 | | | |
Block, Inc., 2.75%, 6/1/2026 | | | |
Boeing Co., 2.196%, 2/4/2026 | | | |
Delta Air Lines, Inc., 3.75%, 10/28/2029 | | | |
Eaton Corp., 4.15%, 3/15/2033 | | | |
Humana, Inc, 5.875%, 3/1/2033 | | | |
Kraft Heinz Foods Co., 4.375%, 6/1/2046 | | | |
Mileage Plus Holdings LLC, 144A, 6.5%, 6/20/2027 | | | |
Oracle Corp., 6.9%, 11/9/2052 | | | |
Pacificorp., 5.35%, 12/1/2053 | | | |
Philip Morris International, Inc.: | | | |
| | | |
| | | |
Prime Security Services Borrower LLC, 144A, 5.25%, 4/15/2024 | | | |
Thermo Fisher Scientific, 4.95%, 11/21/2032 | | | |
United Rentals North America, Inc., 144A, 6.0%, 12/15/2029 | | | |
| | | |
Information Technology 1.2% | |
Broadcom, Inc., 144A, 2.6%, 2/15/2033 | | | |
Dell International LLC, 5.3%, 10/1/2029 | | | |
HP, Inc., 5.5%, 1/15/2033 | | | |
Micron Technology, Inc., 6.75%, 11/1/2029 | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
SK Hynix, Inc., 144A, 1.5%, 1/19/2026 | | | |
| | | |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
| | |
| |
AngloGold Ashanti Holdings PLC, 3.75%, 10/1/2030 | | | |
Berry Global, Inc., 1.65%, 1/15/2027 | | | |
Celanese U.S. Holdings LLC: | | | |
| | | |
| | | |
MEGlobal Canada ULC, 144A, 5.0%, 5/18/2025 | | | |
Suzano Austria GmbH, 2.5%, 9/15/2028 | | | |
| | | |
| |
| | | |
| | | |
| | | |
MPT Operating Partnership LP, (REIT), 3.5%, 3/15/2031 | | | |
| | | |
| |
CMS Energy Corp., 3.75%, 12/1/2050 | | | |
Duke Energy Corp., 3.25%, 1/15/2082 | | | |
Duke Energy Florida LLC, 5.95%, 11/15/2052 | | | |
Enel Finance International NV, 144A, 5.0%, 6/15/2032 | | | |
Eskom Holdings SOC Ltd., REG S, 6.35%, 8/10/2028 | | | |
New England Power Co., 144A, 5.936%, 11/25/2052 | | | |
NextEra Energy Operating Partners LP: | | | |
| | | |
| | | |
Pacific Gas and Electric Co.: | | | |
| | | |
| | | |
| | | |
| | | |
Perusahaan Listrik Negara PT, 144A, 2.875%, 10/25/2025 | | | |
Sempra Energy, 4.125%, 4/1/2052 | | | |
Southern Co., 3.75%, 9/15/2051 | | | |
| | | |
Total Corporate Bonds (Cost $24,083,024) | |
| | |
|
Automobile Receivables 0.2% | |
JPMorgan Chase Bank NA, “E”, Series 2021-1, 144A, 2.365%, 9/25/2028 | | | |
| |
CF Hippolyta Issuer LLC, “B1”, Series 2021-1A, 144A, 1.98%, 3/15/2061 | | | |
DB Master Finance LLC, “A23”, Series 2021-1A, 144A, 2.791%, 11/20/2051 | | | |
Domino's Pizza Master Issuer LLC, “A23”, Series 2017-1A, 144A, 4.118%, 7/25/2047 | | | |
Madison Park Funding XXVI Ltd., “AR”, Series 2007-4A, 144A, 3-month USD- LIBOR + 1.2%, 5.615% (e), 7/29/2030 | | | |
Octagon Investment Partners Ltd., “A1R”, Series 2019-4A, 144A, 3-month USD-LIBOR + 1.15%, 5.8% (e), 5/12/2031 | | | |
Venture 37 CLO Ltd., “A1R”, Series 2019-37A, 144A, 3-month USD-LIBOR + 1.15%, 5.229% (e), 7/15/2032 | | | |
Wendy's Funding LLC, “A2II”, Series 2021-1A, 144A, 2.775%, 6/15/2051 | | | |
| | | |
Total Asset-Backed (Cost $5,224,468) | |
Mortgage-Backed Securities Pass- Throughs 0.0% | |
Federal Home Loan Mortgage Corp., 6.0%, 3/1/2038 | | | |
Federal National Mortgage Association: | | | |
| | | |
| | | |
Total Mortgage-Backed Securities Pass- Throughs (Cost $4,380) | |
Commercial Mortgage-Backed Securities 2.0% | |
Citigroup Commercial Mortgage Trust, “D”, Series 2019-PRM, 144A, 4.35%, 5/10/2036 | | | |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
| | |
Credit Suisse Commercial Mortgage Trust, “B”, Series 2020-TMIC, 144A, 1-month USD-LIBOR + 5.0%, 9.818% (e), 12/15/2035 | | | |
Credit Suisse Mortgage Trust, “A”, Series 2020- TMIC, 144A, 1-month USD-LIBOR + 3.0%, 7.818% (e), 12/15/2035 | | | |
Freddie Mac Multifamily Structured Credit Risk, “M2”, Series 2021-MN1, 144A, 30-day average SOFR + 3.75%, 7.678% (e), 1/25/2051 | | | |
Total Commercial Mortgage-Backed Securities (Cost $2,110,968) | |
Collateralized Mortgage Obligations 0.8% |
Connecticut Avenue Securities Trust: | | | |
“1M2”, Series 2019-R03, 144A, 1-month USD- LIBOR + 2.15%, 6.539% (e), 9/25/2031 | | | |
“1M2”, Series 2019-R02, 144A, 1-month USD- LIBOR + 2.3%, 6.689% (e), 8/25/2031 | | | |
Federal National Mortgage Association, “I”, Series 2003-84, Interest Only, 6.0%, 9/25/2033 | | | |
Freddie Mac Structured Agency Credit Risk Debt Notes: | | | |
“M2”, Series 2020-DNA2, 144A, 1-month USD- LIBOR + 1.85%, 6.239% (e), 2/25/2050 | | | |
“M2”, Series 2019-DNA2, 144A, 1-month USD- LIBOR + 2.45%, 6.839% (e), 3/25/2049 | | | |
JPMorgan Mortgage Trust, “AM”, Series 2016-3, 144A, 3.241%, 10/25/2046 | | | |
Total Collateralized Mortgage Obligations (Cost $837,883) | |
Government & Agency Obligations 5.2% |
| |
Brazilian Government International Bond, 3.875%, 6/12/2030 | | | |
| | |
Indonesia Government International Bond: | | | |
| | | |
| | | |
Perusahaan Penerbit SBSN Indonesia III, 144A, 2.8%, 6/23/2030 | | | |
| | | |
U.S. Treasury Obligations 4.3% | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Total Government & Agency Obligations (Cost $5,825,677) | |
Short-Term U.S. Treasury Obligation 1.4% |
U.S. Treasury Bills, 1.998% (f), 4/20/2023 (g) (h) (Cost $1,490,926) | | | |
| | |
Exchange-Traded Funds 2.8% |
SPDR Bloomberg Convertible Securities ETF (Cost $2,340,555) | | | |
Securities Lending Collateral 0.1% |
DWS Government & Agency Securities Portfolio "DWS Government Cash Institutional Shares", 4.07% (i) (j)
(Cost $82,000) | | | |
|
DWS Central Cash Management Government Fund, 4.2% (i) (Cost $1,133,981) | | | |
| | | |
Total Investment Portfolio (Cost $99,784,523) | | | |
Other Assets and Liabilities, Net | | | |
| | | |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
A summary of the Fund’s transactions with affiliated investments during the year ended December 31, 2022 are as follows:
| | | Net Realized
Gain/
(Loss) ($) | Net Change in
Unrealized
Appreciation
(Depreciation) ($) | | Capital Gain
Distributions ($) | Number
of Shares
at
12/31/2022 | |
Securities Lending Collateral 0.1% |
DWS Government & Agency Securities Portfolio "DWS Government Cash Institutional Shares", 4.07% (i) (j) |
| | | | | | | | |
|
DWS Central Cash Management Government Fund, 4.2% (i) |
| | | | | | | | |
| | | | | | | | |
| Non-income producing security. |
| Investment was valued using significant unobservable inputs. |
| Principal amount stated in U.S. dollars unless otherwise noted. |
| Perpetual, callable security with no stated maturity date. |
| All or a portion of these securities were on loan. In addition, "Other Assets and Liabilities, Net" may include pending sales that are also on loan. The value of securities loaned at December 31, 2022 amounted to $78,540, which is 0.1% of net assets. |
| Variable or floating rate security. These securities are shown at their current rate as of December 31, 2022. For securities based on a published reference rate and spread, the reference rate and spread are indicated within the description above. Certain variable rate securities are not based on a published reference rate and spread but adjust periodically based on current market conditions, prepayment of underlying positions and/or other variables. Securities with a floor or ceiling feature are disclosed at the inherent rate, where applicable. |
| Annualized yield at time of purchase; not a coupon rate. |
| At December 31, 2022, this security has been pledged, in whole or in part, to cover initial margin requirements for open centrally cleared swap contracts. |
| At December 31, 2022, this security has been pledged, in whole or in part, to cover initial margin requirements for open futures contracts. |
| Affiliated fund managed by DWS Investment Management Americas, Inc. The rate shown is the annualized seven-day yield at period end. |
| Represents cash collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates. |
| Represents the net increase (purchase cost) or decrease (sales proceeds) in the amount invested in cash collateral for the year ended December 31, 2022. |
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 |
CLO: Collateralized Loan Obligation |
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. |
MSCI: Morgan Stanley Capital International |
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 |
|
SBSN: Surat Berharga Syariah Negara (Islamic Based Government Securities) |
|
SOFR: Secured Overnight Financing Rate |
SPDR: Standard & Poor's Depositary Receipt |
LIBOR: London Interbank Offered Rate, the benchmark rate for certain floating rate securities, has been phased out as of the end of 2021 for most maturities and currencies, although certain widely used US Dollar LIBOR rates are expected to continue to be published through June 2023 to assist with the transition. The transition process from LIBOR towards its expected replacement reference rate with the Secured Overnight Financing Rate (SOFR) for US Dollar LIBOR rates has become increasingly well defined, especially following the signing of the federal Adjustable Interest Rate (LIBOR) Act in March 2022 , and the adoption of implementing regulations in December 2022, which will replace LIBOR-based benchmark rates in instruments with no, or insufficient, alternative rate-setting provisions with a SOFR-based rate following the cessation of LIBOR. However, the Fund or the instruments in which the Fund invests may be adversely affected by the phase out by, among other things, increased volatility or illiquidity.
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.
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
At December 31, 2022, open futures contracts purchased were as follows:
| | | | | | Unrealized
Depreciation ($) |
10 Year U.S. Treasury Note | | | | | | |
MSCI Emerging Market Index | | | | | | |
Ultra 10 Year U.S. Treasury Note | | | | | | |
Ultra Long U.S. Treasury Bond | | | | | | |
Total unrealized depreciation | |
At December 31, 2022, open futures contracts sold were as follows:
| | | | | | Unrealized
Appreciation/
(Depreciation) ($) |
5 Year U.S. Treasury Note | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Total net unrealized appreciation | |
At December 31, 2022, open interest rate swap contracts were as follows:
|
Cash Flows
Paid by
the Fund/
Frequency | Cash Flows
Received by
the Fund/
Frequency | | | | | Upfront
Payments
Paid/
(Received)
($) | Unrealized
Appreciation
($) |
Fixed — 0.25% Semi-Annually | Floating — 3-Month LIBOR Quarterly β | | | | | | |
Fixed — 0.45% Semi-Annually | Floating — 3-Month LIBOR Quarterly β | | | | | | |
Fixed — 1.3% Semi-Annually | Floating — 3-Month LIBOR Quarterly β | | | | | | |
Fixed — 1.63% Semi-Annually | Floating — 3-Month LIBOR Quarterly β | | | | | | |
Total unrealized appreciation | |
| 3-month LIBOR rate as of December 31, 2022 is 4.767%. |
At December 31, 2022, the Fund had the following open forward foreign currency contracts:
| | | Unrealized
Appreciation ($) | |
| | | | | | |
Currency Abbreviation(s)
For information on the Fund’s policy and additional disclosures regarding futures contracts, interest rate swap contracts and forward foreign currency contracts, please refer to the Derivatives section of Note B in the accompanying Notes to Financial Statements.
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
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 level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2022 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.
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Mortgage-Backed Securities Pass-Throughs | | | | |
Commercial Mortgage-Backed Securities | | | | |
Collateralized Mortgage Obligations | | | | |
Government & Agency Obligations (a) | | | | |
Short-Term U.S. Treasury Obligation | | | | |
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Short-Term Investments (a) | | | | |
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Interest Rate Swap Contracts | | | | |
Forward Foreign Currency Contracts | | | | |
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| See Investment Portfolio for additional detailed categorizations. |
| Derivatives include unrealized appreciation (depreciation) on open futures contracts, interest rate swap contracts and forward foreign currency contracts. |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
Statement of Assets and Liabilities
as of December 31, 2022
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Investments in non-affiliated securities, at value (cost $98,568,542) — including $78,540 of securities loaned | |
Investment in DWS Government & Agency Securities Portfolio (cost $82,000)* | |
Investment in DWS Central Cash Management Government Fund (cost $1,133,981) | |
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Foreign currency, at value (cost $109,258) | |
Receivable for Fund shares sold | |
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Receivable for variation margin on centrally cleared swaps | |
Unrealized appreciation on forward foreign currency contracts | |
Foreign taxes recoverable | |
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Payable upon return of securities loaned | |
Payable for Fund shares redeemed | |
Payable for variation margin on futures contracts | |
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Other accrued expenses and payables | |
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Distributable earnings (loss) | |
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Net Asset Value, offering and redemption price per share ($102,657,572 ÷ 5,077,917 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | |
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Net Asset Value, offering and redemption price per share ($11,410 ÷ 566 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized)** | |
| Represents collateral on securities loaned. |
| Net asset value and redemption price per share may not recalculate due to rounding of net assets and/or shares outstanding. |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
for the year ended December 31, 2022
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Dividends (net of foreign taxes withheld of $146,656) | |
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Income distributions — DWS Central Cash Management Government Fund | |
Securities lending income, net of borrower rebates | |
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Distribution service fee (Class B) | |
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Trustees' fees and expenses | |
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Total expenses before expense reductions | |
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Total expenses after expense reductions | |
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Realized and Unrealized Gain (Loss) | |
Net realized gain (loss) from: | |
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Forward foreign currency contracts | |
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Change in net unrealized appreciation (depreciation) on: | |
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Forward foreign currency contracts | |
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Net increase (decrease) in net assets resulting from operations | |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
Statements of Changes in Net Assets
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Increase (Decrease) in Net Assets | | |
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Change in net unrealized appreciation
(depreciation) | | |
Net increase (decrease) in net assets resulting from operations | | |
Distributions to shareholders: | | |
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Proceeds from shares sold | | |
Reinvestment of distributions | | |
Payments for shares redeemed | | |
Net increase (decrease) in net assets from Class A share transactions | | |
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Reinvestment of distributions | | |
Net increase (decrease) in net assets from Class B share transactions | | |
Increase (decrease) in net assets | | |
Net assets at beginning of period | | |
Net assets at end of period | | |
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Shares outstanding at beginning of period | | |
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Shares issued to shareholders in reinvestment of distributions | | |
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Net increase (decrease) in Class A shares | | |
Shares outstanding at end of period | | |
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Shares outstanding at beginning of period | | |
Shares issued to shareholders in reinvestment of distributions | | |
Net increase (decrease) in Class B shares | | |
Shares outstanding at end of period | | |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
Financial Highlights
DWS Global Income Builder VIP — Class A |
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Net asset value, beginning of period | | | | | |
Income (loss) from investment operations: | | | | | |
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Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
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Net asset value, end of period | | | | | |
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Ratios to Average Net Assets and Supplemental Data |
Net assets, end of period ($ millions) | | | | | |
Ratio of expenses before expense reductions (%)c | | | | | |
Ratio of expenses after expense reductions (%)c | | | | | |
Ratio of net investment income (%) | | | | | |
Portfolio turnover rate (%) | | | | | |
| Based on average shares outstanding during the period. |
| Total return would have been lower had certain expenses not been reduced. |
| Expense ratio does not reflect charges and fees 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 accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
DWS Global Income Builder VIP — Class B |
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Net asset value, beginning of period | | | | | |
Income (loss) from investment operations: | | | | | |
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Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
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Net asset value, end of period | | | | | |
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Ratios to Average Net Assets and Supplemental Data |
Net assets, end of period ($ thousands) | | | | | |
Ratio of expenses before expense reductions (%)d | | | | | |
Ratio of expenses after expense reductions (%)d | | | | | |
Ratio of net investment income (%) | | | | | |
Portfolio turnover rate (%) | | | | | |
| For the period from May 1, 2018 (commencement of operations) to December 31, 2018. |
| Based on average shares outstanding during the period. |
| Total return would have been lower had certain expenses not been reduced. |
| Expense ratio does not reflect charges and fees 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. |
| Represents the Fund’s portfolio turnover rate for the year ended December 31, 2018. |
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The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
Notes to Financial Statements
A.
Organization and Significant Accounting Policies
DWS Global Income Builder VIP (the “Fund”) is a diversified series of Deutsche 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). Class B shares are subject to Rule 12b-1 distribution fees under the 1940 Act and recordkeeping fees equal to an annual rate of up to 0.25% and of up to 0.15%, respectively, 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 12b-1 distribution 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 (“U.S. GAAP”) which require the use of management estimates. Actual results could differ from those estimates. The Fund qualifies as an investment company under Topic 946 of Accounting Standards Codification of U.S. GAAP. 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.
The Fund’s Board has designated DWS Investment Management Americas, Inc. (the “Advisor”) as the valuation designee for the Fund pursuant to Rule 2a-5 under the 1940 Act. The Advisor's Pricing Committee (the “Pricing Committee”) typically values securities using readily available market quotations or prices supplied by independent pricing services (which are considered fair values under Rule 2a-5). The Advisor has adopted fair valuation procedures that provide methodologies for fair valuing securities.
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 level assigned to the securities valuations may not be an indication of the risk or liquidity 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. Equity 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. Equity securities and ETFs are generally categorized as Level 1. 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 are valued at prices supplied by independent pricing services approved by the Pricing Committee. 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, prepayment speeds and other data, as well as broker quotes. If the pricing services are unable to provide valuations, debt securities are valued at the average of the most recent reliable bid quotations or evaluated prices, as applicable, obtained from broker-dealers. These securities are generally 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.
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Swap contracts are valued daily based upon prices supplied by a pricing vendor approved by the Pricing Committee, if available, and otherwise are valued at the price provided by the broker-dealer with which the swap was traded. 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 Pricing Committee and are generally categorized as Level 3. In accordance with the Fund’s valuation procedures, factors considered 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. The 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. Deutsche Bank AG, as lending agent, lends securities of the Fund to certain financial institutions under the terms of its securities lending agreement. During the term of the loans, the Fund continues to receive interest and dividends generated by the 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 securities lending agreement. As of period end, any securities on loan were collateralized by cash. During the year ended December 31, 2022, the Fund invested the cash collateral into a joint trading account in DWS Government & Agency Securities Portfolio, an affiliated money market fund managed by DWS Investment Management Americas, Inc. DWS Investment Management Americas, Inc. receives a management/administration fee (0.07% annualized effective rate as of December 31, 2022) on the cash collateral invested in DWS Government & Agency Securities Portfolio. 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 at any time, and the borrower, after notice, is required to return borrowed securities within a standard time period. 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. If the Fund is not able to recover securities lent, the Fund may sell the collateral and purchase a replacement investment in the market, incurring the risk that the value of the replacement security is greater than the value of the collateral. 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.
As of December 31, 2022, the Fund had securities on loan, which were classified as Corporate Bonds in the Investment Portfolio. The value of the related collateral exceeded the value of the securities loaned at period end. As of period end, the remaining contractual maturity of the collateral agreements was overnight and continuous.
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
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, the Fund may be subject to taxes imposed by the governments of countries in which it invests and are generally based on income and/or capital gains earned or repatriated, a portion of which may be recoverable based upon the current interpretation of the tax rules and regulations. Estimated tax liabilities and recoveries on certain foreign securities are recorded on an accrual basis and are reflected as components of interest income or net change in unrealized gain/loss on investments. Tax liabilities realized as a result of security sales are reflected as a component of net realized gain/loss on investments.
At December 31, 2022, the Fund had net tax basis capital loss carryforwards of approximately $3,559,000 of short-term losses, which may be applied against realized net taxable capital gains indefinitely.
The Fund has reviewed the tax positions for the open tax years as of December 31, 2022 and has determined that no provision for income tax and/or uncertain tax positions 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 from net investment income of the Fund, if any, are 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, income received from passive foreign investment companies, investments in derivatives, premium amortization on debt securities, interest income on defaulted securities, the realized tax character on distributions from certain securities and additional income recognition on debt securities classified as equity. 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.
At December 31, 2022, the Fund's components of distributable earnings (accumulated losses) on a net tax basis were as follows:
Undistributed ordinary income* | |
Capital loss carryforwards | |
Net unrealized appreciation (depreciation) on investments | |
At December 31, 2022, the aggregate cost of investments for federal income tax purposes was $100,118,826. The net unrealized appreciation for all investments based on tax cost was $2,393,740. This consisted of aggregate gross unrealized appreciation for all investments for which there was an excess of value over tax cost of $11,586,651 and aggregate gross unrealized depreciation for all investments for which there was an excess of tax cost over value of $9,192,911.
In addition, the tax character of distributions paid by the Fund is summarized as follows:
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Distributions from ordinary income* | | |
Distributions from long-term capital gains | | |
| For tax purposes, short-term capital gain distributions are considered ordinary income distributions. |
Expenses. Expenses of the Trust arising in connection with a specific fund are allocated to that fund. Other Trust expenses which cannot be directly attributed to a fund are apportioned among the funds in the Trust based upon the relative net assets or other appropriate measures.
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
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
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. Proceeds from litigation payments, if any, are included in net realized gain (loss) from investments. All premiums and discounts are amortized/accreted for both tax and financial reporting purposes, with the exception of securities in default of principal.
Swaps. A swap is a contract between two parties to exchange future cash flows at periodic intervals based on the notional amount of the swap. A bilateral swap is a transaction between the Fund and a counterparty where cash flows are exchanged between the two parties. A centrally cleared swap is a transaction executed between the Fund and a counterparty, then cleared by a clearing member through a central clearinghouse. The central clearinghouse serves as the counterparty, with whom the Fund exchanges cash flows.
The value of a 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. Gains or losses are realized when the swap expires or is closed. Certain risks may arise when entering into swap transactions including counterparty default; liquidity; or unfavorable changes in interest rates or the value of the underlying reference security, commodity or index. In connection with bilateral swaps, securities and/or cash may be identified as collateral in accordance with the terms of the swap agreement 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 swap, 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. Upon entering into a centrally cleared swap, 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 notional amount of the swap. Subsequent payments (“variation margin”) are made or received by the Fund dependent upon the daily fluctuations in the value of the swap. In a centrally cleared swap transaction, counterparty risk is minimized as the central clearinghouse acts as the counterparty.
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.
Interest Rate Swaps. Interest rate swaps are agreements in which the Fund agrees to pay to the counterparty a fixed rate payment in exchange for the counterparty agreeing to pay to the Fund a variable rate payment, or the Fund agrees to receive from the counterparty a fixed rate payment in exchange for the counterparty agreeing to receive from the Fund a variable rate payment. The payment obligations are based on the notional amount of the swap. For the year ended December 31, 2022, the Fund entered into interest rate swap agreements to gain exposure to different parts of the yield curve while managing overall duration.
A summary of the open interest rate swap contracts as of December 31, 2022 is included in a table following the Fund’s Investment Portfolio. For the year ended December 31, 2022, the investment in interest rate swap contracts had a total notional amount of $6,000,000.
Credit Default Swaps. Credit default swaps are agreements between a buyer and a seller of protection against predefined credit events for the reference entity. The Fund may enter into credit default swaps to gain exposure to an underlying issuer’s credit quality characteristics without directly investing in that issuer or to hedge against the risk of a credit event on debt securities. As a seller of a credit default swap, 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 swap 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 swaps, in which case the Fund functions as the counterparty referenced above. This
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
involves the risk that the swap 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, 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 swaps sold by the Fund. For the year ended December 31, 2022, the Fund entered into credit default swap agreements to gain exposure to the underlying issuer’s credit quality characteristics and to hedge the risk of default or other specified credit events on portfolio assets.
Under the terms of a credit default swap, the Fund receives or makes periodic 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 swap are recognized, net of a proportional amount of the upfront payment, as realized gains or losses in the Statement of Operations.
There were no open credit default swap contracts as of December 31, 2022. For the year ended December 31, 2022, the investment in credit default swap contracts purchased had a total notional amount generally indicative of a range from $0 to $4,690,000.
Futures Contracts. A futures contract is an agreement between a buyer or seller and an established futures exchange or its clearinghouse in which the buyer or seller agrees to take or make a delivery of a specific amount of a financial instrument at a specified price on a specific date (settlement date). For the year ended December 31, 2022, the Fund entered into interest rate futures to gain exposure to different parts of the yield curve while managing overall duration. The Fund also entered into interest rate futures contracts for non-hedging purposes to seek to enhance potential gains. In addition, the Fund entered into equity index futures as a means of gaining exposure to the equity asset class without investing directly into such asset class and to manage the risk of stock market volatility.
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 recognized in the Statement of Assets and Liabilities.
A summary of the open futures contracts as of December 31, 2022, is included in a table following the Fund’s Investment Portfolio. For the year ended December 31, 2022, the investment in futures contracts purchased had a total notional value generally indicative of a range from approximately $9,016,000 to $12,691,000, and the investment in futures contracts sold had a total notional value generally indicative of a range from approximately $9,702,000 to $19,366,000.
Forward Foreign Currency Contracts. A forward foreign currency contract (“forward currency contract”) is a commitment to purchase or sell a foreign currency at the settlement date at a negotiated rate. For the year ended December 31, 2022, 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 for non-hedging purposes to seek to enhance potential gains.
Forward currency contracts are valued at the prevailing forward exchange rate of the underlying currencies and unrealized gain (loss) is recorded daily. On the settlement date of the forward currency contract, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it was closed. Certain risks may arise upon entering into forward currency contracts from the potential inability of counterparties to meet the terms of their contracts. The maximum counterparty credit risk to the Fund is measured by the unrealized gain on appreciated contracts. Additionally, when utilizing forward currency contracts to hedge, the Fund gives up the opportunity to profit from favorable exchange rate movements during the term of the contract.
A summary of the open forward currency contracts as of December 31, 2022, is included in the table following the Fund’s Investment Portfolio. For the year ended December 31, 2022, the investment in forward
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
currency contracts short vs. U.S. dollars had a total contract value generally indicative of a range from $0 to approximately $446,000, and the investment in forward currency contracts long vs. U.S. dollars had a total contract value generally indicative of a range from $0 to approximately $3,879,000.
The following tables summarize the value of the Fund's derivative instruments held as of December 31, 2022 and the related location in the accompanying Statement of Assets and Liabilities, presented by primary underlying risk exposure:
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Interest Rate Contracts (a) | | | | |
Foreign Exchange Contracts (b) | | | | |
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Each of the above derivatives is located in the following Statement of Assets and Liabilities accounts: |
| Includes cumulative appreciation of futures and centrally cleared swap contracts as disclosed in the Investment Portfolio. Unsettled variation margin is disclosed separately within the Statement of Assets and Liabilities. |
| Unrealized appreciation on forward foreign currency contracts |
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Interest Rate Contracts (a) | |
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The above derivative is located in the following Statement of Assets and Liabilities account: |
| 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 year ended December 31, 2022 and the related location in the accompanying Statement of Operations is summarized in the following tables by primary underlying risk exposure:
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Interest Rate Contracts (a) | | | | |
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Foreign Exchange Contracts (a) | | | | |
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Each of the above derivatives is located in the following Statement of Operations accounts: |
| Net realized gain (loss) from forward foreign currency contracts, swap and futures contracts, respectively |
Change in Net Unrealized Appreciation (Depreciation) | | | | |
| | | | |
Interest Rate Contracts (a) | | | | |
Foreign Exchange Contracts (a) | | | | |
| | | | |
Each of the above derivatives is located in the following Statement of Operations accounts: |
| Change in net unrealized appreciation (depreciation) on forward foreign currency contracts, swap and futures contracts, respectively |
As of December 31, 2022, the Fund has transactions subject to enforceable master netting agreements which govern the terms of certain transactions, and reduce the counterparty risk associated with such transactions. Master netting agreements allow a Fund to close out and net total exposure to a counterparty in the event of a deterioration in the credit quality or contractual default with respect to all of the transactions with a counterparty. As defined by the master netting agreement, the Fund may have collateral agreements with certain counterparties to mitigate risk. For financial reporting purposes the Statement of Assets and
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
Liabilities generally shows derivatives assets and liabilities on a gross basis, which reflects the full risks and exposures prior to netting. A reconciliation of the gross amounts on the Statement of Assets and Liabilities to the net amounts by a counterparty, including any collateral exposure, is included in the following table:
| Gross Amount
of Assets
Presented
in the
Statement of
Assets and
Liabilities | Financial
Instruments
and
Derivatives
Available
for Offset | | Net Amount
of Derivative
Assets |
| | | | |
C.
Purchases and Sales of Securities
During the year ended December 31, 2022, purchases and sales of investment securities, excluding short-term investments, were as follows:
| | |
Non-U.S. Treasury Obligations | | |
U.S. Treasury Obligations | | |
Management Agreement. Under the Investment Management Agreement with DWS Investment Management Americas, Inc. (“DIMA” or the “Advisor”), an indirect, wholly owned subsidiary of DWS Group GmbH & Co. KGaA (“DWS Group”), 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.
Under the Investment Management Agreement with the Advisor, the Fund pays a monthly management fee based on the average daily net assets of the Fund, computed and accrued daily and payable monthly, at the following annual rates:
First $250 million of the Fund’s average daily net assets | |
Next $750 million of such net assets | |
Over $1 billion of such net assets | |
Accordingly, for the year ended December 31, 2022, the fee pursuant to the Investment Management Agreement was equivalent to an annual rate (exclusive of any applicable waivers/reimbursements) of 0.37% of the Fund’s average daily net assets.
For the period from January 1, 2022 through September 30, 2023 (through April 30, 2022 for Class B shares), the Advisor has contractually agreed to waive its fees and/or reimburse certain operating expenses of the Fund to the extent necessary to maintain the total annual operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of each class as follows:
For the period from May 1, 2022 through September 30, 2022, the Advisor had contractually agreed to waive its fees and/or reimburse certain operating expenses of Class B shares to the extent necessary to maintain the total annual operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) at 0.97%.
Effective October 1, 2022 through September 30, 2023, the Advisor has contractually agreed to waive its fees and/or reimburse certain operating expenses of Class B shares to the extent necessary to maintain the total annual operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) at 0.96%.
For the year ended December 31, 2022, fees waived and/or expenses reimbursed for Class B are $19.
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
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 the Advisor an annual fee (“Administration Fee”) of 0.097% of the Fund’s average daily net assets, computed and accrued daily and payable monthly. For the year ended December 31, 2022, the Administration Fee was $109,051, of which $8,611 is unpaid.
Distribution Service Agreement. DWS Distributors, Inc. (“DDI”), an affiliate of the Advisor, is the Fund’s distributor. In accordance with the Distribution Plan, DDI receives 12b-1 fees of up to 0.25% of the average daily net assets of Class B shares. For the year ended December 31, 2022, the Distribution Service Fee was as follows:
| | Unpaid at
December 31, 2022 |
| | |
Service Provider Fees. DWS Service Company (“DSC”), 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 DSC and SS&C GIDS, Inc. (“SS&C”) (name changed from DST Systems, Inc. effective January 1, 2023), DSC has delegated certain transfer agent, dividend-paying agent and shareholder service agent functions to SS&C. DSC compensates SS&C out of the shareholder servicing fee it receives from the Fund. For the year ended December 31, 2022, the amounts charged to the Fund by DSC were as follows:
| | Unpaid at
December 31, 2022 |
| | |
| | |
| | |
Other Service Fees. Under an agreement with the Fund, DIMA is compensated for providing regulatory filing services to the Fund. For the year ended December 31, 2022, the amount charged to the Fund by DIMA included in the Statement of Operations under “Reports to shareholders” aggregated $1,391, of which $59 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 Vehicles. The Fund may invest uninvested cash balances in DWS Central Cash Management Government Fund and DWS ESG Liquidity Fund, affiliated money market funds which are managed by the Advisor. Each affiliated money market fund is managed in accordance with Rule 2a-7 under the 1940 Act, which governs the quality, maturity, diversity and liquidity of instruments in which a money market fund may invest. DWS Central Cash Management Government Fund seeks to maintain a stable net asset value, and DWS ESG Liquidity Fund maintains a floating net asset value. The Fund indirectly bears its proportionate share of the expenses of each affiliated money market fund in which it invests. DWS Central Cash Management Government Fund does not pay the Advisor an investment management fee. To the extent that DWS ESG Liquidity Fund pays an investment management fee to the Advisor, the Advisor will waive an amount of the investment management fee payable to the Advisor by the Fund equal to the amount of the investment management fee payable on the Fund’s assets invested in DWS ESG Liquidity Fund.
Securities Lending Agent Fees. Deutsche Bank AG serves as securities lending agent for the Fund. For the year ended December 31, 2022, the Fund incurred securities lending agent fees to Deutsche Bank AG in the amount of $1,578.
At December 31, 2022, one participating insurance company was owner of record of 10% or more of the total outstanding Class A shares of the Fund, owning 64%.
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
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
the Participants. Interest is calculated at a daily fluctuating rate per annum equal to the sum of 0.10% plus the higher of the Federal Funds Effective Rate and the Overnight Bank Funding Rate, plus 1.25%. 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 December 31, 2022.
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Deutsche DWS Variable Series II and Shareholders of DWS Global Income Builder VIP:
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities of DWS Global Income Builder VIP (the “Fund”) (one of the funds constituting Deutsche DWS Variable Series II) (the “Trust”), including the investment portfolio, as of December 31, 2022, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund (one of the funds constituting Deutsche DWS Variable Series II) at December 31, 2022, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and its financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Trust is not required to have, nor were we engaged to perform, an audit of the Trust’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2022, by correspondence with the custodian, brokers and others; when replies were not received from brokers and others, we performed other auditing procedures. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the auditor of one or more investment companies in the DWS family of funds since at least 1979, but we are unable to determine the specific year.
Boston, Massachusetts
February 13, 2023
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
Information About Your Fund’s Expenses (Unaudited)
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, 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 for Class B shares; had it not done so, expenses would have
been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2022 to December 31, 2022).
The tables illustrate your Fund’s expenses in two ways:
—
Actual Fund Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Fund using the Fund’s actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the “Expenses Paid per $1,000” line under the share class you hold.
—
Hypothetical 5% Fund Return. This helps you to compare your Fund’s ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund’s actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The “Expenses Paid per $1,000” line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
Expenses and Value of a $1,000 Investment for the six months ended December 31, 2022
| | |
Beginning Account Value 7/1/22 | | |
Ending Account Value 12/31/22 | | |
Expenses Paid per $1,000* | | |
Hypothetical 5% Fund Return | | |
Beginning Account Value 7/1/22 | | |
Ending Account Value 12/31/22 | | |
Expenses Paid per $1,000* | | |
| 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 184 (the number of days in the most recent six-month period), then divided by 365. |
Annualized Expense Ratios | | |
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | | |
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.
For an analysis of the fees associated with an investment in the Fund or similar funds, please refer to the current and hypothetical expense calculators for Variable Insurance Products which can be found at dws.com/calculators.
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
Tax Information (Unaudited)
The Fund paid distributions of $1.33 per share from net long-term capital gains during its year ended December 31, 2022.
For corporate shareholders, 14% of the ordinary dividends (i.e., income dividends plus short-term capital gains) paid during the Fund’s fiscal year ended December 31, 2022, qualified for the dividends received deduction.
Please consult a tax advisor if you have questions about federal or state income tax laws, or on how to prepare your tax returns. If you have specific questions about your account, please contact your insurance provider.
Proxy Voting
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 most recent 12-month period ended June 30 are available on our Web site — dws.com/en-us/resources/proxy-voting — or on the SEC’s Web site — 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.
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
Advisory Agreement Board Considerations and Fee Evaluation
The Board of Trustees (hereinafter referred to as the “Board” or “Trustees”) approved the renewal of DWS Global Income Builder VIP's (the “Fund”) investment management agreement (the “Agreement”) with DWS Investment Management Americas, Inc. (“DIMA”) in September 2022.
In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:
—
During the entire process, all of the Fund's Trustees were independent of DIMA and its affiliates (the “Independent Trustees”).
—
The Board met frequently during the past year to discuss fund matters and dedicated a substantial amount of time to contract review matters. Over the course of several months, the Board reviewed extensive materials received from DIMA, independent third parties and independent counsel. These materials included an analysis of the Fund’s performance, fees and expenses, and profitability from a fee consultant retained by the Fund’s Independent Trustees (the “Fee Consultant”).
—
The Board also received extensive information throughout the year regarding performance of the Fund.
—
The Independent Trustees regularly met privately with counsel to discuss contract review and other matters. In addition, the Independent Trustees were advised by the Fee Consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the Fee Consultant in connection with their deliberations.
—
In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's Rule 12b-1 plan, distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
In connection with the contract review process, the Board considered the factors discussed below, among others. The Board also considered that DIMA and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DIMA managed the Fund. DIMA is part of DWS Group GmbH & Co. KGaA (“DWS Group”). DWS Group is a global asset management business that offers a wide range of investing expertise and resources, including research capabilities in many countries throughout the world. In 2018, approximately 20% of DWS Group’s shares were sold in an initial public offering, with Deutsche Bank AG owning the remaining shares.
As part of the contract review process, the Board carefully considered the fees and expenses of each DWS fund overseen by the Board in light of the fund’s performance. In many cases, this led to the negotiation and implementation of expense caps.
While shareholders may focus primarily on fund performance and fees, the Fund’s Board considers these and many other factors, including the quality and integrity of DIMA’s personnel and administrative support services provided by DIMA, such as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DIMA provides portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DIMA provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel and the resources made available to such personnel. The Board also considered the risks to DIMA in sponsoring or managing the Fund, including financial, operational and reputational risks, the potential economic impact to DIMA from such risks and DIMA’s approach to addressing such risks. The Board reviewed the Fund’s performance over short-term and long-term periods and compared those returns to various agreed-upon performance measures, including market index(es) and a peer universe compiled using information supplied by Morningstar Direct (“Morningstar”), an independent fund data service. The Board also noted that it has put into place a process of identifying “Funds in Review” (e.g., funds performing poorly relative to a peer universe), and receives additional reporting from DIMA regarding such funds and, where appropriate, DIMA’s plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that, for the one-, three- and five-year periods ended December 31, 2021, the Fund’s performance (Class A shares) was in the 2nd quartile of the applicable Morningstar universe (the 1st quartile being the best performers and the 4th quartile being
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
the worst performers). The Board also observed that the Fund has underperformed its benchmark in the one-, three- and five-year periods ended December 31, 2021.
Fees and Expenses. The Board considered the Fund’s investment management fee schedule, operating expenses and total expense ratios, and comparative information provided by Broadridge Financial Solutions, Inc. (“Broadridge”) and the Fee Consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include a 0.097% fee paid to DIMA under the Fund’s administrative services agreement, were lower than the median (1st quartile) of the applicable Broadridge peer group (based on Broadridge data provided as of December 31, 2021). The Board noted that the Fund’s Class A shares total (net) operating expenses were expected to be lower than the median (2nd quartile) of the applicable Broadridge expense universe (based on Broadridge data provided as of December 31, 2021, and analyzing Broadridge expense universe Class A (net) expenses less any applicable 12b-1 fees) (“Broadridge Universe Expenses”). The Board also reviewed data comparing each other operational share class’s total (net) operating expenses to the applicable Broadridge Universe Expenses. The Board noted that the expense limitations agreed to by DIMA were expected to help the Fund’s total (net) operating expenses remain competitive. The Board considered the Fund’s management fee rate as compared to fees charged by DIMA to a comparable DWS U.S. registered fund (“DWS Funds”) and considered differences between the Fund and the comparable DWS Fund. The information requested by the Board as part of its review of fees and expenses also included information about institutional accounts (including any sub-advised funds and accounts) and funds offered primarily to European investors (“DWS Europe Funds”) managed by DWS Group. The Board noted that DIMA indicated that DWS Group does not manage any institutional accounts or DWS Europe Funds comparable to the Fund.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DIMA.
Profitability. The Board reviewed detailed information regarding revenues received by DIMA under the Agreement. The Board considered the estimated costs to DIMA, and pre-tax profits realized by DIMA, from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DIMA and its affiliates with respect to all fund services in totality and by fund. The Board and the Fee Consultant reviewed DIMA’s methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DIMA in connection with the management of the Fund were not unreasonable. The Board also reviewed certain publicly available information regarding the profitability of certain similar investment management firms. The Board noted that, while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DIMA and its affiliates’ overall profitability with respect to the DWS Funds (after taking into account distribution and other services provided to the funds by DIMA and its affiliates) was lower than the overall profitability levels of most comparable firms for which such data was available.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund’s investment management fee schedule includes fee breakpoints. The Board concluded that the Fund’s fee schedule represents an appropriate sharing between the Fund and DIMA of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DIMA and Its Affiliates. The Board also considered the character and amount of other incidental or “fall-out” benefits received by DIMA and its affiliates, including any fees received by DIMA for administrative services provided to the Fund, any fees received by an affiliate of DIMA for transfer agency services provided to the Fund and any fees received by an affiliate of DIMA for distribution services. The Board also considered benefits to DIMA related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities. In addition, the Board considered the incidental public relations benefits to DIMA related to DWS Funds advertising and cross-selling opportunities among DIMA products and services. The Board considered these benefits in reaching its conclusion that the Fund’s management fees were reasonable.
Compliance. The Board considered the significant attention and resources dedicated by DIMA to its compliance processes in recent years. The Board noted in particular (i) the experience, seniority and time commitment of the individuals serving as DIMA’s and the Fund’s chief compliance officers and (ii) the
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
substantial commitment of resources by DIMA and its affiliates to compliance matters, including the retention of compliance personnel.
Based on all of the information considered and the conclusions reached, the Board determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and counsel present. It is possible that individual Independent Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
Board Members and Officers
The following table presents certain information regarding the Board Members and Officers of the Trust/Corporation. Each Board Member’s year of birth is set forth in parentheses after his or her name. Unless otherwise noted, (i) each Board Member has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity; and (ii) the address of each Independent Board Member is c/o Keith R. Fox, DWS Funds Board Chair, c/o Thomas R. Hiller, Ropes & Gray LLP, Prudential Tower, 800 Boylston Street, Boston, MA 02199-3600. Except as otherwise noted below, the term of office for each Board Member is until the election and qualification of a successor, or until such Board Member sooner dies, resigns, is removed or as otherwise provided in the governing documents of the Trust/Corporation. Because the Fund does not hold an annual meeting of shareholders, each Board Member will hold office for an indeterminate period.
The Board Members may also serve in similar capacities with other funds in the fund complex. The number of funds in the DWS fund complex shown in the table below includes all registered open- and closed-end funds (including all of their portfolios) advised by the Advisor and any registered funds that have an investment advisor that is an affiliated person of the Advisor.
Independent Board Members/Independent Advisory Board Members
Name, Year of
Birth, Position
with the Trust/
Corporation
and Length of
| Business Experience and Directorships
During the Past Five Years | Number of
Funds in
DWS Fund
Complex
Overseen | Other
Directorships
Held by Board
Member |
Keith R. Fox, CFA (1954) Chairperson since 2017, and Board Member since 1996 | Managing General Partner, Exeter Capital Partners (a series of private investment funds) (since 1986). Directorships: Progressive International Corporation (kitchen goods designer and distributor); former Chairman, National Association of Small Business Investment Companies; Former Directorships: ICI Mutual Insurance Company; BoxTop Media Inc. (advertising); Sun Capital Advisers Trust (mutual funds) | | |
John W. Ballantine (1946) Board Member since 1999 | Retired; formerly, Executive Vice President and Chief Risk Management Officer, First Chicago NBD Corporation/The First National Bank of Chicago (1996–1998); Executive Vice President and Head of International Banking (1995–1996); Not-for-Profit Directorships: Window to the World Communications (public media); Life Director of Harris Theater for Music and Dance (Chicago); Life Director of Hubbard Street Dance Chicago; Former Directorships: Director and Chairman of the Board, Healthways, Inc.2 (population wellbeing and wellness services) (2003–2014); Stockwell Capital Investments PLC (private equity); Enron Corporation; FNB Corporation; Tokheim Corporation; First Oak Brook Bancshares, Inc.; Oak Brook Bank; Portland General Electric2 (utility company (2003–2021); and Prisma Energy International; Former Not-for-Profit Directorships: Public Radio International; Palm Beach Civic Assn. | | |
Dawn-Marie Driscoll (1946) Board Member since 1987 | Advisory Board and former Executive Fellow, Hoffman Center for Business Ethics, Bentley University; formerly: Partner, Palmer & Dodge (law firm) (1988–1990); Vice President of Corporate Affairs and General Counsel, Filene’s (retail) (1978–1988); Directorships: Trustee and former Chairman of the Board, Southwest Florida Community Foundation (charitable organization); Former Directorships: ICI Mutual Insurance Company (2007–2015); Sun Capital Advisers Trust (mutual funds) (2007–2012), Investment Company Institute (audit, executive, nominating committees) and Independent Directors Council (governance, executive committees) | | |
Richard J. Herring (1946) Board Member since 1990 | Jacob Safra Professor of International Banking and Professor of Finance, The Wharton School, University of Pennsylvania (since July 1972); formerly: Director, The Wharton Financial Institutions Center (1994–2020); Vice Dean and Director, Wharton Undergraduate Division (1995–2000) and Director, The Lauder Institute of International Management Studies (2000–2006); Member FDIC Systemic Risk Advisory Committee since 2011, member Systemic Risk Council since 2012 and member of the Advisory Board at the Yale Program on Financial Stability since 2013; Former Directorships: Co-Chair of the Shadow Financial Regulatory Committee (2003–2015), Executive Director of The Financial Economists Roundtable (2008–2015), Director of The Thai Capital Fund (2007–2013), Director of The Aberdeen Singapore Fund (2007–2018), Director, The Aberdeen Japan Fund (2007-2021) and Nonexecutive Director of Barclays Bank DE (2010–2018) | | |
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
Name, Year of Birth, Position with the Trust/ Corporation and Length of Time Served1 | Business Experience and Directorships During the Past Five Years | Number of Funds in DWS Fund Complex Overseen | Other Directorships Held by Board Member |
Chad D. Perry (1972) Board Member or Advisory | Executive Vice President, General Counsel and Secretary, Tanger Factory Outlet Centers, Inc.2 (since 2011); formerly Executive Vice President and Deputy General Counsel, LPL Financial Holdings Inc.2 (2006–2011); Senior Corporate Counsel, EMC Corporation (2005–2006); Associate, Ropes & Gray LLP (1997–2005) | | Director - Great Elm Capital Corp. (business development company) (since 2022) |
Rebecca W. Rimel (1951) Board Member since 1995 | Director, The Bridgespan Group (nonprofit organization) (since October 2020); formerly: Executive Vice President, The Glenmede Trust Company (investment trust and wealth management) (1983–2004); Board Member, Investor Education (charitable organization) (2004–2005); Former Directorships: Trustee, Executive Committee, Philadelphia Chamber of Commerce (2001–2007); Director, Viasys Health Care2 (January 2007–June 2007); Trustee, Thomas Jefferson Foundation (charitable organization) (1994–2012); President, Chief Executive Officer and Director (1994–2020) and Senior Advisor (2020-2021), The Pew Charitable Trusts (charitable organization); Director, BioTelemetry Inc.2 (acquired by Royal Philips in 2021) (healthcare) (2009–2021); Director, Becton Dickinson and Company2 (medical technology company) (2012-2022) | | |
Catherine Schrand (1964) Board Member since 2021* | Celia Z. Moh Professor of Accounting (since 2016) and Professor of Accounting (since 1994), The Wharton School, University of Pennsylvania; formerly Vice Dean, Wharton Doctoral Programs (2016–2019) | | |
William N. Searcy, Jr. (1946) Board Member since 1993 | Private investor since October 2003; formerly: Pension & Savings Trust Officer, Sprint Corporation2 (telecommunications) (November 1989–September 2003); Former Directorships: Trustee, Sun Capital Advisers Trust (mutual funds) (1998–2012) | | |
Officers5
Name, Year of Birth, Position
with the Trust/Corporation
and Length of Time Served6 | Business Experience and Directorships During the
Past Five Years |
Hepsen Uzcan7 (1974) President and Chief Executive Officer, 2017–present | Fund Administration (Head since 2017), DWS; Secretary, DWS USA Corporation (2018–present); Assistant Secretary, DWS Distributors, Inc. (2018–present); Director and Vice President, DWS Service Company (2018–present); Assistant Secretary, DWS Investment Management Americas, Inc. (2018–present); Director and President, DB Investment Managers, Inc. (2018–present); President and Chief Executive Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2017–present); formerly: Vice President for the Deutsche funds (2016–2017); Assistant Secretary for the DWS funds (2013–2019); Assistant Secretary, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2013–2020); Directorships: Interested Director, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (since June 25, 2020); ICI Mutual Insurance Company (since October 16, 2020); and Episcopalian Charities of New York (2018–present) |
John Millette8 (1962) Vice President and Secretary, 1999–present | Legal (Associate General Counsel), DWS; Chief Legal Officer, DWS Investment Management Americas, Inc. (2015–present); Director and Vice President, DWS Trust Company (2016–present); Secretary, DBX ETF Trust (2020–present); Vice President, DBX Advisors LLC (2021–present); Secretary, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. 2011–present); formerly: Secretary, Deutsche Investment Management Americas Inc. (2015–2017); and Assistant Secretary, DBX ETF Trust (2019–2020) |
Ciara Crawford9 (1984) Assistant Secretary, 2019–present | Fund Administration (Specialist), DWS (2015–present); formerly, Legal Assistant at Accelerated Tax Solutions |
Diane Kenneally8 (1966) Chief Financial Officer and Treasurer, 2018–present | Fund Administration Treasurer's Office (Co-Head since 2018), DWS; Treasurer, Chief Financial Officer and Controller, DBX ETF Trust (2019–present); Treasurer and Chief Financial Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2018–present); formerly: Assistant Treasurer for the DWS funds (2007–2018) |
Paul Antosca8 (1957) Assistant Treasurer, 2007–present | Fund Administration Tax (Head), DWS; and Assistant Treasurer, DBX ETF Trust (2019–present) |
Sheila Cadogan8 (1966) Assistant Treasurer, 2017–present | Fund Administration Treasurer's Office (Co-Head since 2018), DWS; Director and Vice President, DWS Trust Company (2018–present); Assistant Treasurer, DBX ETF Trust (2019–present); Assistant Treasurer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2018–present) |
Scott D. Hogan8 (1970) Chief Compliance Officer, 2016–present | Anti-Financial Crime & Compliance US (Senior Team Lead), DWS; Chief Compliance Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2016–present) |
Deutsche DWS Variable Series II — DWS Global Income Builder VIP | |
Name, Year of Birth, Position with the Trust/Corporation and Length of Time Served6 | Business Experience and Directorships During the Past Five Years |
Caroline Pearson8 (1962) Chief Legal Officer, 2010–present | Legal (Senior Team Lead), DWS; Assistant Secretary, DBX ETF Trust (2020–present); Chief Legal Officer, DBX Advisors LLC (2020–present); Chief Legal Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2012–present); formerly: Secretary, Deutsche AM Distributors, Inc. (2002–2017); Secretary, Deutsche AM Service Company (2010–2017); and Chief Legal Officer, DBX Strategic Advisors LLC (2020–2021) |
Christian Rijs7 (1980) Anti-Money Laundering
Compliance Officer,
since October 6, 2021 | Senior Team Lead Anti-Financial Crime and Compliance, DWS; AML Officer, DWS Trust Company (since November 2, 2021); AML Officer, DBX ETF Trust (since October 21, 2021); AML Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (since November 12, 2021); formerly: DWS UK & Ireland Head of Anti-Financial Crime and MLRO |
| Ms. Schrand was an Advisory Board Member for certain funds in the DWS Fund Complex for the period from November 18, 2021 to December 31, 2022 and was elected as a Full Board Member as of January 1, 2023 for all funds in the DWS Fund Complex. |
| The length of time served represents the year in which the Board Member joined the board of one or more DWS funds currently overseen by the Board. |
| A publicly held company with securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. |
| Mr. Perry is an Advisory Board Member of Deutsche DWS Asset Allocation Trust, Deutsche DWS Equity 500 Index Portfolio, Deutsche DWS Global/International Fund, Inc., Deutsche DWS Income Trust, Deutsche DWS Institutional Funds, Deutsche DWS International Fund, Inc., Deutsche DWS Investment Trust, Deutsche DWS Investments VIT Funds, Deutsche DWS Money Market Trust, Deutsche DWS Municipal Trust, Deutsche DWS Portfolio Trust, Deutsche DWS Securities Trust, Deutsche DWS Tax Free Trust, Deutsche DWS Variable Series I and Government Cash Management Portfolio. Mr. Perry is a Board Member of each other Trust. |
| Mr. Perry oversees 21 funds in the DWS Fund Complex as a Board Member of various Trusts. Mr. Perry is an Advisory Board Member of various Trusts/Corporations comprised of 48 funds in the DWS Fund Complex. |
| As a result of their respective positions held with the Advisor or its affiliates, these individuals are considered “interested persons” of the Advisor within the meaning of the 1940 Act. Interested persons receive no compensation from the Fund. |
| The length of time served represents the year in which the officer was first elected in such capacity for one or more DWS funds. |
| Address: 875 Third Avenue, New York, NY 10022. |
| Address: 100 Summer Street, Boston, MA 02110. |
| Address: 5201 Gate Parkway, Jacksonville, FL 32256. |
Certain officers hold similar positions for other investment companies for which DIMA or an affiliate serves as the Advisor.
The Fund’s Statement of Additional Information (“SAI”) includes additional information about the Board Members. The SAI is available, without charge, upon request. If you would like to request a copy of the SAI, you may do so by calling the following toll-free number: (800) 728-3337.
| Deutsche DWS Variable Series II — DWS Global Income Builder VIP |
VS2GIB-2 (R-025825-12 2/23)
December 31, 2022
Annual Report
Deutsche DWS Variable Series II
DWS Government Money Market VIP
Contents
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.
You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time. 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. Please read the prospectus for specific details regarding the Fund’s risk profile.
War, terrorism, sanctions, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and, in the future, may lead to significant disruptions in U.S. and world economies and markets, which may lead to increased market volatility and may have significant adverse effects on the Fund and its investments.
The brand DWS represents DWS Group GmbH & Co. KGaA and any of its subsidiaries such as DWS Distributors, Inc. which offers investment products or DWS Investment Management Americas, Inc. and RREEF America L.L.C. which offer advisory services.
DWS Distributors, Inc., 222 South Riverside Plaza, Chicago, IL 60606, (800) 621-1148
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
| Deutsche DWS Variable Series II — DWS Government Money Market VIP |
Management Summary December 31, 2022 (Unaudited)
Entering the period, with unemployment levels near pre-pandemic lows, the U.S. Federal Reserve (Fed) had begun tapering the bond purchases that it had used to keep longer-term interest rates low. Short-term Treasury yields drifted higher as markets began to anticipate additional hikes in the fed funds rate in 2022, as opposed to the previously signaled 2023 rate lift-off. An already challenging inflation outlook entering 2022 was exacerbated by Russia’s late-February invasion of Ukraine, which led to a spike in prices for oil and other commodities. As expected, the Fed implemented a quarter-point increase in fed funds at its mid-March meeting, the first such upward move since December of 2018. With inflation hovering around 40-year highs, the Fed went on to implement a series of sharper rate hikes of 50 to 75 basis points between May and December, bringing the fed funds target to a range of 4.25%–4.50%, versus 0%–0.25% entering 2022.
Short-term U.S. Treasury yields finished the 12-month period markedly higher given the hawkish turn in Fed policy. As of December 31, 2022, yields for one-month, six-month and one-year Treasury bills were 4.12%, 4.76% and 4.73%, respectively, versus 0.06%, 0.19% and 0.39%, respectively, as of December 31, 2021 (source: U.S. Department of the Treasury).
We were able to maintain what we believe to be a competitive yield for the Fund during the annual period ended December 31, 2022. During the period, the Fund held a large percentage of assets in agency and Treasury floating-rate securities to take advantage of incremental rises in SOFR (the Securities Overnight Financing Rate) and Treasury bill rates. At the same time, the Fund invested in overnight agency repurchase agreements for liquidity and looked for yield opportunities from three- to six-month agency and Treasury securities. The types of securities that we were investing in tended to have lower yields than issues carrying more risk. We preferred to be cautious during a time of market uncertainty. In the end, this cost the Fund some yield, but we believe that this represented a prudent approach to preserving principal.
We believe that short term rates will rise further as the Fed likely implements one or more additional interest rate hikes in the first half of 2023. Additionally, a rebound in the supply of short-term agency and Treasury securities should also contribute to higher money market rates. We therefore continue to look to shorten duration while taking advantage of expected higher yields on the front end of the yield curve.
A group of investment professionals is responsible for the day-to-day management of the Fund. These investment professionals have a broad range of experience managing money market funds.
The views expressed reflect those of the portfolio management team only through the end of the period of the report as stated on the cover. The management team’s views are subject to change at any time based on market and other conditions and should not be construed as a recommendation. Past performance is no guarantee of future results. Current and future portfolio holdings are subject to risk.
Deutsche DWS Variable Series II — DWS Government Money Market VIP | |
Fund Performance (as of December 31, 2022)
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 does 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. These charges and fees will reduce returns. The yield quotation more closely reflects the current earnings of the Fund than the total return quotation.
You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.
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DWS Government Money Market VIP — Class A | |
Yields are historical, will fluctuate and do not guarantee future performance. The 7-day current yield refers to the income paid by the portfolio over a 7-day period expressed as an annual percentage rate of the fund’s shares outstanding. Please visit our Web site at liquidity.dws.com/US/index.jsp for the product’s most recent month-end performance.
Terms to Know
The yield curve is a graphical representation of how yields on bonds of different maturities compare. Normally, yield curves slant upward, as bonds with longer maturities typically offer higher yields than short-term bonds.
Floating-rate securities are investments with interest payments that adjust periodically based upon a predetermined benchmark interest rate.
Repurchase Agreements (Repos) are agreements between a seller and a buyer, usually of government securities, where the seller agrees to repurchase the securities at a given price and usually at a stated time. Repos are widely used money market instruments.
Duration, which is expressed in years, measures the sensitivity of the price of a bond or bond fund to a change in interest rates.
| Deutsche DWS Variable Series II — DWS Government Money Market VIP |
Portfolio Summary(Unaudited)
Asset Allocation (As a % of Investment Portfolio) | | |
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Government & Agency Obligations | | |
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Weighted Average Maturity | | |
Deutsche DWS Variable Series II —DWS Government Money Market VIP | | |
iMoneyNet Money Fund AverageTM— Gov’t & Agency Retail* | | |
| The Fund is compared to its respective iMoneyNet Money Fund Average category: Gov’t & Agency Retail — Category includes the most broadly based of the government retail funds. These funds may invest in U.S. Treasury securities, securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. |
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.
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 sec.gov. The Fund’s portfolio holdings are also posted on dws.com as of each month-end. Please see the Fund’s current prospectus for more information.
Deutsche DWS Variable Series II — DWS Government Money Market VIP | |
Investment Portfolioas of December 31, 2022
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Government & Agency Obligations 31.6% |
U.S. Government Sponsored Agencies 22.2% |
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SOFR + 0.03%, 4.33% (a), 1/13/2023 | | | |
SOFR + 0.04%, 4.34% (a), 1/26/2023 | | | |
SOFR + 0.04%, 4.34% (a), 2/10/2023 | | | |
SOFR + 0.055%, 4.355% (a), 3/9/2023 | | | |
SOFR + 0.06%, 4.36% (a), 5/1/2023 | | | |
SOFR + 0.07%, 4.37% (a), 4/3/2023 | | | |
SOFR + 0.09%, 4.39% (a), 5/23/2023 | | | |
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U.S. Treasury Obligations 9.4% |
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U.S. Treasury Floating Rate Notes: | | | |
3-month U.S. Treasury Bill Money Market Yield minus 0.015%, 4.383% (a), 1/31/2024 | | | |
3-month U.S. Treasury Bill Money Market Yield + 0.029%, 4.427% (a), 7/31/2023 | | | |
3-month U.S. Treasury Bill Money Market Yield + 0.034%, 4.432% (a), 4/30/2023 | | | |
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Total Government & Agency Obligations (Cost $59,008,606) | |
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Repurchase Agreements 68.5% |
BNP Paribas, 4.25%, dated 12/30/2022, to be repurchased at $28,813,600 on 1/3/2023 (c) | | | |
Citigroup Global Markets, Inc., 4.25%, dated 12/30/2022, to be repurchased at $32,215,206 on 1/3/2023 (d) | | | |
JPMorgan Securities, Inc., 4.26%, dated 12/30/2022, to be repurchased at $33,996,084 on 1/3/2023 (e) | | | |
Wells Fargo Bank, 4.31%, dated 12/30/2022, to be repurchased at $32,785,693 on 1/3/2023 (f) | | | |
Total Repurchase Agreements (Cost $127,750,000) | |
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Total Investment Portfolio (Cost $186,758,606) | | | |
Other Assets and Liabilities, Net | | | |
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| Floating rate security. These securities are shown at their current rate as of December 31, 2022. |
| Annualized yield at time of purchase; not a coupon rate. |
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The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Government Money Market VIP |
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| U.S. Treasury Inflation-Indexed Notes | | | |
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| Federal National Mortgage Association | | | |
SOFR: Secured Overnight Financing Rate |
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 level assigned to the securities valuations may not be an indication of the risk or liquidity 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 December 31, 2022 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.
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Investments in Securities (a) | | | | |
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| See Investment Portfolio for additional detailed categorizations. |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Government Money Market VIP | |
Statement of
Assets and Liabilities
as of December 31, 2022
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Investments in securities, valued at amortized cost | |
Repurchase agreements, valued at amortized cost | |
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Receivable for Fund shares sold | |
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Payable for Fund shares redeemed | |
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Other accrued expenses and payables | |
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Distributable earnings (loss) | |
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Net Asset Value, offering and redemption price per share ($186,546,770 ÷ 186,606,016 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | |
for the year ended December 31, 2022
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Trustees' fees and expenses | |
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Total expenses before expense reductions | |
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Total expenses after expense reductions | |
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Net realized gain (loss) from investments | |
Net increase (decrease) in net assets resulting from operations | |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Government Money Market VIP |
Statements of Changes in Net Assets
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Increase (Decrease) in Net Assets | | |
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Net increase (decrease) in net assets resulting from operations | | |
Distributions to shareholders: | | |
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Proceeds from shares sold | | |
Reinvestment of distributions | | |
Payments for shares redeemed | | |
Net increase (decrease) in net assets from Class A share transactions | | |
Increase (decrease) in net assets | | |
Net assets at beginning of period | | |
Net assets at end of period | | |
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Shares outstanding at beginning of period | | |
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Shares issued to shareholders in reinvestment of distributions | | |
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Net increase (decrease) in Class A shares | | |
Shares outstanding at end of period | | |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Government Money Market VIP | |
Financial Highlights
DWS Government Money Market VIP — Class A |
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Net asset value, beginning of period | | | | | |
Income (loss) from investment operations: | | | | | |
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Total from investment operations | | | | | |
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Net asset value, end of period | | | | | |
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Ratios to Average Net Assets and Supplemental Data |
Net assets, end of period ($ millions) | | | | | |
Ratio of expenses before expense reductions (%)b | | | | | |
Ratio of expenses after expense reductions (%)b | | | | | |
Ratio of net investment income (%) | | | | | |
| Total return would have been lower had certain expenses not been reduced. |
| Expense ratio does not reflect charges and fees 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. |
| Amount is less than $.0005. |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Government Money Market VIP |
Notes to Financial Statements
A.
Organization and Significant Accounting Policies
DWS Government Money Market VIP (the “Fund”) is a diversified series of Deutsche 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 (“U.S. GAAP”) which require the use of management estimates. Actual results could differ from those estimates. The Fund qualifies as an investment company under Topic 946 of Accounting Standards Codification of U.S. GAAP. 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 level assigned to the securities valuations may not be an indication of the risk or liquidity 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, under the terms of a Master Repurchase Agreement, 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 market value is equal to at least the principal amount of the repurchase price plus accrued interest. The custodian bank 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.
As of December 31, 2022, the Fund held repurchase agreements with a gross value of $127,750,000. The value of the related collateral exceeded the value of the repurchase agreements at period end. The detail of the related collateral is included in the footnotes 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.
At December 31, 2022, the Fund had net tax basis capital loss carryforwards of approximately $148 of short-term losses, which may be applied against realized net taxable capital gains indefinitely.
The Fund has reviewed the tax positions for the open tax years as of December 31, 2022 and has determined that no provision for income tax and/or uncertain tax positions 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.
Deutsche DWS Variable Series II — DWS Government Money Market VIP | |
Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid-in capital. Temporary book and tax basis differences will reverse in a subsequent period. There were no significant book-to-tax differences for the Fund.
At December 31, 2022, the Fund's components of distributable earnings (accumulated losses) on a net tax basis were as follows:
Undistributed ordinary income | |
Capital loss carryforwards | |
At December 31, 2022, the Fund had an aggregate cost of investments for federal income tax purposes of $186,758,606.
In addition, the tax character of distributions paid to shareholders by the Fund is summarized as follows:
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Distributions from ordinary income | | |
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 based upon the relative net assets or other appropriate measures.
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 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 premiums and discounts are amortized/accreted for both tax and financial reporting purposes.
Management Agreement. Under the Investment Management Agreement with DWS Investment Management Americas, Inc. (“DIMA” or the “Advisor”), an indirect, wholly owned subsidiary of DWS Group GmbH & Co. KGaA (“DWS Group”), 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 average daily net assets of the Fund, computed and accrued daily and payable monthly, at the following annual rates:
First $500 million of the Fund’s average daily net assets | |
Next $500 million of such net assets | |
Next $1.0 billion of such net assets | |
Over $2.0 billion of such net assets | |
Accordingly, for the year ended December 31, 2022, the fee pursuant to the Investment Management Agreement was equivalent to an annual rate (exclusive of any applicable waivers/reimbursements) of 0.235% of the Fund’s average daily net assets.
For the period from January 1, 2022 through September 30, 2023, the Advisor has contractually agreed to waive its fees and/or reimburse certain operating expenses to the extent necessary to maintain the total annual operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of Class A at 0.51%.
In addition, the Advisor agreed to voluntarily waive additional expenses. This voluntary waiver may be changed or terminated at any time without notice. Under these arrangements, the Advisor waived certain expenses of Class A.
For the year ended December 31, 2022, fees waived and/or expenses reimbursed for Class A were $151,993.
| Deutsche DWS Variable Series II — DWS Government Money Market VIP |
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 the Advisor an annual fee (“Administration Fee”) of 0.097% of the Fund’s average daily net assets, computed and accrued daily and payable monthly. For the year ended December 31, 2022, the Administration Fee was $185,623, of which $15,273 is unpaid.
Service Provider Fees. DWS Service Company (“DSC“), 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 DSC and SS&C GIDS, Inc. (“SS&C”) (name changed from DST Systems, Inc. effective January 1, 2023), DSC has delegated certain transfer agent, dividend-paying agent and shareholder service agent functions to SS&C. DSC compensates SS&C out of the shareholder servicing fee it receives from the Fund. For the year ended December 31, 2022, the amounts charged to the Fund by DSC aggregated $2,671, of which $448 is unpaid.
Other Service Fees. Under an agreement with the Fund, DIMA is compensated for providing regulatory filing services to the Fund. For the year ended December 31, 2022, the amount charged to the Fund by DIMA included in the Statement of Operations under “Reports to shareholders” aggregated $1,114, of which $206 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.
At December 31, 2022, one participating insurance company was owner of record of 10% or more of the total outstanding Class A shares of the Fund, owning 71%.
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 daily fluctuating rate per annum equal to the sum of 0.10% plus the higher of the Federal Funds Effective Rate and the Overnight Bank Funding Rate, plus 1.25%. 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 December 31, 2022.
E.
Money Market Fund Investments and Yield
Rising interest rates could cause the value of the Fund’s investments — and therefore its share price as well — to decline. A rising interest rate environment may cause investors to move out of fixed-income securities and related markets on a large scale, which could adversely affect the price and liquidity of such securities and could also result in increased redemptions from the Fund. Increased redemptions from the Fund may force the Fund to sell investments at a time when it is not advantageous to do so, which could result in losses. Recently, there have been signs of inflationary price movements. As such, fixed-income and related markets may experience heightened levels of interest rate volatility and liquidity risk. A sharp rise in interest rates could cause the value of the Fund’s investments to decline and impair the Fund’s ability to maintain a stable $1.00 share price. Conversely, any decline in interest rates is likely to cause the Fund’s yield to decline, and during periods of unusually low or negative interest rates, the Fund’s yield may approach or fall below zero. A low or negative interest rate environment may prevent the Fund from providing a positive yield or paying fund expenses out of current income and, at times, could impair the Fund’s ability to maintain a stable $1.00 share price. Over time, the total return of a money market fund may not keep pace with inflation, which could result in a net loss of purchasing power for long-term investors. Interest rates can change in response to the supply and demand for credit, government and/or central bank monetary policy and action, inflation rates, and other factors. Recent and potential future changes in monetary policy made by central banks or governments are likely to affect the level of interest rates. Changing interest rates may have unpredictable effects on markets, may result in heightened market volatility and potential illiquidity and may detract from Fund performance to the extent the Fund is exposed to such interest rates and/or volatility. Money market funds try to minimize interest rate risk by purchasing short-term securities. If there is an insufficient supply of U.S. government securities to meet investor demand, it could result in lower yields on such securities and increase interest rate risk for the Fund.
Deutsche DWS Variable Series II — DWS Government Money Market VIP | |
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Deutsche DWS Variable Series II and Shareholders of DWS Government Money Market VIP:
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities of DWS Government Money Market VIP (the “Fund”) (one of the funds constituting Deutsche DWS Variable Series II) (the “Trust”), including the investment portfolio, as of December 31, 2022, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund (one of the funds constituting Deutsche DWS Variable Series II) at December 31, 2022, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and its financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Trust is not required to have, nor were we engaged to perform, an audit of the Trust’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2022, by correspondence with the custodian, brokers and others ; when replies were not received from brokers and others, we performed other auditing procedures. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the auditor of one or more investment companies in the DWS family of funds since at least 1979, but we are unable to determine the specific year.
Boston, Massachusetts
February 13, 2023
| Deutsche DWS Variable Series II — DWS Government Money Market VIP |
Information About Your Fund’s Expenses (Unaudited)
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, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these
expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2022 to December 31, 2022).
The tables illustrate your Fund’s expenses in two ways:
—
Actual Fund Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Fund using the Fund’s actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the “Expenses Paid per $1,000” line under the share class you hold.
—
Hypothetical 5% Fund Return. This helps you to compare your Fund’s ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund’s actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The “Expenses Paid per $1,000” line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
Expenses and Value of a $1,000 Investment for the six months ended December 31, 2022
| |
Beginning Account Value 7/1/22 | |
Ending Account Value 12/31/22 | |
Expenses Paid per $1,000* | |
Hypothetical 5% Fund Return | |
Beginning Account Value 7/1/22 | |
Ending Account Value 12/31/22 | |
Expenses Paid per $1,000* | |
| Expenses are equal to the Fund's annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 (the number of days in the most recent six-month period), then divided by 365. |
| |
Deutsche DWS Variable Series II — DWS Government Money Market VIP | |
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.
For an analysis of the fees associated with an investment in the Fund or similar funds, please refer to the current and hypothetical expense calculators for Variable Insurance Products which can be found at dws.com/calculators.
Deutsche DWS Variable Series II — DWS Government Money Market VIP | |
Tax Information (Unaudited)
Please consult a tax advisor if you have questions about federal or state income tax laws, or on how to prepare your tax returns. If you have specific questions about your account, please contact your insurance provider.
Proxy Voting
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 most recent 12-month period ended June 30 are available on our Web site — dws.com/en-us/resources/proxy-voting — or on the SEC’s Web site — 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.
| Deutsche DWS Variable Series II — DWS Government Money Market VIP |
Advisory Agreement Board Considerations and Fee Evaluation
The Board of Trustees (hereinafter referred to as the “Board” or “Trustees”) approved the renewal of DWS Government Money Market VIP's (the “Fund”) investment management agreement (the “Agreement”) with DWS Investment Management Americas, Inc. (“DIMA”) in September 2022.
In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:
—
During the entire process, all of the Fund's Trustees were independent of DIMA and its affiliates (the “Independent Trustees”).
—
The Board met frequently during the past year to discuss fund matters and dedicated a substantial amount of time to contract review matters. Over the course of several months, the Board reviewed extensive materials received from DIMA, independent third parties and independent counsel. These materials included an analysis of the Fund’s performance, fees and expenses, and profitability from a fee consultant retained by the Fund’s Independent Trustees (the “Fee Consultant”).
—
The Board also received extensive information throughout the year regarding performance of the Fund.
—
The Independent Trustees regularly met privately with counsel to discuss contract review and other matters. In addition, the Independent Trustees were advised by the Fee Consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the Fee Consultant in connection with their deliberations.
—
In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
In connection with the contract review process, the Board considered the factors discussed below, among others. The Board also considered that DIMA and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DIMA managed the Fund. DIMA is part of DWS Group GmbH & Co. KGaA (“DWS Group”). DWS Group is a global asset management business that offers a wide range of investing expertise and resources, including research capabilities in many countries throughout the world. In 2018, approximately 20% of DWS Group’s shares were sold in an initial public offering, with Deutsche Bank AG owning the remaining shares.
As part of the contract review process, the Board carefully considered the fees and expenses of each DWS fund overseen by the Board in light of the fund’s performance. In many cases, this led to the negotiation and implementation of expense caps.
While shareholders may focus primarily on fund performance and fees, the Fund’s Board considers these and many other factors, including the quality and integrity of DIMA’s personnel and administrative support services provided by DIMA, such as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DIMA provides portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DIMA provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel and the resources made available to such personnel. The Board also considered the risks to DIMA in sponsoring or managing the Fund, including financial, operational and reputational risks, the potential economic impact to DIMA from such risks and DIMA’s approach to addressing such risks. The Board reviewed the Fund’s performance over short-term and long-term periods and compared those returns to various agreed-upon performance measures, including a peer universe compiled using information supplied by iMoneyNet, an independent fund data service. The Board also noted that it has put into place a process of identifying “Funds in Review” (e.g., funds performing poorly relative to a peer universe), and receives additional reporting from DIMA regarding such funds and, where appropriate, DIMA’s plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that, for the one- and three-year periods ended December 31, 2021, the Fund’s gross performance (Class A shares) was in the 3rd quartile and 4th quartile, respectively, of the applicable iMoneyNet universe (the 1st quartile being the best performers and the 4th quartile being the worst performers).
Deutsche DWS Variable Series II — DWS Government Money Market VIP | |
Fees and Expenses. The Board considered the Fund’s investment management fee schedule, operating expenses and total expense ratios, and comparative information provided by Broadridge Financial Solutions, Inc. (“Broadridge”) and the Fee Consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include a 0.097% fee paid to DIMA under the Fund’s administrative services agreement, were lower than the median (2nd quartile) of the applicable Broadridge peer group (based on Broadridge data provided as of December 31, 2021). Based on Broadridge data provided as of December 31, 2021, the Board noted that the Fund’s Class A shares total (net) operating expenses were lower than the median (2nd quartile) of the applicable Broadridge expense universe (less any applicable 12b-1 fees). The Board noted the expense limitation agreed to by DIMA. The Board also noted the voluntary fee waivers implemented by DIMA from time to time in recent years to ensure the Fund maintained a positive yield. The Board considered the Fund’s management fee rate as compared to fees charged by DIMA to comparable DWS U.S. registered funds (“DWS Funds”) and considered differences between the Fund and the comparable DWS Funds. The information requested by the Board as part of its review of fees and expenses also included information about institutional accounts (including any sub-advised funds and accounts) and funds offered primarily to European investors (“DWS Europe Funds”) managed by DWS Group. The Board noted that DIMA indicated that DWS Group does not manage any institutional accounts or DWS Europe Funds comparable to the Fund.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DIMA.
Profitability. The Board reviewed detailed information regarding revenues received by DIMA under the Agreement. The Board considered the estimated costs to DIMA, and pre-tax profits realized by DIMA, from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DIMA and its affiliates with respect to all fund services in totality and by fund. The Board and the Fee Consultant reviewed DIMA’s methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DIMA in connection with the management of the Fund were not unreasonable. The Board also reviewed certain publicly available information regarding the profitability of certain similar investment management firms. The Board noted that, while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DIMA and its affiliates’ overall profitability with respect to the DWS Funds (after taking into account distribution and other services provided to the funds by DIMA and its affiliates) was lower than the overall profitability levels of most comparable firms for which such data was available.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund’s investment management fee schedule includes fee breakpoints. The Board concluded that the Fund’s fee schedule represents an appropriate sharing between the Fund and DIMA of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DIMA and Its Affiliates. The Board also considered the character and amount of other incidental or “fall-out” benefits received by DIMA and its affiliates, including any fees received by DIMA for administrative services provided to the Fund and any fees received by an affiliate of DIMA for transfer agency services provided to the Fund. The Board also considered benefits to DIMA related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities. In addition, the Board considered the incidental public relations benefits to DIMA related to DWS Funds advertising and cross-selling opportunities among DIMA products and services. The Board considered these benefits in reaching its conclusion that the Fund’s management fees were reasonable.
Compliance. The Board considered the significant attention and resources dedicated by DIMA to its compliance processes in recent years. The Board noted in particular (i) the experience, seniority and time commitment of the individuals serving as DIMA’s and the Fund’s chief compliance officers and (ii) the substantial commitment of resources by DIMA and its affiliates to compliance matters, including the retention of compliance personnel.
Based on all of the information considered and the conclusions reached, the Board determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent
| Deutsche DWS Variable Series II — DWS Government Money Market VIP |
Trustees and counsel present. It is possible that individual Independent Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.
Deutsche DWS Variable Series II — DWS Government Money Market VIP | |
Board Members and Officers
The following table presents certain information regarding the Board Members and Officers of the Trust/Corporation. Each Board Member’s year of birth is set forth in parentheses after his or her name. Unless otherwise noted, (i) each Board Member has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity; and (ii) the address of each Independent Board Member is c/o Keith R. Fox, DWS Funds Board Chair, c/o Thomas R. Hiller, Ropes & Gray LLP, Prudential Tower, 800 Boylston Street, Boston, MA 02199-3600. Except as otherwise noted below, the term of office for each Board Member is until the election and qualification of a successor, or until such Board Member sooner dies, resigns, is removed or as otherwise provided in the governing documents of the Trust/Corporation. Because the Fund does not hold an annual meeting of shareholders, each Board Member will hold office for an indeterminate period.
The Board Members may also serve in similar capacities with other funds in the fund complex. The number of funds in the DWS fund complex shown in the table below includes all registered open- and closed-end funds (including all of their portfolios) advised by the Advisor and any registered funds that have an investment advisor that is an affiliated person of the Advisor.
Independent Board Members/Independent Advisory Board Members
Name, Year of
Birth, Position
with the Trust/
Corporation
and Length of
| Business Experience and Directorships
During the Past Five Years | Number of
Funds in
DWS Fund
Complex
Overseen | Other
Directorships
Held by Board
Member |
Keith R. Fox, CFA (1954) Chairperson since 2017, and Board Member since 1996 | Managing General Partner, Exeter Capital Partners (a series of private investment funds) (since 1986). Directorships: Progressive International Corporation (kitchen goods designer and distributor); former Chairman, National Association of Small Business Investment Companies; Former Directorships: ICI Mutual Insurance Company; BoxTop Media Inc. (advertising); Sun Capital Advisers Trust (mutual funds) | | |
John W. Ballantine (1946) Board Member since 1999 | Retired; formerly, Executive Vice President and Chief Risk Management Officer, First Chicago NBD Corporation/The First National Bank of Chicago (1996–1998); Executive Vice President and Head of International Banking (1995–1996); Not-for-Profit Directorships: Window to the World Communications (public media); Life Director of Harris Theater for Music and Dance (Chicago); Life Director of Hubbard Street Dance Chicago; Former Directorships: Director and Chairman of the Board, Healthways, Inc.2 (population wellbeing and wellness services) (2003–2014); Stockwell Capital Investments PLC (private equity); Enron Corporation; FNB Corporation; Tokheim Corporation; First Oak Brook Bancshares, Inc.; Oak Brook Bank; Portland General Electric2 (utility company (2003–2021); and Prisma Energy International; Former Not-for-Profit Directorships: Public Radio International; Palm Beach Civic Assn. | | |
Dawn-Marie Driscoll (1946) Board Member since 1987 | Advisory Board and former Executive Fellow, Hoffman Center for Business Ethics, Bentley University; formerly: Partner, Palmer & Dodge (law firm) (1988–1990); Vice President of Corporate Affairs and General Counsel, Filene’s (retail) (1978–1988); Directorships: Trustee and former Chairman of the Board, Southwest Florida Community Foundation (charitable organization); Former Directorships: ICI Mutual Insurance Company (2007–2015); Sun Capital Advisers Trust (mutual funds) (2007–2012), Investment Company Institute (audit, executive, nominating committees) and Independent Directors Council (governance, executive committees) | | |
Richard J. Herring (1946) Board Member since 1990 | Jacob Safra Professor of International Banking and Professor of Finance, The Wharton School, University of Pennsylvania (since July 1972); formerly: Director, The Wharton Financial Institutions Center (1994–2020); Vice Dean and Director, Wharton Undergraduate Division (1995–2000) and Director, The Lauder Institute of International Management Studies (2000–2006); Member FDIC Systemic Risk Advisory Committee since 2011, member Systemic Risk Council since 2012 and member of the Advisory Board at the Yale Program on Financial Stability since 2013; Former Directorships: Co-Chair of the Shadow Financial Regulatory Committee (2003–2015), Executive Director of The Financial Economists Roundtable (2008–2015), Director of The Thai Capital Fund (2007–2013), Director of The Aberdeen Singapore Fund (2007–2018), Director, The Aberdeen Japan Fund (2007-2021) and Nonexecutive Director of Barclays Bank DE (2010–2018) | | |
| Deutsche DWS Variable Series II — DWS Government Money Market VIP |
Name, Year of Birth, Position with the Trust/ Corporation and Length of Time Served1 | Business Experience and Directorships During the Past Five Years | Number of Funds in DWS Fund Complex Overseen | Other Directorships Held by Board Member |
Chad D. Perry (1972) Board Member or Advisory | Executive Vice President, General Counsel and Secretary, Tanger Factory Outlet Centers, Inc.2 (since 2011); formerly Executive Vice President and Deputy General Counsel, LPL Financial Holdings Inc.2 (2006–2011); Senior Corporate Counsel, EMC Corporation (2005–2006); Associate, Ropes & Gray LLP (1997–2005) | | Director - Great Elm Capital Corp. (business development company) (since 2022) |
Rebecca W. Rimel (1951) Board Member since 1995 | Director, The Bridgespan Group (nonprofit organization) (since October 2020); formerly: Executive Vice President, The Glenmede Trust Company (investment trust and wealth management) (1983–2004); Board Member, Investor Education (charitable organization) (2004–2005); Former Directorships: Trustee, Executive Committee, Philadelphia Chamber of Commerce (2001–2007); Director, Viasys Health Care2 (January 2007–June 2007); Trustee, Thomas Jefferson Foundation (charitable organization) (1994–2012); President, Chief Executive Officer and Director (1994–2020) and Senior Advisor (2020-2021), The Pew Charitable Trusts (charitable organization); Director, BioTelemetry Inc.2 (acquired by Royal Philips in 2021) (healthcare) (2009–2021); Director, Becton Dickinson and Company2 (medical technology company) (2012-2022) | | |
Catherine Schrand (1964) Board Member since 2021* | Celia Z. Moh Professor of Accounting (since 2016) and Professor of Accounting (since 1994), The Wharton School, University of Pennsylvania; formerly Vice Dean, Wharton Doctoral Programs (2016–2019) | | |
William N. Searcy, Jr. (1946) Board Member since 1993 | Private investor since October 2003; formerly: Pension & Savings Trust Officer, Sprint Corporation2 (telecommunications) (November 1989–September 2003); Former Directorships: Trustee, Sun Capital Advisers Trust (mutual funds) (1998–2012) | | |
Officers5
Name, Year of Birth, Position
with the Trust/Corporation
and Length of Time Served6 | Business Experience and Directorships During the
Past Five Years |
Hepsen Uzcan7 (1974) President and Chief Executive Officer, 2017–present | Fund Administration (Head since 2017), DWS; Secretary, DWS USA Corporation (2018–present); Assistant Secretary, DWS Distributors, Inc. (2018–present); Director and Vice President, DWS Service Company (2018–present); Assistant Secretary, DWS Investment Management Americas, Inc. (2018–present); Director and President, DB Investment Managers, Inc. (2018–present); President and Chief Executive Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2017–present); formerly: Vice President for the Deutsche funds (2016–2017); Assistant Secretary for the DWS funds (2013–2019); Assistant Secretary, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2013–2020); Directorships: Interested Director, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (since June 25, 2020); ICI Mutual Insurance Company (since October 16, 2020); and Episcopalian Charities of New York (2018–present) |
John Millette8 (1962) Vice President and Secretary, 1999–present | Legal (Associate General Counsel), DWS; Chief Legal Officer, DWS Investment Management Americas, Inc. (2015–present); Director and Vice President, DWS Trust Company (2016–present); Secretary, DBX ETF Trust (2020–present); Vice President, DBX Advisors LLC (2021–present); Secretary, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. 2011–present); formerly: Secretary, Deutsche Investment Management Americas Inc. (2015–2017); and Assistant Secretary, DBX ETF Trust (2019–2020) |
Ciara Crawford9 (1984) Assistant Secretary, 2019–present | Fund Administration (Specialist), DWS (2015–present); formerly, Legal Assistant at Accelerated Tax Solutions |
Diane Kenneally8 (1966) Chief Financial Officer and Treasurer, 2018–present | Fund Administration Treasurer's Office (Co-Head since 2018), DWS; Treasurer, Chief Financial Officer and Controller, DBX ETF Trust (2019–present); Treasurer and Chief Financial Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2018–present); formerly: Assistant Treasurer for the DWS funds (2007–2018) |
Paul Antosca8 (1957) Assistant Treasurer, 2007–present | Fund Administration Tax (Head), DWS; and Assistant Treasurer, DBX ETF Trust (2019–present) |
Sheila Cadogan8 (1966) Assistant Treasurer, 2017–present | Fund Administration Treasurer's Office (Co-Head since 2018), DWS; Director and Vice President, DWS Trust Company (2018–present); Assistant Treasurer, DBX ETF Trust (2019–present); Assistant Treasurer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2018–present) |
Scott D. Hogan8 (1970) Chief Compliance Officer, 2016–present | Anti-Financial Crime & Compliance US (Senior Team Lead), DWS; Chief Compliance Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2016–present) |
Deutsche DWS Variable Series II — DWS Government Money Market VIP | |
Name, Year of Birth, Position with the Trust/Corporation and Length of Time Served6 | Business Experience and Directorships During the Past Five Years |
Caroline Pearson8 (1962) Chief Legal Officer, 2010–present | Legal (Senior Team Lead), DWS; Assistant Secretary, DBX ETF Trust (2020–present); Chief Legal Officer, DBX Advisors LLC (2020–present); Chief Legal Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2012–present); formerly: Secretary, Deutsche AM Distributors, Inc. (2002–2017); Secretary, Deutsche AM Service Company (2010–2017); and Chief Legal Officer, DBX Strategic Advisors LLC (2020–2021) |
Christian Rijs7 (1980) Anti-Money Laundering
Compliance Officer,
since October 6, 2021 | Senior Team Lead Anti-Financial Crime and Compliance, DWS; AML Officer, DWS Trust Company (since November 2, 2021); AML Officer, DBX ETF Trust (since October 21, 2021); AML Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (since November 12, 2021); formerly: DWS UK & Ireland Head of Anti-Financial Crime and MLRO |
| Ms. Schrand was an Advisory Board Member for certain funds in the DWS Fund Complex for the period from November 18, 2021 to December 31, 2022 and was elected as a Full Board Member as of January 1, 2023 for all funds in the DWS Fund Complex. |
| The length of time served represents the year in which the Board Member joined the board of one or more DWS funds currently overseen by the Board. |
| A publicly held company with securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. |
| Mr. Perry is an Advisory Board Member of Deutsche DWS Asset Allocation Trust, Deutsche DWS Equity 500 Index Portfolio, Deutsche DWS Global/International Fund, Inc., Deutsche DWS Income Trust, Deutsche DWS Institutional Funds, Deutsche DWS International Fund, Inc., Deutsche DWS Investment Trust, Deutsche DWS Investments VIT Funds, Deutsche DWS Money Market Trust, Deutsche DWS Municipal Trust, Deutsche DWS Portfolio Trust, Deutsche DWS Securities Trust, Deutsche DWS Tax Free Trust, Deutsche DWS Variable Series I and Government Cash Management Portfolio. Mr. Perry is a Board Member of each other Trust. |
| Mr. Perry oversees 21 funds in the DWS Fund Complex as a Board Member of various Trusts. Mr. Perry is an Advisory Board Member of various Trusts/Corporations comprised of 48 funds in the DWS Fund Complex. |
| As a result of their respective positions held with the Advisor or its affiliates, these individuals are considered “interested persons” of the Advisor within the meaning of the 1940 Act. Interested persons receive no compensation from the Fund. |
| The length of time served represents the year in which the officer was first elected in such capacity for one or more DWS funds. |
| Address: 875 Third Avenue, New York, NY 10022. |
| Address: 100 Summer Street, Boston, MA 02110. |
| Address: 5201 Gate Parkway, Jacksonville, FL 32256. |
Certain officers hold similar positions for other investment companies for which DIMA or an affiliate serves as the Advisor.
The Fund’s Statement of Additional Information (“SAI”) includes additional information about the Board Members. The SAI is available, without charge, upon request. If you would like to request a copy of the SAI, you may do so by calling the following toll-free number: (800) 728-3337.
| Deutsche DWS Variable Series II — DWS Government Money Market VIP |
VS2GMM-2 (R-025834-12 2/23)
December 31, 2022
Annual Report
Deutsche DWS Variable Series II
Contents
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, credit, liquidity and market risks to varying degrees. 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 foreign securities presents certain risks, such as currency fluctuations, political and economic changes, and market risks. 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. Please read the prospectus for details.
War, terrorism, sanctions, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and, in the future, may lead to significant disruptions in U.S. and world economies and markets, which may lead to increased market volatility and may have significant adverse effects on the Fund and its investments.
The brand DWS represents DWS Group GmbH & Co. KGaA and any of its subsidiaries such as DWS Distributors, Inc. which offers investment products or DWS Investment Management Americas, Inc. and RREEF America L.L.C. which offer advisory services.
DWS Distributors, Inc., 222 South Riverside Plaza, Chicago, IL 60606, (800) 621-1148
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
| Deutsche DWS Variable Series II — DWS High Income VIP |
Performance SummaryDecember 31, 2022 (Unaudited)
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 does 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. 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, 2022 are 0.84% and 1.27% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Generally accepted accounting principles require adjustments to be made to the net assets of the Fund at period end for financial reporting purposes only, and as such, the total return based on the unadjusted net asset value per share may differ from the total return reported in the financial highlights.
Growth of an Assumed $10,000 Investment
Yearly periods ended December 31
ICE BofA US High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market.
Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index.
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Average annual total return | | | | |
ICE BofA US High Yield Index | | | | | |
Average annual total return | | | | |
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Average annual total return | | | | |
ICE BofA US High Yield Index | | | | | |
Average annual total return | | | | |
The growth of $10,000 is cumulative. |
Deutsche DWS Variable Series II — DWS High Income VIP | |
Management Summary December 31, 2022 (Unaudited)
The Fund returned –8.88% in 2022 (Class A shares, unadjusted for contract charges), outperforming the –11.21% return of its benchmark, the ICE BofA US High Yield Index.
High-yield bonds endured a difficult year in 2022. Concerns about persistent inflation, the aggressive interest rate hikes by the U.S. Federal Reserve (Fed), and the potential for a recession in the U.S. economy combined to weigh on sentiment. Geopolitical issues also were a source of disruption across the higher-risk segments of the financial markets. Together, these factors led to sizable outflows from the high-yield category.
The negative return for high yield reflected the combination of rising U.S. Treasury yields and increasing yield spreads. The yield on the 10-year U.S. Treasury note rose from 1.44% to 3.88% over the course of the year. At the same time, the ICE BofA US High Yield Master II Option-Adjusted Spread — which measures the difference between the yields of high-yield bonds and equivalent Treasuries — climbed from 310 basis points (3.10 percentage points) at the beginning of the year to 421 at the end of December 2022.*
The Fund’s sector allocation contributed to performance in 2022. At a time of negative market performance, the largest contributions came from underweights or zero weightings in underperforming sectors, such as retail, media & entertainment, and pharmaceuticals. On the other hand, overweights in underperforming sectors — including healthcare and automotive — detracted. Security selection was an additional positive. From a ratings perspective, an underweight in CCC rated bonds was a key contributor. The Fund used derivatives to hedge its modest euro exposure back into U.S. dollars, which did not have a material effect on performance. Although we use derivatives periodically for specific purposes, they are not a core aspect of our strategy.
We retain a constructive view on the U.S. high-yield market, but we believe the risk of a recession remains elevated given that the Fed continues to pursue restrictive monetary policies to fight inflation. Additionally, we expect that market sentiment will remain volatile and vulnerable to a range of other potentially disruptive factors, including economic data releases and geopolitical risks associated with the war in Ukraine.
Despite constrained issuer access to capital markets, rising interest expenses, and an uncertain growth outlook, the high-yield default rate remained stable. The default rate by issuer was 0.85% in 2022, which compares to 0.86% in 2021 and the long-term average of 3.5%. One reason for this is that only 11% of the market is rated CCC, well beneath the historical average of about 22%. There is also a limited amount of near-term maturities, with only about 10% of the approximately $2.6 trillion in leveraged finance debt (high yield bonds and senior loans) due to mature before 2025. Nevertheless, as recession risks build and the Fed continues to increase interest rates, we anticipate the default rate will trend upward over the next two years and potentially approach the longer-term average.
We continue to find opportunities for relatively attractive total returns in the high-yield market. As always, we are seeking issuers whose improving credit metrics could drive rating agency upgrades that would push prices higher and cause spreads to tighten. Additionally, we remain on the lookout for opportunities where merger and acquisition activity could benefit the credit profile of the acquiring and target companies. Given increasing energy and raw materials costs, we are striving to identify issuers most capable of passing on price increases to defend both profit margins and cash flows. On the other hand, we are increasingly cautious on issuers with a significant portion of their capital structure in floating-rate debt – a potential negative at a time of rising yields. Ultimately, we continue to view credit analysis as critical for generating attractive total returns and balancing risk.
*
Source: Federal Reserve Bank of St. Louis Economic Database
Gary Russell, CFA, Head of Investment Strategy Fixed Income
Thomas R. Bouchard, Senior Portfolio Manager & Team Lead Fixed Income
Lonnie Fox, Senior Portfolio Manager & Team Lead Fixed Income
Sarah Rowin, CFA, Senior Portfolio Manager Fixed Income1
Portfolio Managers
1Began managing the Fund on February 1, 2023.
The views expressed reflect those of the portfolio management team only through the end of the period of the report as stated on the cover. The management team’s views are subject to change at any time based on market and other conditions and should not be construed as a recommendation. Past performance is no guarantee of future results. Current and future portfolio holdings are subject to risk.
| Deutsche DWS Variable Series II — DWS High Income VIP |
Terms to Know
The ICE BofA US High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the US domestic market.
Index returns do not reflect fees or expenses and it is not possible to invest directly into an index.
Yield spread refers to differences between yields on differing debt instruments, calculated by deducting the yield of one instrument from another. The higher the yield spread, the greater the difference between the yields offered by each instrument.
The ICE BofA Merrill Lynch US High Yield Option-Adjusted Spread (OAS) calculates the spread between a computed OAS index of bonds that are below investment grade (those rated BB or below) and a spot Treasury curve.
Credit ratings are assessments of the creditworthiness of a borrower such as a corporation, a municipality or a sovereign country by a credit ratings agency (i.e., Standard & Poor’s, Moody’s, Fitch). Ratings agencies are paid to make such credit assessments by the entity that is seeking a rating for itself. Letter grades of “BBB” and above indicate that the rated borrower is considered “investment grade” by a particular ratings agency.
Contribution and detraction incorporate both an investment’s total return and its weighting in the Fund.
Overweight means that a fund holds a higher weighting in a given sector compared with its benchmark index. Underweight means that a fund holds a lower weighting.
Derivatives are contracts whose values can be based on a variety of instruments, including indices, currencies or securities. They can be utilized for a variety of reasons, including for hedging purposes, for risk management, for non‐hedging purposes to seek to enhance potential gains, as a substitute for direct investment in a particular asset class or to keep cash on hand to meet shareholder redemptions. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility.
A default occurs when an issuer fails to make an interest or principal payment on a bond. The default rate is the percentage of issuers that default in a given year.
Deutsche DWS Variable Series II — DWS High Income VIP | |
Portfolio Summary(Unaudited)
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | | |
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Loan Participations and Assignments | | |
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Sector Diversification (As a % of Investment Portfolio excluding Exchange-Traded Funds, Securities Lending Collateral and Cash Equivalents) | | |
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Quality (As a % of Investment Portfolio excluding Securities Lending Collateral and Cash Equivalents) | | |
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The quality ratings represent the higher of Moody’s Investors Service, Inc. (“Moody’s”), Fitch Ratings, Inc. (“Fitch”) or S&P Global Ratings (“S&P”) credit ratings. The ratings of Moody’s, Fitch 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 posted on dws.com, and is available free of charge by contacting your financial intermediary, or if you are a direct investor, by calling (800) 728-3337. In addition, the portfolio holdings listing is filed with the SEC on the Fund’s Form N-PORT and will be available on the SEC’s Web site at sec.gov. Additional portfolio holdings for the Fund are also posted on dws.com from time to time. Please see the Fund’s current prospectus for more information.
| Deutsche DWS Variable Series II — DWS High Income VIP |
Investment Portfolioas of December 31, 2022
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Communication Services 15.9% | |
Altice France Holding SA: | | | |
144A, 6.0%, 2/15/2028 (b) | | | |
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Altice France SA, 144A, 5.5%, 1/15/2028 | | | |
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Clear Channel Outdoor Holdings, Inc., 144A, 5.125%, 8/15/2027 | | | |
CommScope Technologies LLC: | | | |
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DirecTV Financing LLC, 144A, 5.875%, 8/15/2027 | | | |
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DISH Network Corp., 144A, 11.75%, 11/15/2027 | | | |
Frontier Communications Holdings LLC: | | | |
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Iliad Holding SASU, 144A, 6.5%, 10/15/2026 | | | |
Lamar Media Corp., 4.875%, 1/15/2029 | | | |
LCPR Senior Secured Financing DAC, 144A, 6.75%, 10/15/2027 | | | |
Lumen Technologies, Inc., 144A, 5.125%, 12/15/2026 (b) | | | |
Outfront Media Capital LLC: | | | |
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Sprint Capital Corp., 6.875%, 11/15/2028 | | | |
Sprint LLC, 7.625%, 3/1/2026 | | | |
Telecom Italia Capital SA, 6.375%, 11/15/2033 | | | |
Telenet Finance Luxembourg Notes Sarl, 144A, 5.5%, 3/1/2028 | | | |
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ViaSat, Inc., 144A, 5.625%, 9/15/2025 | | | |
Virgin Media Finance PLC, 144A, 5.0%, 7/15/2030 | | | |
Virgin Media Secured Finance PLC, 144A, 5.5%, 5/15/2029 | | | |
Vodafone Group PLC, 7.0%, 4/4/2079 | | | |
Ziggo Bond Co. BV, 144A, 3.375%, 2/28/2030 | | | |
Ziggo BV, 144A, 4.875%, 1/15/2030 | | | |
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Consumer Discretionary 17.1% | |
Affinity Gaming, 144A, 6.875%, 12/15/2027 | | | |
Arko Corp., 144A, 5.125%, 11/15/2029 | | | |
Avis Budget Car Rental LLC: | | | |
144A, 5.375%, 3/1/2029 (b) | | | |
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Beacon Roofing Supply, Inc., 144A, 4.125%, 5/15/2029 | | | |
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Caesars Entertainment, Inc.: | | | |
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The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS High Income VIP | |
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Ford Motor Credit Co. LLC: | | | |
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Hilton Grand Vacations Borrower Escrow LLC: | | | |
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Jaguar Land Rover Automotive PLC, 144A, 5.875%, 1/15/2028 | | | |
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Macy's Retail Holdings LLC, 144A, 5.875%, 3/15/2030 | | | |
Marriott Ownership Resorts, Inc., 144A, 4.5%, 6/15/2029 | | | |
Melco Resorts Finance Ltd., 144A, 5.375%, 12/4/2029 | | | |
Meritage Homes Corp., 6.0%, 6/1/2025 | | | |
Midwest Gaming Borrower LLC, 144A, 4.875%, 5/1/2029 | | | |
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NCL Finance Ltd., 144A, 6.125%, 3/15/2028 | | | |
Newell Brands, Inc., 5.75%, 4/1/2046 | | | |
Raptor Acquisition Corp., 144A, 4.875%, 11/1/2026 | | | |
Royal Caribbean Cruises Ltd.: | | | |
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Sands China Ltd., 4.875%, 6/18/2030 | | | |
Scientific Games International, Inc.: | | | |
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Staples, Inc., 144A, 7.5%, 4/15/2026 | | | |
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Vail Resorts, Inc., 144A, 6.25%, 5/15/2025 | | | |
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Viking Ocean Cruises Ship VII Ltd., 144A, 5.625%, 2/15/2029 | | | |
Williams Scotsman International, Inc., 144A, 6.125%, 6/15/2025 | | | |
Wynn Macau Ltd., 144A, 5.125%, 12/15/2029 | | | |
Wynn Resorts Finance LLC, 144A, 5.125%, 10/1/2029 | | | |
Yum Brands, Inc., 5.375%, 4/1/2032 | | | |
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Albertsons Companies, Inc., 144A, 3.25%, 3/15/2026 | | | |
Coty, Inc., REG S, 3.875%, 4/15/2026 | | | |
Darling Ingredients, Inc., 144A, 6.0%, 6/15/2030 | | | |
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Antero Midstream Partners LP: | | | |
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Apache Corp., 5.1%, 9/1/2040 | | | |
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Ascent Resources Utica Holdings LLC: | | | |
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Buckeye Partners LP, 144A, 4.5%, 3/1/2028 | | | |
Cheniere Energy Partners LP: | | | |
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The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS High Income VIP |
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Chord Energy Corp., 144A, 6.375%, 6/1/2026 | | | |
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Colgate Energy Partners III LLC, 144A, 5.875%, 7/1/2029 | | | |
Comstock Resources, Inc.: | | | |
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DCP Midstream Operating LP, 5.375%, 7/15/2025 | | | |
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Endeavor Energy Resources LP, 144A, 5.75%, 1/30/2028 | | | |
EnLink Midstream LLC, 144A, 6.5%, 9/1/2030 | | | |
EQM Midstream Partners LP: | | | |
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Harvest Midstream I LP, 144A, 7.5%, 9/1/2028 | | | |
Hess Midstream Operations LP: | | | |
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Howard Midstream Energy Partners LLC, 144A, 6.75%, 1/15/2027 | | | |
Murphy Oil U.S.A., Inc., 4.75%, 9/15/2029 | | | |
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NuStar Logistics LP, 5.75%, 10/1/2025 | | | |
Occidental Petroleum Corp.: | | | |
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Parkland Corp., 144A, 5.875%, 7/15/2027 | | | |
Precision Drilling Corp., 144A, 6.875%, 1/15/2029 | | | |
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Rockcliff Energy II LLC, 144A, 5.5%, 10/15/2029 | | | |
SM Energy Co., 6.5%, 7/15/2028 | | | |
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TransAlta Corp., 7.75%, 11/15/2029 | | | |
Transocean Poseidon Ltd., 144A, 6.875%, 2/1/2027 | | | |
Transocean, Inc., 144A, 7.5%, 1/15/2026 | | | |
USA Compression Partners LP: | | | |
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Venture Global Calcasieu Pass LLC, 144A, 4.125%, 8/15/2031 | | | |
Weatherford International Ltd., 144A, 8.625%, 4/30/2030 | | | |
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Navient Corp., 6.125%, 3/25/2024 | | | |
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Acadia Healthcare Co., Inc., 144A, 5.0%, 4/15/2029 | | | |
Avantor Funding, Inc., REG S, 3.875%, 7/15/2028 | | | |
Bausch Health Companies, Inc.: | | | |
144A, 5.5%, 11/1/2025 (b) | | | |
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Catalent Pharma Solutions, Inc.: | | | |
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Charles River Laboratories International, Inc., 144A, 3.75%, 3/15/2029 | | | |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS High Income VIP | |
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Community Health Systems, Inc.: | | | |
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144A, 6.125%, 4/1/2030 (b) | | | |
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IQVIA, Inc., 144A, 5.0%, 5/15/2027 | | | |
Legacy LifePoint Health LLC, 144A, 4.375%, 2/15/2027 | | | |
LifePoint Health, Inc., 144A, 5.375%, 1/15/2029 | | | |
Molina Healthcare, Inc., 144A, 3.875%, 11/15/2030 | | | |
Organon & Co, 144A, 4.125%, 4/30/2028 | | | |
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Select Medical Corp., 144A, 6.25%, 8/15/2026 | | | |
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Teva Pharmaceutical Finance Netherlands II BV: | | | |
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Teva Pharmaceutical Finance Netherlands III BV: | | | |
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ADT Security Corp., 144A, 4.875%, 7/15/2032 | | | |
Advanced Drainage Systems, Inc., 144A, 6.375%, 6/15/2030 | | | |
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ATS Corp., 144A, 4.125%, 12/15/2028 | | | |
Avient Corp., 144A, 7.125%, 8/1/2030 | | | |
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Builders FirstSource, Inc., 144A, 4.25%, 2/1/2032 | | | |
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Cargo Aircraft Management, Inc., 144A, 4.75%, 2/1/2028 | | | |
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Clean Harbors, Inc., 144A, 5.125%, 7/15/2029 | | | |
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Hawaiian Brand Intellectual Property Ltd., 144A, 5.75%, 1/20/2026 | | | |
Hertz Corp., 144A, 4.625%, 12/1/2026 | | | |
Howmet Aerospace, Inc., 6.875%, 5/1/2025 | | | |
Imola Merger Corp., 144A, 4.75%, 5/15/2029 | | | |
Masonite International Corp., 144A, 5.375%, 2/1/2028 | | | |
Mileage Plus Holdings LLC, 144A, 6.5%, 6/20/2027 | | | |
Moog, Inc., 144A, 4.25%, 12/15/2027 | | | |
NESCO Holdings II, Inc., 144A, 5.5%, 4/15/2029 | | | |
Prime Security Services Borrower LLC: | | | |
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Sabre GLBL, Inc., 144A, 11.25%, 12/15/2027 | | | |
Signature Aviation U.S. Holdings, Inc., 144A, 4.0%, 3/1/2028 | | | |
Spirit Loyalty Cayman Ltd., 144A, 8.0%, 9/20/2025 | | | |
Summit Materials LLC, 144A, 5.25%, 1/15/2029 | | | |
TK Elevator U.S. Newco, Inc., 144A, 5.25%, 7/15/2027 | | | |
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United Airlines, Inc., 144A, 4.375%, 4/15/2026 | | | |
United Rentals North America, Inc.: | | | |
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The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS High Income VIP |
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Information Technology 0.7% | |
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Open Text Corp., 144A, 6.9%, 12/1/2027 | | | |
Playtika Holding Corp., 144A, 4.25%, 3/15/2029 | | | |
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Arconic Corp., 144A, 6.125%, 2/15/2028 | | | |
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Consolidated Energy Finance SA, 144A, 5.625%, 10/15/2028 | | | |
Constellium SE, 144A, 3.75%, 4/15/2029 | | | |
First Quantum Minerals Ltd.: | | | |
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Methanex Corp., 5.25%, 12/15/2029 | | | |
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Roller Bearing Co. of America, Inc., 144A, 4.375%, 10/15/2029 | | | |
SK Invictus Intermediate II Sarl, 144A, 5.0%, 10/30/2029 | | | |
Taseko Mines Ltd., 144A, 7.0%, 2/15/2026 | | | |
Tronox, Inc., 144A, 4.625%, 3/15/2029 | | | |
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Iron Mountain Information Management Services, Inc., 144A, (REIT), 5.0%, 7/15/2032 | | | |
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144A, (REIT), 4.875%, 9/15/2027 | | | |
144A, (REIT), 4.875%, 9/15/2029 | | | |
144A, (REIT), 5.0%, 7/15/2028 | | | |
144A, (REIT), 5.25%, 3/15/2028 | | | |
144A, (REIT), 5.25%, 7/15/2030 | | | |
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MPT Operating Partnership LP: | | | |
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SBA Communications Corp., (REIT), 3.125%, 2/1/2029 | | | |
Starwood Property Trust, Inc., 144A, (REIT), 3.625%, 7/15/2026 | | | |
Uniti Group LP, 144A, (REIT), 6.0%, 1/15/2030 (b) | | | |
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144A, (REIT), 4.625%, 6/15/2025 | | | |
144A, (REIT), 5.75%, 2/1/2027 | | | |
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Clearway Energy Operating LLC, 144A, 4.75%, 3/15/2028 | | | |
FirstEnergy Corp., 4.4%, 7/15/2027 | | | |
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Pattern Energy Operations LP, 144A, 4.5%, 8/15/2028 | | | |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS High Income VIP | |
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PG&E Corp., 5.25%, 7/1/2030 | | | |
Vistra Operations Co. LLC, 144A, 4.375%, 5/1/2029 | | | |
| | | |
Total Corporate Bonds (Cost $40,866,954) | |
Loan Participations and Assignments 3.3% | |
| |
Athenahealth, Inc., Term Loan B, 30-day average SOFR + 3.5%, 7.821%, 2/15/2029 | | | |
Clear Channel Outdoor Holdings, Inc., Term Loan B, 3-month USD-LIBOR + 3.5%, 7.915%, 8/21/2026 | | | |
CommScope, Inc., Term Loan B, 1-month USD-LIBOR + 3.25%, 7.634%, 4/6/2026 | | | |
DirecTV Financing LLC, Term Loan, 1-month USD-LIBOR + 5.0%, 9.384%, 8/2/2027 | | | |
Frontier Communications Corp., First Lien Term Loan, 3-month USD-LIBOR + 3.75%, 8.5%, 5/1/2028 | | | |
Gray Television, Inc., Term Loan B, 1-month USD-LIBOR + 2.5%, 6.62% - 6.884%, 2/7/2024 | | | |
Naked Juice LLC, Term Loan, 90-day average SOFR + 3.25%, 7.93%, 1/24/2029 | | | |
Option Care Health, Inc., Term Loan B, 1-month USD- LIBOR + 2.75%, 7.134%, 10/27/2028 | | | |
Pacific Gas & Electric Co., Term Loan, 1-month USD- LIBOR + 3.0%, 7.438%, 6/23/2025 | | | |
Tronox Finance LLC, Term Loan B, 1-month USD-LIBOR + 2.25%, 6.634%, 3/11/2028 | | | |
Total Loan Participations and Assignments (Cost $1,432,902) | |
| | |
Exchange-Traded Funds 2.2% | |
iShares iBoxx High Yield Corporate Bond ETF (b) | | | |
SPDR Bloomberg High Yield Bond ETF | | | |
Total Exchange-Traded Funds (Cost $1,073,795) | |
| |
| |
Quad Graphics, Inc.* (Cost $0) | | | |
| |
| |
Hercules Trust II, Expiration Date 3/31/2029* (d) (Cost $244,286) | | | |
Securities Lending Collateral 2.9% | |
DWS Government & Agency Securities Portfolio "DWS Government Cash Institutional Shares", 4.07% (e) (f) (Cost $1,212,645) | | | |
| |
DWS Central Cash Management Government Fund, 4.2% (e) (Cost $1,468,062) | | | |
| | | |
Total Investment Portfolio (Cost $46,298,644) | | |
Other Assets and Liabilities, Net | | |
| | |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS High Income VIP |
A summary of the Fund’s transactions with affiliated investments during the year ended December 31, 2022 are as follows:
| | | Net Realized
Gain/
(Loss) ($) | Net Change in
Unrealized
Appreciation
(Depreciation) ($) | | Capital Gain
Distributions ($) | Number
of Shares
at
12/31/2022 | |
Securities Lending Collateral 2.9% |
DWS Government & Agency Securities Portfolio "DWS Government Cash Institutional Shares", 4.07% (e) (f) |
| | | | | | | | |
|
DWS Central Cash Management Government Fund, 4.2% (e) |
| | | | | | | | |
| | | | | | | | |
| Non-income producing security. |
| Principal amount stated in U.S. dollars unless otherwise noted. |
| All or a portion of these securities were on loan. In addition, "Other Assets and Liabilities, Net" may include pending sales that are also on loan. The value of securities loaned at December 31, 2022 amounted to $1,165,801, which is 2.8% of net assets. |
| Variable or floating rate security. These securities are shown at their current rate as of December 31, 2022. For securities based on a published reference rate and spread, the reference rate and spread are indicated within the description above. Certain variable rate securities are not based on a published reference rate and spread but adjust periodically based on current market conditions, prepayment of underlying positions and/or other variables. Securities with a floor or ceiling feature are disclosed at the inherent rate, where applicable. |
| Investment was valued using significant unobservable inputs. |
| Affiliated fund managed by DWS Investment Management Americas, Inc. The rate shown is the annualized seven-day yield at period end. |
| Represents cash collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates. |
| Represents the net increase (purchase cost) or decrease (sales proceeds) in the amount invested in cash collateral for the year ended December 31, 2022. |
144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. |
REG S: Securities sold under Regulation S may not be offered, sold or delivered within the United States or to, or for the account or benefit of, 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 |
SOFR: Secured Overnight Financing Rate |
SPDR: Standard & Poor's Depositary Receipt |
LIBOR: London Interbank Offered Rate, the benchmark rate for certain floating rate securities, has been phased out as of the end of 2021 for most maturities and currencies, although certain widely used US Dollar LIBOR rates are expected to continue to be published through June 2023 to assist with the transition. The transition process from LIBOR towards its expected replacement reference rate with the Secured Overnight Financing Rate (SOFR) for US Dollar LIBOR rates has become increasingly well defined, especially following the signing of the federal Adjustable Interest Rate (LIBOR) Act in March 2022 , and the adoption of implementing regulations in December 2022, which will replace LIBOR-based benchmark rates in instruments with no, or insufficient, alternative rate-setting provisions with a SOFR-based rate following the cessation of LIBOR. However, the Fund or the instruments in which the Fund invests may be adversely affected by the phase out by, among other things, increased volatility or illiquidity.
At December 31, 2022, the Fund had an unfunded loan commitments of $10,434, which could be extended at the option of the borrower, pursuant to the following loan agreements:
| Unfunded Loan Commitments ($) | | Unrealized Depreciation ($) |
Athenahealth, Inc., Delayed Draw Term Loan, 2/15/2029 | | | |
At December 31, 2022, the Fund had the following open forward foreign currency contracts:
| | | Unrealized
Appreciation ($) | |
| | | | | | |
| | | | | | |
Total unrealized appreciation | | |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS High Income VIP | |
| | | Unrealized
Depreciation ($) | |
| | | | | | |
Currency Abbreviation(s)
For information on the Fund’s policy and additional disclosures regarding forward foreign currency 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 level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2022 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.
| | | | |
| | | | |
Loan Participations and Assignments | | | | |
| | | | |
| | | | |
| | | | |
Short-Term Investments (a) | | | | |
| | | | |
Forward Foreign Currency Contracts | | | | |
| | | | |
| | | | |
Unfunded Loan Commitment (c) | | | | |
| | | | |
Forward Foreign Currency Contracts | | | | |
| | | | |
| See Investment Portfolio for additional detailed categorizations. |
| Derivatives include unrealized appreciation (depreciation) on open forward foreign currency contracts. |
| Includes depreciation on unfunded loan commitments. |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS High Income VIP |
Statement of Assets and Liabilities
as of December 31, 2022
| |
Investments in non-affiliated securities, at value (cost $43,617,937) — including $1,165,801 of securities loaned | |
Investment in DWS Government & Agency Securities Portfolio (cost $1,212,645)* | |
Investment in DWS Central Cash Management Government Fund (cost $1,468,062) | |
| |
Foreign currency, at value (cost $23,612) | |
Receivable for investments sold | |
Receivable for Fund shares sold | |
| |
Unrealized appreciation on forward foreign currency contracts | |
| |
| |
| |
Payable upon return of securities loaned | |
Payable for Fund shares redeemed | |
Unrealized depreciation on forward foreign currency contracts | |
Unrealized depreciation on unfunded commitments | |
| |
| |
Other accrued expenses and payables | |
| |
| |
| |
Distributable earnings (loss) | |
| |
| |
| |
| |
Net Asset Value, offering and redemption price per share ($41,237,977 ÷ 7,728,847 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | |
| |
Net Asset Value, offering and redemption price per share ($674,169 ÷ 125,968 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | |
| Represents collateral on securities loaned. |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS High Income VIP | |
for the year ended December 31, 2022
| |
| |
| |
| |
Income distributions — DWS Central Cash Management Government Fund | |
Securities lending income, net of borrower rebates | |
| |
| |
| |
| |
| |
Record keeping fee (Class B) | |
Distribution service fee (Class B) | |
| |
| |
| |
| |
| |
Trustees' fees and expenses | |
| |
Total expenses before expense reductions | |
| |
Total expenses after expense reductions | |
| |
Realized and Unrealized Gain (Loss) | |
Net realized gain (loss) from: | |
| |
Forward foreign currency contracts | |
| |
| |
Change in net unrealized appreciation (depreciation) on: | |
| |
Unfunded loan commitments | |
Forward foreign currency contracts | |
| |
| |
| |
Net increase (decrease) in net assets resulting from operations | |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS High Income VIP |
Statements of Changes in Net Assets
| |
Increase (Decrease) in Net Assets | | |
| | |
| | |
| | |
Change in net unrealized appreciation
(depreciation) | | |
Net increase (decrease) in net assets resulting from operations | | |
Distributions to shareholders: | | |
| | |
| | |
| | |
| | |
| | |
Proceeds from shares sold | | |
Reinvestment of distributions | | |
Payments for shares redeemed | | |
Net increase (decrease) in net assets from Class A share transactions | | |
| | |
Proceeds from shares sold | | |
Reinvestment of distributions | | |
Payments for shares redeemed | | |
Net increase (decrease) in net assets from Class B share transactions | | |
Increase (decrease) in net assets | | |
Net assets at beginning of period | | |
Net assets at end of period | | |
| |
| | |
| | |
Shares outstanding at beginning of period | | |
| | |
Shares issued to shareholders in reinvestment of distributions | | |
| | |
Net increase (decrease) in Class A shares | | |
Shares outstanding at end of period | | |
| | |
Shares outstanding at beginning of period | | |
| | |
Shares issued to shareholders in reinvestment of distributions | | |
| | |
Net increase (decrease) in Class B shares | | |
Shares outstanding at end of period | | |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS High Income VIP | |
Financial Highlights
DWS High Income VIP — Class A |
| |
| | | | | |
|
Net asset value, beginning of period | | | | | |
Income (loss) from investment operations: | | | | | |
| | | | | |
Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
| | | | | |
| | | | | |
Net asset value, end of period | | | | | |
| | | | | |
Ratios to Average Net Assets and Supplemental Data |
Net assets, end of period ($ millions) | | | | | |
Ratio of expenses before expense reductions (%)c | | | | | |
Ratio of expenses after expense reductions (%)c | | | | | |
Ratio of net investment income (%) | | | | | |
Portfolio turnover rate (%) | | | | | |
| Based on average shares outstanding during the period. |
| Total return would have been lower had certain expenses not been reduced. |
| Expense ratio does not reflect charges and fees 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 accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS High Income VIP |
DWS High Income VIP — Class B |
| |
| | | | | |
| | | | | |
Net asset value, beginning of period | | | | | |
Income (loss) from investment operations: | | | | | |
| | | | | |
Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
| | | | | |
| | | | | |
Net asset value, end of period | | | | | |
| | | | | |
Ratios to Average Net Assets and Supplemental Data |
Net assets, end of period ($ millions) | | | | | |
Ratio of expenses before expense reductions (%)c | | | | | |
Ratio of expenses after expense reductions (%)c | | | | | |
Ratio of net investment income (%) | | | | | |
Portfolio turnover rate (%) | | | | | |
| Based on average shares outstanding during the period. |
| Total return would have been lower had certain expenses not been reduced. |
| Expense ratio does not reflect charges and fees 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 accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS High Income VIP | |
Notes to Financial Statements
A.
Organization and Significant Accounting Policies
DWS High Income VIP (the “Fund”) is a diversified series of Deutsche 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). Class B shares are subject to Rule 12b-1 distribution fees under the 1940 Act and recordkeeping fees equal to an annual rate of up to 0.25% and of up to 0.15%, respectively, 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 12b-1 distribution fees 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 (“U.S. GAAP”) which require the use of management estimates. Actual results could differ from those estimates. The Fund qualifies as an investment company under Topic 946 of Accounting Standards Codification of U.S. GAAP. 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.
The Fund’s Board has designated DWS Investment Management Americas, Inc. (the “Advisor”) as the valuation designee for the Fund pursuant to Rule 2a-5 under the 1940 Act. The Advisor's Pricing Committee (the “Pricing Committee”) typically values securities using readily available market quotations or prices supplied by independent pricing services (which are considered fair values under Rule 2a-5). The Advisor has adopted fair valuation procedures that provide methodologies for fair valuing securities.
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 level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities.
Debt securities are valued at prices supplied by independent pricing services approved by the Pricing Committee. 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, prepayment speeds and other data, as well as broker quotes. If the pricing services are unable to provide valuations, debt securities are valued at the average of the most recent reliable bid quotations or evaluated prices, as applicable, obtained from broker-dealers. These securities are generally categorized as Level 2.
Senior loans are valued by independent pricing services approved by the Pricing Committee, whose valuations are intended to reflect the average of broker supplied quotes representing mean between the bid and asked prices. If the pricing services are unable to provide valuations, the securities are valued at the mean of the most recent bid and asked quotations or evaluated price, as applicable, obtained from one or more broker-dealers. Certain securities may be valued on the basis of a price provided by a single source or broker-dealer. No active trading market may exist for some senior loans, and they may be subject to restrictions on resale. The inability to dispose of senior loans in a timely fashion could result in losses. Senior loans 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. Equity 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. Equity securities and ETFs are generally 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.
| Deutsche DWS Variable Series II — DWS High Income VIP |
Forward currency contracts are valued at the prevailing forward exchange rate of the underlying currencies and are 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 Pricing Committee and are generally categorized as Level 3. In accordance with the Fund’s valuation procedures, factors considered 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. The 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. Deutsche Bank AG, as lending agent, lends securities of the Fund to certain financial institutions under the terms of its securities lending agreement. During the term of the loans, the Fund continues to receive interest and dividends generated by the 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 efforts to obtain additional collateral on the next business day to meet required amounts under the securities lending agreement. As of period end, any securities on loan were collateralized by cash. During the year ended December 31, 2022, the Fund invested the cash collateral into a joint trading account in DWS Government & Agency Securities Portfolio, an affiliated money market fund managed by DWS Investment Management Americas, Inc. DWS Investment Management Americas, Inc. receives a management/administration fee (0.07% annualized effective rate as of December 31, 2022) on the cash collateral invested in DWS Government & Agency Securities Portfolio. 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 at any time, and the borrower, after notice, is required to return borrowed securities within a standard time period. 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. If the Fund is not able to recover securities lent, the Fund may sell the collateral and purchase a replacement investment in the market, incurring the risk that the value of the replacement security is greater than the value of the collateral. 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.
Deutsche DWS Variable Series II — DWS High Income VIP | |
As of December 31, 2022, the Fund had securities on loan. The value of the related collateral exceeded the value of the securities loaned at period end.
Remaining Contractual Maturity of the Agreements as of December 31, 2022
| | | | | |
Securities Lending Transactions |
| | | | | |
| | | | | |
| | | | | |
Gross amount of recognized liabilities for securities lending transactions: | |
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.
At December 31, 2022, the Fund had net tax basis capital loss carryforwards of approximately $7,865,000, including short-term losses ($1,237,000) and long-term losses ($6,628,000), which may be applied against realized net taxable capital gains indefinitely.
The Fund has reviewed the tax positions for the open tax years as of December 31, 2022 and has determined that no provision for income tax and/or uncertain tax positions 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 from net investment income of the Fund, if any, are 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, investments in derivatives and premium amortization on debt securities. 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.
At December 31, 2022, the Fund's components of distributable earnings (accumulated losses) on a net tax basis were as follows:
Undistributed ordinary income* | |
Capital loss carryforwards | |
Net unrealized appreciation (depreciation) on investments | |
At December 31, 2022, the aggregate cost of investments for federal income tax purposes was $46,352,907. The net unrealized depreciation for all investments based on tax cost was $3,759,099. This consisted of aggregate gross unrealized appreciation for all investments for which there was an excess of value over tax cost of $131,925 and aggregate gross unrealized depreciation for all investments for which there was an excess of tax cost over value of $3,891,024.
In addition, the tax character of distributions paid to shareholders by the Fund is summarized as follows:
| |
| | |
Distributions from ordinary income* | | |
| For tax purposes, short-term capital gain distributions are considered ordinary income distributions. |
| Deutsche DWS Variable Series II — DWS High Income VIP |
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 based upon the relative net assets or other appropriate measures.
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. Realized gains and losses from investment transactions are recorded on an identified cost basis. Proceeds from litigation payments, if any, are included in net realized gain (loss) from investments. All premiums and discounts are amortized/accreted for both tax and financial reporting purposes for the Fund, with the exception of securities in default of principal.
A forward foreign currency contract ("forward currency contract") is a commitment to purchase or sell a foreign currency at the settlement date at a negotiated rate. For the year ended December 31, 2022, 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 December 31, 2022, is included in the table following the Fund’s Investment Portfolio. For the year ended December 31, 2022, the investment in forward currency contracts short vs. U.S. dollars had a total contract value generally indicative of a range from approximately $846,000 to $1,235,000, and the investment in forward currency contracts long vs. U.S. dollars had a total contract value generally indicative of a range from $0 to approximately $30,000.
The following tables summarize the value of the Fund's derivative instruments held as of December 31, 2022 and the related location in the accompanying Statement of Assets and Liabilities, presented by primary underlying risk exposure:
| |
Foreign Exchange Contracts (a) | |
The above derivative is located in the following Statement of Assets and Liabilities account: |
| Unrealized appreciation on forward foreign currency contracts |
| |
Foreign Exchange Contracts (a) | |
The above derivative is located in the following Statement of Assets and Liabilities account: |
| Unrealized depreciation on forward foreign currency contracts |
Deutsche DWS Variable Series II — DWS High Income VIP | |
Additionally, the amount of unrealized and realized gains and losses on derivative instruments recognized in Fund earnings during the year ended December 31, 2022 and the related location in the accompanying Statement of Operations is summarized in the following tables by primary underlying risk exposure:
| |
Foreign Exchange Contracts (a) | |
The above derivative is located in the following Statement of Operations account: |
| Net realized gain (loss) from forward foreign currency contracts |
Change in Net Unrealized Appreciation (Depreciation) | |
Foreign Exchange Contracts (a) | |
The above derivative is located in the following Statement of Operations account: |
| Change in net unrealized appreciation (depreciation) on forward foreign currency contracts |
As of December 31, 2022, the Fund has transactions subject to enforceable master netting agreements which govern the terms of certain transactions, and reduce the counterparty risk associated with such transactions. Master netting agreements allow a Fund to close out and net total exposure to a counterparty in the event of a deterioration in the credit quality or contractual default with respect to all of the transactions with a counterparty. As defined by the master netting agreement, the Fund may have collateral agreements with certain counterparties to mitigate risk. For financial reporting purposes the Statement of Assets and Liabilities generally shows derivatives assets and liabilities on a gross basis, which reflects the full risks and exposures prior to netting. A reconciliation of the gross amounts on the Statement of Assets and Liabilities to the net amounts by a counterparty, including any collateral exposure, is included in the following tables:
| Gross Amount
of Assets
Presented
in the
Statement of
Assets and
Liabilities | Financial
Instruments
and
Derivatives
Available
for Offset | | Net Amount
of Derivative
Assets |
| | | | |
| | | | |
| | | | |
| Gross Amount
of Liabilities
Presented
in the
Statement of
Assets and
Liabilities | Financial
Instruments
and
Derivatives
Available
for Offset | | Net Amount
of Derivative
Liabilities |
| | | | |
C.
Purchases and Sales of Securities
During the year ended December 31, 2022, purchases and sales of investment securities (excluding short-term investments and U.S. Treasury securities) aggregated $19,481,949 and $21,438,444, respectively.
Management Agreement. Under the Investment Management Agreement with DWS Investment Management Americas, Inc. (“DIMA” or the “Advisor”), an indirect, wholly owned subsidiary of DWS Group GmbH & Co. KGaA (“DWS Group”), 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.
| Deutsche DWS Variable Series II — DWS High Income VIP |
Under the Investment Management Agreement with the Advisor, the Fund pays a monthly management fee based on the average daily net assets of the Fund, computed and accrued daily and payable monthly, at the following annual rates:
First $250 million of the Fund’s average daily net assets | |
Next $750 million of such net assets | |
Next $1.5 billion of such net assets | |
Next $2.5 billion of such net assets | |
Next $2.5 billion of such net assets | |
Next $2.5 billion of such net assets | |
Next $2.5 billion of such net assets | |
Over $12.5 billion of such net assets | |
Accordingly, for the year ended December 31, 2022, the fee pursuant to the Investment Management Agreement was equivalent to an annual rate (exclusive of any applicable waivers/reimbursements) of 0.50% of the Fund’s average daily net assets.
For the period from January 1, 2022 through September 30, 2022, the Advisor had contractually agreed to waive its fees and/or reimburse certain operating expenses of the Fund to the extent necessary to maintain the total annual operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of each class as follows:
Effective October 1, 2022 through September 30, 2023, the Advisor has contractually agreed to waive its fees and/or reimburse certain operating expenses of the Fund to the extent necessary to maintain the total annual operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of each class as follows:
For the year ended December 31, 2022, fees waived and/or expenses reimbursed for each class are as follows:
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 the Advisor an annual fee (“Administration Fee”) of 0.097% of the Fund’s average daily net assets, computed and accrued daily and payable monthly. For the year ended December 31, 2022, the Administration Fee was $43,745, of which $3,493 is unpaid.
Service Provider Fees. DWS Service Company (“DSC”), 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 DSC and SS&C GIDS, Inc. (“SS&C”) (name changed from DST Systems, Inc. effective January 1, 2023), DSC has delegated certain transfer agent, dividend-paying agent and shareholder service agent functions to SS&C. DSC compensates SS&C out of the shareholder servicing fee it receives from the Fund. For the year ended December 31, 2022, the amounts charged to the Fund by DSC were as follows:
| | Unpaid at
December 31, 2022 |
| | |
| | |
| | |
Deutsche DWS Variable Series II — DWS High Income VIP | |
Distribution Service Agreement. Under the Fund’s Class B 12b-1 plan, DWS Distributors, Inc. (“DDI”) received a fee (“Distribution Service Fee”) of up to 0.25% of average daily net assets of Class B shares. For the year ended December 31, 2022, the Distribution Service Fee aggregated $1,609, of which $147 is unpaid.
Other Service Fees. Under an agreement with the Fund, DIMA is compensated for providing regulatory filing services to the Fund. For the year ended December 31, 2022, the amount charged to the Fund by DIMA included in the Statement of Operations under “Reports to shareholders” aggregated $1,214, of which $111 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 Vehicles. The Fund may invest uninvested cash balances in DWS Central Cash Management Government Fund and DWS ESG Liquidity Fund, affiliated money market funds which are managed by the Advisor. Each affiliated money market fund is managed in accordance with Rule 2a-7 under the 1940 Act, which governs the quality, maturity, diversity and liquidity of instruments in which a money market fund may invest. DWS Central Cash Management Government Fund seeks to maintain a stable net asset value, and DWS ESG Liquidity Fund maintains a floating net asset value. The Fund indirectly bears its proportionate share of the expenses of each affiliated money market fund in which it invests. DWS Central Cash Management Government Fund does not pay the Advisor an investment management fee. To the extent that DWS ESG Liquidity Fund pays an investment management fee to the Advisor, the Advisor will waive an amount of the investment management fee payable to the Advisor by the Fund equal to the amount of the investment management fee payable on the Fund’s assets invested in DWS ESG Liquidity Fund.
Securities Lending Agent Fees. Deutsche Bank AG serves as securities lending agent for the Fund. For the year ended December 31, 2022, the Fund incurred securities lending agent fees to Deutsche Bank AG in the amount of $1,613.
E.
Investing in High-Yield Debt Securities
High-yield debt securities or junk bonds are generally regarded as speculative with respect to the issuer’s continuing ability to meet principal and interest payments. The Fund’s performance could be hurt if an issuer of a debt security suffers an adverse change in financial condition that results in the issuer not making timely payments of interest or principal, a security downgrade or an inability to meet a financial obligation. High-yield debt securities’ total return and yield may generally be expected to fluctuate more than the total return and yield of investment-grade debt securities. A real or perceived economic downturn or an increase in market interest rates could cause a decline in the value of high-yield debt securities, result in increased redemptions and/or result in increased portfolio turnover, which could result in a decline in net asset value of the Fund, reduce liquidity for certain investments and/or increase costs. High-yield debt securities are often thinly traded and can be more difficult to sell and value accurately than investment-grade debt securities as there may be no established secondary market. Investments in high yield debt securities could increase liquidity risk for the Fund. In addition, the market for high-yield debt securities can experience sudden and sharp volatility which is generally associated more with investments in stocks.
At December 31, 2022, one participating insurance company was owner of record of 10% or more of the
total outstanding Class A shares of the Fund, owning 89%. Three participating insurance companies were owners of record of 10% or more of the total outstanding Class B shares of the Fund, each owning 50%, 32% and 17%, respectively.
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 daily fluctuating rate per annum equal to the sum of 0.10% plus the higher of the Federal Funds Effective Rate and the Overnight Bank Funding Rate, plus 1.25%. The Fund may borrow up to a maximum of 20 percent of its net assets under the agreement. The Fund had no outstanding loans at December 31, 2022.
| Deutsche DWS Variable Series II — DWS High Income VIP |
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Deutsche DWS Variable Series II and Shareholders of DWS High Income VIP:
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities of DWS High Income VIP (the “Fund”) (one of the funds constituting Deutsche DWS Variable Series II) (the “Trust”), including the investment portfolio, as of December 31, 2022, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund (one of the funds constituting Deutsche DWS Variable Series II) at December 31, 2022, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and its financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Trust is not required to have, nor were we engaged to perform, an audit of the Trust’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2022, by correspondence with the custodian, brokers and others: when replies were not received from brokers and others, we performed other auditing procedures. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the auditor of one or more investment companies in the DWS family of funds since at least 1979, but we are unable to determine the specific year.
Boston, Massachusetts
February 13, 2023
Deutsche DWS Variable Series II — DWS High Income VIP | |
Information About Your Fund’s Expenses (Unaudited)
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, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Fund limited these expenses; had it not done so, expenses would have
been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2022 to December 31, 2022).
The tables illustrate your Fund’s expenses in two ways:
—
Actual Fund Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Fund using the Fund’s actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the “Expenses Paid per $1,000” line under the share class you hold.
—
Hypothetical 5% Fund Return. This helps you to compare your Fund’s ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund’s actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The “Expenses Paid per $1,000” line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
Expenses and Value of a $1,000 Investment for the six months ended December 31, 2022
| | |
Beginning Account Value 7/1/22 | | |
Ending Account Value 12/31/22 | | |
Expenses Paid per $1,000* | | |
Hypothetical 5% Fund Return | | |
Beginning Account Value 7/1/22 | | |
Ending Account Value 12/31/22 | | |
Expenses Paid per $1,000* | | |
| 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 184 (the number of days in the most recent six-month period), then divided by 365. |
Annualized Expense Ratios | | |
Deutsche DWS Variable Series II — DWS High Income VIP | | |
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.
For an analysis of the fees associated with an investment in the Fund or similar funds, please refer to the current and hypothetical expense calculators for Variable Insurance Products which can be found at dws.com/calculators.
| Deutsche DWS Variable Series II — DWS High Income VIP |
Tax Information (Unaudited)
Please consult a tax advisor if you have questions about federal or state income tax laws, or on how to prepare your tax returns. If you have specific questions about your account, please contact your insurance provider.
Proxy Voting
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 most recent 12-month period ended June 30 are available on our Web site — dws.com/en-us/resources/proxy-voting — or on the SEC’s Web site — 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.
Deutsche DWS Variable Series II — DWS High Income VIP | |
Advisory Agreement Board Considerations and Fee Evaluation
The Board of Trustees (hereinafter referred to as the “Board” or “Trustees”) approved the renewal of DWS High Income VIP's (the “Fund”) investment management agreement (the “Agreement”) with DWS Investment Management Americas, Inc. (“DIMA”) in September 2022.
In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:
—
During the entire process, all of the Fund's Trustees were independent of DIMA and its affiliates (the “Independent Trustees”).
—
The Board met frequently during the past year to discuss fund matters and dedicated a substantial amount of time to contract review matters. Over the course of several months, the Board reviewed extensive materials received from DIMA, independent third parties and independent counsel. These materials included an analysis of the Fund’s performance, fees and expenses, and profitability from a fee consultant retained by the Fund’s Independent Trustees (the “Fee Consultant”).
—
The Board also received extensive information throughout the year regarding performance of the Fund.
—
The Independent Trustees regularly met privately with counsel to discuss contract review and other matters. In addition, the Independent Trustees were advised by the Fee Consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the Fee Consultant in connection with their deliberations.
—
In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's Rule 12b-1 plan, distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
In connection with the contract review process, the Board considered the factors discussed below, among others. The Board also considered that DIMA and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DIMA managed the Fund. DIMA is part of DWS Group GmbH & Co. KGaA (“DWS Group”). DWS Group is a global asset management business that offers a wide range of investing expertise and resources, including research capabilities in many countries throughout the world. In 2018, approximately 20% of DWS Group’s shares were sold in an initial public offering, with Deutsche Bank AG owning the remaining shares.
As part of the contract review process, the Board carefully considered the fees and expenses of each DWS fund overseen by the Board in light of the fund’s performance. In many cases, this led to the negotiation and implementation of expense caps.
While shareholders may focus primarily on fund performance and fees, the Fund’s Board considers these and many other factors, including the quality and integrity of DIMA’s personnel and administrative support services provided by DIMA, such as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DIMA provides portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DIMA provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel and the resources made available to such personnel. The Board also considered the risks to DIMA in sponsoring or managing the Fund, including financial, operational and reputational risks, the potential economic impact to DIMA from such risks and DIMA’s approach to addressing such risks. The Board reviewed the Fund’s performance over short-term and long-term periods and compared those returns to various agreed-upon performance measures, including market index(es) and a peer universe compiled using information supplied by Morningstar Direct (“Morningstar”), an independent fund data service. The Board also noted that it has put into place a process of identifying “Funds in Review” (e.g., funds performing poorly relative to a peer universe), and receives additional reporting from DIMA regarding such funds and, where appropriate, DIMA’s plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that, for the one-, three- and five-year periods ended December 31, 2021, the Fund’s performance (Class A shares) was in the 4th quartile, 2nd quartile and 2nd quartile, respectively, of the applicable Morningstar universe (the 1st quartile being the
| Deutsche DWS Variable Series II — DWS High Income VIP |
best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has underperformed its benchmark in the one-, three- and five-year periods ended December 31, 2021.
Fees and Expenses. The Board considered the Fund’s investment management fee schedule, operating expenses and total expense ratios, and comparative information provided by Broadridge Financial Solutions, Inc. (“Broadridge”) and the Fee Consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include a 0.097% fee paid to DIMA under the Fund’s administrative services agreement, were lower than the median (1st quartile) of the applicable Broadridge peer group (based on Broadridge data provided as of December 31, 2021). The Board noted that the Fund’s Class A shares total (net) operating expenses were expected to be higher than the median (3rd quartile) of the applicable Broadridge expense universe (based on Broadridge data provided as of December 31, 2021, and analyzing Broadridge expense universe Class A (net) expenses less any applicable 12b-1 fees) (“Broadridge Universe Expenses”). The Board also reviewed data comparing each other operational share class’s total (net) operating expenses to the applicable Broadridge Universe Expenses. The Board noted that the expense limitations agreed to by DIMA were expected to help the Fund’s total (net) operating expenses remain competitive. The Board considered the Fund’s management fee rate as compared to fees charged by DIMA to comparable DWS U.S. registered funds (“DWS Funds”) and considered differences between the Fund and the comparable DWS Funds. The information requested by the Board as part of its review of fees and expenses also included information about institutional accounts (including any sub-advised funds and accounts) and funds offered primarily to European investors (“DWS Europe Funds”) managed by DWS Group. The Board noted that DIMA indicated that DWS Group does not manage any institutional accounts or DWS Europe Funds comparable to the Fund.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DIMA.
Profitability. The Board reviewed detailed information regarding revenues received by DIMA under the Agreement. The Board considered the estimated costs to DIMA, and pre-tax profits realized by DIMA, from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DIMA and its affiliates with respect to all fund services in totality and by fund. The Board and the Fee Consultant reviewed DIMA’s methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DIMA in connection with the management of the Fund were not unreasonable. The Board also reviewed certain publicly available information regarding the profitability of certain similar investment management firms. The Board noted that, while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DIMA and its affiliates’ overall profitability with respect to the DWS Funds (after taking into account distribution and other services provided to the funds by DIMA and its affiliates) was lower than the overall profitability levels of most comparable firms for which such data was available.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund’s investment management fee schedule includes fee breakpoints. The Board concluded that the Fund’s fee schedule represents an appropriate sharing between the Fund and DIMA of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DIMA and Its Affiliates. The Board also considered the character and amount of other incidental or “fall-out” benefits received by DIMA and its affiliates, including any fees received by DIMA for administrative services provided to the Fund, any fees received by an affiliate of DIMA for transfer agency services provided to the Fund and any fees received by an affiliate of DIMA for distribution services. The Board also considered benefits to DIMA related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities. In addition, the Board considered the incidental public relations benefits to DIMA related to DWS Funds advertising and cross-selling opportunities among DIMA products and services. The Board considered these benefits in reaching its conclusion that the Fund’s management fees were reasonable.
Compliance. The Board considered the significant attention and resources dedicated by DIMA to its compliance processes in recent years. The Board noted in particular (i) the experience, seniority and time commitment of the individuals serving as DIMA’s and the Fund’s chief compliance officers and (ii) the
Deutsche DWS Variable Series II — DWS High Income VIP | |
substantial commitment of resources by DIMA and its affiliates to compliance matters, including the retention of compliance personnel.
Based on all of the information considered and the conclusions reached, the Board determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and counsel present. It is possible that individual Independent Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.
| Deutsche DWS Variable Series II — DWS High Income VIP |
Board Members and Officers
The following table presents certain information regarding the Board Members and Officers of the Trust/Corporation. Each Board Member’s year of birth is set forth in parentheses after his or her name. Unless otherwise noted, (i) each Board Member has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity; and (ii) the address of each Independent Board Member is c/o Keith R. Fox, DWS Funds Board Chair, c/o Thomas R. Hiller, Ropes & Gray LLP, Prudential Tower, 800 Boylston Street, Boston, MA 02199-3600. Except as otherwise noted below, the term of office for each Board Member is until the election and qualification of a successor, or until such Board Member sooner dies, resigns, is removed or as otherwise provided in the governing documents of the Trust/Corporation. Because the Fund does not hold an annual meeting of shareholders, each Board Member will hold office for an indeterminate period.
The Board Members may also serve in similar capacities with other funds in the fund complex. The number of funds in the DWS fund complex shown in the table below includes all registered open- and closed-end funds (including all of their portfolios) advised by the Advisor and any registered funds that have an investment advisor that is an affiliated person of the Advisor.
Independent Board Members/Independent Advisory Board Members
Name, Year of
Birth, Position
with the Trust/
Corporation
and Length of
| Business Experience and Directorships
During the Past Five Years | Number of
Funds in
DWS Fund
Complex
Overseen | Other
Directorships
Held by Board
Member |
Keith R. Fox, CFA (1954) Chairperson since 2017, and Board Member since 1996 | Managing General Partner, Exeter Capital Partners (a series of private investment funds) (since 1986). Directorships: Progressive International Corporation (kitchen goods designer and distributor); former Chairman, National Association of Small Business Investment Companies; Former Directorships: ICI Mutual Insurance Company; BoxTop Media Inc. (advertising); Sun Capital Advisers Trust (mutual funds) | | |
John W. Ballantine (1946) Board Member since 1999 | Retired; formerly, Executive Vice President and Chief Risk Management Officer, First Chicago NBD Corporation/The First National Bank of Chicago (1996–1998); Executive Vice President and Head of International Banking (1995–1996); Not-for-Profit Directorships: Window to the World Communications (public media); Life Director of Harris Theater for Music and Dance (Chicago); Life Director of Hubbard Street Dance Chicago; Former Directorships: Director and Chairman of the Board, Healthways, Inc.2 (population wellbeing and wellness services) (2003–2014); Stockwell Capital Investments PLC (private equity); Enron Corporation; FNB Corporation; Tokheim Corporation; First Oak Brook Bancshares, Inc.; Oak Brook Bank; Portland General Electric2 (utility company (2003–2021); and Prisma Energy International; Former Not-for-Profit Directorships: Public Radio International; Palm Beach Civic Assn. | | |
Dawn-Marie Driscoll (1946) Board Member since 1987 | Advisory Board and former Executive Fellow, Hoffman Center for Business Ethics, Bentley University; formerly: Partner, Palmer & Dodge (law firm) (1988–1990); Vice President of Corporate Affairs and General Counsel, Filene’s (retail) (1978–1988); Directorships: Trustee and former Chairman of the Board, Southwest Florida Community Foundation (charitable organization); Former Directorships: ICI Mutual Insurance Company (2007–2015); Sun Capital Advisers Trust (mutual funds) (2007–2012), Investment Company Institute (audit, executive, nominating committees) and Independent Directors Council (governance, executive committees) | | |
Richard J. Herring (1946) Board Member since 1990 | Jacob Safra Professor of International Banking and Professor of Finance, The Wharton School, University of Pennsylvania (since July 1972); formerly: Director, The Wharton Financial Institutions Center (1994–2020); Vice Dean and Director, Wharton Undergraduate Division (1995–2000) and Director, The Lauder Institute of International Management Studies (2000–2006); Member FDIC Systemic Risk Advisory Committee since 2011, member Systemic Risk Council since 2012 and member of the Advisory Board at the Yale Program on Financial Stability since 2013; Former Directorships: Co-Chair of the Shadow Financial Regulatory Committee (2003–2015), Executive Director of The Financial Economists Roundtable (2008–2015), Director of The Thai Capital Fund (2007–2013), Director of The Aberdeen Singapore Fund (2007–2018), Director, The Aberdeen Japan Fund (2007-2021) and Nonexecutive Director of Barclays Bank DE (2010–2018) | | |
Deutsche DWS Variable Series II — DWS High Income VIP | |
Name, Year of Birth, Position with the Trust/ Corporation and Length of Time Served1 | Business Experience and Directorships During the Past Five Years | Number of Funds in DWS Fund Complex Overseen | Other Directorships Held by Board Member |
Chad D. Perry (1972) Board Member or Advisory | Executive Vice President, General Counsel and Secretary, Tanger Factory Outlet Centers, Inc.2 (since 2011); formerly Executive Vice President and Deputy General Counsel, LPL Financial Holdings Inc.2 (2006–2011); Senior Corporate Counsel, EMC Corporation (2005–2006); Associate, Ropes & Gray LLP (1997–2005) | | Director - Great Elm Capital Corp. (business development company) (since 2022) |
Rebecca W. Rimel (1951) Board Member since 1995 | Director, The Bridgespan Group (nonprofit organization) (since October 2020); formerly: Executive Vice President, The Glenmede Trust Company (investment trust and wealth management) (1983–2004); Board Member, Investor Education (charitable organization) (2004–2005); Former Directorships: Trustee, Executive Committee, Philadelphia Chamber of Commerce (2001–2007); Director, Viasys Health Care2 (January 2007–June 2007); Trustee, Thomas Jefferson Foundation (charitable organization) (1994–2012); President, Chief Executive Officer and Director (1994–2020) and Senior Advisor (2020-2021), The Pew Charitable Trusts (charitable organization); Director, BioTelemetry Inc.2 (acquired by Royal Philips in 2021) (healthcare) (2009–2021); Director, Becton Dickinson and Company2 (medical technology company) (2012-2022) | | |
Catherine Schrand (1964) Board Member since 2021* | Celia Z. Moh Professor of Accounting (since 2016) and Professor of Accounting (since 1994), The Wharton School, University of Pennsylvania; formerly Vice Dean, Wharton Doctoral Programs (2016–2019) | | |
William N. Searcy, Jr. (1946) Board Member since 1993 | Private investor since October 2003; formerly: Pension & Savings Trust Officer, Sprint Corporation2 (telecommunications) (November 1989–September 2003); Former Directorships: Trustee, Sun Capital Advisers Trust (mutual funds) (1998–2012) | | |
Officers5
Name, Year of Birth, Position
with the Trust/Corporation
and Length of Time Served6 | Business Experience and Directorships During the
Past Five Years |
Hepsen Uzcan7 (1974) President and Chief Executive Officer, 2017–present | Fund Administration (Head since 2017), DWS; Secretary, DWS USA Corporation (2018–present); Assistant Secretary, DWS Distributors, Inc. (2018–present); Director and Vice President, DWS Service Company (2018–present); Assistant Secretary, DWS Investment Management Americas, Inc. (2018–present); Director and President, DB Investment Managers, Inc. (2018–present); President and Chief Executive Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2017–present); formerly: Vice President for the Deutsche funds (2016–2017); Assistant Secretary for the DWS funds (2013–2019); Assistant Secretary, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2013–2020); Directorships: Interested Director, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (since June 25, 2020); ICI Mutual Insurance Company (since October 16, 2020); and Episcopalian Charities of New York (2018–present) |
John Millette8 (1962) Vice President and Secretary, 1999–present | Legal (Associate General Counsel), DWS; Chief Legal Officer, DWS Investment Management Americas, Inc. (2015–present); Director and Vice President, DWS Trust Company (2016–present); Secretary, DBX ETF Trust (2020–present); Vice President, DBX Advisors LLC (2021–present); Secretary, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. 2011–present); formerly: Secretary, Deutsche Investment Management Americas Inc. (2015–2017); and Assistant Secretary, DBX ETF Trust (2019–2020) |
Ciara Crawford9 (1984) Assistant Secretary, 2019–present | Fund Administration (Specialist), DWS (2015–present); formerly, Legal Assistant at Accelerated Tax Solutions |
Diane Kenneally8 (1966) Chief Financial Officer and Treasurer, 2018–present | Fund Administration Treasurer's Office (Co-Head since 2018), DWS; Treasurer, Chief Financial Officer and Controller, DBX ETF Trust (2019–present); Treasurer and Chief Financial Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2018–present); formerly: Assistant Treasurer for the DWS funds (2007–2018) |
Paul Antosca8 (1957) Assistant Treasurer, 2007–present | Fund Administration Tax (Head), DWS; and Assistant Treasurer, DBX ETF Trust (2019–present) |
Sheila Cadogan8 (1966) Assistant Treasurer, 2017–present | Fund Administration Treasurer's Office (Co-Head since 2018), DWS; Director and Vice President, DWS Trust Company (2018–present); Assistant Treasurer, DBX ETF Trust (2019–present); Assistant Treasurer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2018–present) |
Scott D. Hogan8 (1970) Chief Compliance Officer, 2016–present | Anti-Financial Crime & Compliance US (Senior Team Lead), DWS; Chief Compliance Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2016–present) |
| Deutsche DWS Variable Series II — DWS High Income VIP |
Name, Year of Birth, Position with the Trust/Corporation and Length of Time Served6 | Business Experience and Directorships During the Past Five Years |
Caroline Pearson8 (1962) Chief Legal Officer, 2010–present | Legal (Senior Team Lead), DWS; Assistant Secretary, DBX ETF Trust (2020–present); Chief Legal Officer, DBX Advisors LLC (2020–present); Chief Legal Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2012–present); formerly: Secretary, Deutsche AM Distributors, Inc. (2002–2017); Secretary, Deutsche AM Service Company (2010–2017); and Chief Legal Officer, DBX Strategic Advisors LLC (2020–2021) |
Christian Rijs7 (1980) Anti-Money Laundering
Compliance Officer,
since October 6, 2021 | Senior Team Lead Anti-Financial Crime and Compliance, DWS; AML Officer, DWS Trust Company (since November 2, 2021); AML Officer, DBX ETF Trust (since October 21, 2021); AML Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (since November 12, 2021); formerly: DWS UK & Ireland Head of Anti-Financial Crime and MLRO |
| Ms. Schrand was an Advisory Board Member for certain funds in the DWS Fund Complex for the period from November 18, 2021 to December 31, 2022 and was elected as a Full Board Member as of January 1, 2023 for all funds in the DWS Fund Complex. |
| The length of time served represents the year in which the Board Member joined the board of one or more DWS funds currently overseen by the Board. |
| A publicly held company with securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. |
| Mr. Perry is an Advisory Board Member of Deutsche DWS Asset Allocation Trust, Deutsche DWS Equity 500 Index Portfolio, Deutsche DWS Global/International Fund, Inc., Deutsche DWS Income Trust, Deutsche DWS Institutional Funds, Deutsche DWS International Fund, Inc., Deutsche DWS Investment Trust, Deutsche DWS Investments VIT Funds, Deutsche DWS Money Market Trust, Deutsche DWS Municipal Trust, Deutsche DWS Portfolio Trust, Deutsche DWS Securities Trust, Deutsche DWS Tax Free Trust, Deutsche DWS Variable Series I and Government Cash Management Portfolio. Mr. Perry is a Board Member of each other Trust. |
| Mr. Perry oversees 21 funds in the DWS Fund Complex as a Board Member of various Trusts. Mr. Perry is an Advisory Board Member of various Trusts/Corporations comprised of 48 funds in the DWS Fund Complex. |
| As a result of their respective positions held with the Advisor or its affiliates, these individuals are considered “interested persons” of the Advisor within the meaning of the 1940 Act. Interested persons receive no compensation from the Fund. |
| The length of time served represents the year in which the officer was first elected in such capacity for one or more DWS funds. |
| Address: 875 Third Avenue, New York, NY 10022. |
| Address: 100 Summer Street, Boston, MA 02110. |
| Address: 5201 Gate Parkway, Jacksonville, FL 32256. |
Certain officers hold similar positions for other investment companies for which DIMA or an affiliate serves as the Advisor.
The Fund’s Statement of Additional Information (“SAI”) includes additional information about the Board Members. The SAI is available, without charge, upon request. If you would like to request a copy of the SAI, you may do so by calling the following toll-free number: (800) 728-3337.
Deutsche DWS Variable Series II — DWS High Income VIP | |
VS2HI-2 (R-025832-12 2/23)
December 31, 2022
Annual Report
Deutsche DWS Variable Series II
DWS International Growth VIP
Contents
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 foreign securities, particularly those of emerging markets, presents certain risks, such as currency fluctuations, political and economic changes, and market risks. Emerging markets tend to be more volatile and less liquid than the markets of more mature economies, and generally have less diverse and less mature economic structures and less stable political systems than those of developed countries. Stocks may decline in value. Smaller company stocks tend to be more volatile than medium-sized or large company stocks. The Fund may lend securities to approved institutions. Please read the prospectus for details.
War, terrorism, sanctions, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and, in the future, may lead to significant disruptions in U.S. and world economies and markets, which may lead to increased market volatility and may have significant adverse effects on the Fund and its investments.
The brand DWS represents DWS Group GmbH & Co. KGaA and any of its subsidiaries such as DWS Distributors, Inc. which offers investment products or DWS Investment Management Americas, Inc. and RREEF America L.L.C. which offer advisory services.
DWS Distributors, Inc., 222 South Riverside Plaza, Chicago, IL 60606, (800) 621-1148
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
| Deutsche DWS Variable Series II — DWS International Growth VIP |
Performance SummaryDecember 31, 2022 (Unaudited)
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 does 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. 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, 2022 are 1.33% and 1.62% for Class A and Class B shares, respectively,and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Generally accepted accounting principles require adjustments to be made to the net assets of the Fund at period end for financial reporting purposes only, and as such, the total return based on the unadjusted net asset value per share may differ from the total return reported in the financial highlights.
Growth of an Assumed $10,000 Investment
Yearly periods ended December 31
MSCI All Country World ex-USA Index is an unmanaged equity index which captures large and mid-capitalization representation across 22 of 23 developed markets countries excluding the U.S. and 24 emerging markets countries. It covers approximately 85% of the global equity opportunity set outside of the U.S.
Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index.
Prior to October 1, 2017, the fund was named Deutsche Global Growth VIP and operated with a different investment strategy. Performance would have been different if the fund’s current investment strategy had been in effect.
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DWS International Growth VIP | | | | |
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Average annual total return | | | | |
MSCI All
Country World
ex-USA Index | | | | | |
Average annual total return | | | | |
DWS International Growth VIP | | | | |
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Average annual total return | | | | |
MSCI All
Country World
ex-USA Index | | | | | |
Average annual total return | | | | |
The growth of $10,000 is cumulative. |
Deutsche DWS Variable Series II — DWS International Growth VIP | |
Management Summary December 31, 2022 (Unaudited)
The Fund’s Class A shares returned –28.51% in 2022 (unadjusted for contract charges), underperforming the –16.00% return of the MSCI All-Country World ex-USA Index. However, the Fund outpaced the index in the 10-year period that ended on December 31, 2022.
International equities lost ground in 2022, as high inflation and sharply rising short-term interest rates fueled concerns about the possibility of a slowdown in economic growth in the year ahead. Geopolitical factors — most notably, Russia’s invasion of Ukraine and China’s growth-restricting policies — were also a drag on the foreign markets. Currency translation was an additional challenge for U.S. investors, with most major international currencies declining against the U.S. dollar.
Significant underperformance for the growth style in relation to value was the key factor in the Fund’s shortfall relative to the MSCI All-Country World ex-USA Index. The benchmark holds both growth and value stocks, whereas the Fund emphasizes the growth style. Growth underperformed value by a wide margin in 2022, as rising rates prompted investors to gravitate toward stable companies with high current cash flows over those whose earnings are weighted further in the future.
The impact of the Fund’s growth orientation was evident in the adverse effect its sector allocations had on relative performance. Specifically, an underweight in energy and a large overweight in information technology — both of which are consistent with our growth mandate — detracted from results. The headwind from our growth bias was also evident in stock selection, particularly in the healthcare sector. The Switzerland-based pharmaceutical services company Lonza Group AG, which was pressured by its large investments in capacity expansion and concerns about the sustainability of its COVID-19 vaccine revenues, was the leading detractor. The German biotechnology company Evotec SE, which was hurt by its increased investment spending and negative sentiment with respect to its royalty portfolio, was another key detractor of note. Despite our underperformance in healthcare, we believe the sector remains home to many of the most compelling growth ideas in the international markets.
The industrials sector also proved to be a challenging area over the past 12 months. Kornit Digital Ltd. benefited from strong initial demand for its more flexible, efficient, and environmentally friendly digital textile printing solutions, but weaker competitive dynamics and a slowdown in orders put pressure on its share price. Stock selection in consumer staples also detracted, as did positions in Globant SA and EPAM Systems, Inc.
On the positive side, selection in energy contributed to performance. TotalEnergies SE, a French energy stock, benefited from rising oil prices and its robust fundamentals relative to other major European oil producers. Outside of energy, the Singaporean financial company DBS Group Holdings Ltd. was the largest contributor. The stock advanced on the strength of rising interest rates and its increasing return on equity.
We believed international equities offered a favorable risk/reward profile versus the United States as of year-end. The Fund remained diversified across all regions, with its leading overweights in Western Europe (Germany, France, Netherlands, Ireland, and Switzerland) and North America. Its largest underweights were in Japan, the United Kingdom, and China. The Fund was underweight in the emerging markets, but the category remained an area of interest due to the potential for above-average long-term growth. In addition, emerging countries in Asia may see a near-term benefit from China’s reopening. With that said, we were cautious in adding to the Fund’s weighting in this area due to the challenging economic environment.
We believe the downward rerating of valuation multiples toward, or even below, historical norms has provided more reasonable entry points to invest in higher-quality companies. As investors wrestle with the impact of rising rates on growth stocks, we remain confident in the continuing forces of innovation and disruption that have accelerated the shifts in the competitive landscape. In our view, many of the underlying changes are still largely underappreciated. We therefore remain focused on capturing the best structural growth opportunities we see across the spectrum of the corporate life cycle.
Sebastian P. Werner, PhD, Head of Investment Strategy Equity
Portfolio Manager
The views expressed reflect those of the portfolio management team only through the end of the period of the report as stated on the cover. The management team’s views are subject to change at any time based on market and other conditions and should not be construed as a recommendation. Past performance is no guarantee of future results. Current and future portfolio holdings are subject to risk.
| Deutsche DWS Variable Series II — DWS International Growth VIP |
Terms to Know
MSCI All Country World ex USA Index is an unmanaged equity index which captures large and mid-capitalization representation across 22 of 23 developed markets countries excluding the U.S. and 24 emerging markets countries. It covers approximately 85% of the global equity opportunity set outside of the U.S.
Overweight means that a fund holds a higher weighting in a given sector or security than its benchmark index. Underweight means that a fund holds a lower weighting.
Stock selection refers to the performance of the Fund’s holdings in a given sector relative to the sector as a whole.
Contribution and detraction incorporate both an investment’s total return and its weighting in the Fund.
Deutsche DWS Variable Series II — DWS International Growth VIP | |
Portfolio Summary(Unaudited)
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | | |
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Sector Diversification (As a % of Investment Portfolio excluding Securities Lending Collateral and Cash Equivalents) | | |
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Geographical Diversification (As a % of Investment Portfolio excluding Securities Lending Collateral and Cash Equivalents) | | |
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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 posted on dws.com, and is available free of charge by contacting your financial intermediary, or if you are a direct investor, by calling (800) 728-3337. In addition, the portfolio holdings listing is filed with the SEC on the Fund’s Form N-PORT and will be available on the SEC’s Web site at sec.gov. Additional portfolio holdings for the Fund are also posted on dws.com from time to time. Please see the Fund’s current prospectus for more information.
| Deutsche DWS Variable Series II — DWS International Growth VIP |
Investment Portfolioas of December 31, 2022
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Pagseguro Digital Ltd. "A"* (Cost $261,752) | | | |
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Alimentation Couche-Tard, Inc. | | | |
Brookfield Asset Management Ltd. "A"* | | | |
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Canadian National Railway Co. | | | |
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Alibaba Group Holding Ltd. (ADR)* | | | |
ANTA Sports Products Ltd. | | | |
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Ping An Insurance Group Co. of China Ltd. "H" | | | |
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Novo Nordisk AS "B" (Cost $101,279) | | | |
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LVMH Moet Hennessy Louis Vuitton SE | | | |
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BNP Paribas Emissions- und Handelsgesellschaft mbH | | | |
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Deutsche Post AG (Registered) | | | |
Deutsche Telekom AG (Registered) | | | |
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Siemens Healthineers AG 144A | | | |
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Techtronic Industries Co., Ltd. (Cost $216,384) | | | |
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Kornit Digital Ltd.* (a) (Cost $239,759) | | | |
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Samsung Electronics Co., Ltd. (Cost $262,946) | | | |
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Eurofins Scientific SE (Cost $57,184) | | | |
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NXP Semiconductors NV (a) | | | |
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DBS Group Holdings Ltd. (Cost $523,815) | | | |
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Spotify Technology SA* (b) | | | |
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The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS International Growth VIP | |
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Lonza Group AG (Registered) | | | |
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Roche Holding AG (Genusschein) | | | |
Sportradar Holding AG "A"* (a) (c) | | | |
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Taiwan Semiconductor Manufacturing Co., Ltd. (Cost $274,548) | | | |
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Marsh & McLennan Companies, Inc. | | | |
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Thermo Fisher Scientific, Inc. | | | |
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Total Common Stocks (Cost $17,182,044) | | | |
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Sartorius AG (Cost $88,635) | | | |
Securities Lending Collateral 0.3% | |
DWS Government & Agency Securities Portfolio "DWS Government Cash Institutional Shares", 4.07% (d) (e) (Cost $58,500) | | | |
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DWS Central Cash Management Government Fund, 4.2% (d) (Cost $328,851) | | | |
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Total Investment Portfolio (Cost $17,658,030) | | | |
Other Assets and Liabilities, Net | | | |
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A summary of the Fund’s transactions with affiliated investments during the year ended December 31, 2022 are as follows:
| | | Net Realized
Gain/
(Loss) ($) | Net Change in
Unrealized
Appreciation
(Depreciation) ($) | | Capital Gain
Distributions ($) | Number
of Shares
at
12/31/2022 | |
Securities Lending Collateral 0.3% |
DWS Government & Agency Securities Portfolio "DWS Government Cash Institutional Shares", 4.07% (d) (e) |
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DWS Central Cash Management Government Fund, 4.2% (d) |
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| Non-income producing security. |
| Listed on the NASDAQ Stock Market, Inc. |
| Listed on the New York Stock Exchange. |
| All or a portion of these securities were on loan. In addition, "Other Assets and Liabilities, Net" may include pending sales that are also on loan. The value of securities loaned at December 31, 2022 amounted to $59,760, which is 0.3% of net assets. |
| Affiliated fund managed by DWS Investment Management Americas, Inc. The rate shown is the annualized seven-day yield at period end. |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS International Growth VIP |
| Represents cash collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates. |
| Represents the net increase (purchase cost) or decrease (sales proceeds) in the amount invested in cash collateral for the year ended December 31, 2022. |
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 |
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 level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2022 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.
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Short-Term Investments (a) | | | | |
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| See Investment Portfolio for additional detailed categorizations. |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS International Growth VIP | |
Statement of
Assets and Liabilities
as of December 31, 2022
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Investments in non-affiliated securities, at value (cost $17,270,679) — including $59,760 of securities loaned | |
Investment in DWS Government & Agency Securities Portfolio (cost $58,500)* | |
Investment in DWS Central Cash Management Government Fund (cost $328,851) | |
Foreign currency, at value (cost $93,537) | |
Receivable for Fund shares sold | |
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Foreign taxes recoverable | |
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Payable upon return of securities loaned | |
Payable for Fund shares redeemed | |
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Other accrued expenses and payables | |
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Distributable earnings (loss) | |
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Net Asset Value, offering and redemption price per share ($19,127,667 ÷ 1,457,916 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | |
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Net Asset Value, offering and redemption price per share ($25,792 ÷ 1,962 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | |
| Represents collateral on securities loaned. |
for the year ended December 31, 2022
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Dividends (net of foreign taxes withheld of $51,100) | |
Income distributions — DWS Central Cash Management Government Fund | |
Securities lending income, net of borrower rebates | |
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Record keeping fee (Class B) | |
Distribution service fee (Class B) | |
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Trustees' fees and expenses | |
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Total expenses before expense reductions | |
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Total expenses after expense reductions | |
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Realized and Unrealized Gain (Loss) | |
Net realized gain (loss) from: | |
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Change in net unrealized appreciation (depreciation) on: | |
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Net increase (decrease) in net assets resulting from operations | |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS International Growth VIP |
Statements of Changes in Net Assets
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Increase (Decrease) in Net Assets | | |
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Change in net unrealized appreciation
(depreciation) | | |
Net increase (decrease) in net assets resulting from operations | | |
Distributions to shareholders: | | |
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Proceeds from shares sold | | |
Reinvestment of distributions | | |
Payments for shares redeemed | | |
Net increase (decrease) in net assets from Class A share transactions | | |
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Proceeds from shares sold | | |
Reinvestment of distributions | | |
Payments for shares redeemed | | |
Net increase (decrease) in net assets from Class B share transactions | | |
Increase (decrease) in net assets | | |
Net assets at beginning of period | | |
Net assets at end of period | | |
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Shares outstanding at beginning of period | | |
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Shares issued to shareholders in reinvestment of distributions | | |
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Net increase (decrease) in Class A shares | | |
Shares outstanding at end of period | | |
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Shares outstanding at beginning of period | | |
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Shares issued to shareholders in reinvestment of distributions | | |
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Net increase (decrease) in Class B shares | | |
Shares outstanding at end of period | | |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS International Growth VIP | |
Financial Highlights
DWS International Growth VIP — Class A |
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Net asset value, beginning of period | | | | | |
Income (loss) from investment operations: | | | | | |
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Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
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Net asset value, end of period | | | | | |
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Ratios to Average Net Assets and Supplemental Data |
Net assets, end of period ($ millions) | | | | | |
Ratio of expenses before expense reductions (%)c | | | | | |
Ratio of expenses after expense reductions (%)c | | | | | |
Ratio of net investment income (%) | | | | | |
Portfolio turnover rate (%) | | | | | |
| Based on average shares outstanding during the period. |
| Total return would have been lower had certain expenses not been reduced. |
| Expense ratio does not reflect charges and fees 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 accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS International Growth VIP |
DWS International Growth VIP — Class B |
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Net asset value, beginning of period | | | | | |
Income (loss) from investment operations: | | | | | |
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Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
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Net asset value, end of period | | | | | |
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Ratios to Average Net Assets and Supplemental Data |
Net assets, end of period ($ millions) | | | | | |
Ratio of expenses before expense reductions (%)c | | | | | |
Ratio of expenses after expense reductions (%)c | | | | | |
Ratio of net investment income (%) | | | | | |
Portfolio turnover rate (%) | | | | | |
| Based on average shares outstanding during the period. |
| Total return would have been lower had certain expenses not been reduced. |
| Expense ratio does not reflect charges and fees 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 accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS International Growth VIP | |
Notes to Financial Statements
A.
Organization and Significant Accounting Policies
DWS International Growth VIP (the “Fund”) is a diversified series of Deutsche 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). Class B shares are subject to Rule 12b-1 distribution fees under the 1940 Act and recordkeeping fees equal to an annual rate of up to 0.25% and of up to 0.15%, respectively, 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 12b-1 distribution fees 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 (“U.S. GAAP”) which require the use of management estimates. Actual results could differ from those estimates. The Fund qualifies as an investment company under Topic 946 of Accounting Standards Codification of U.S. GAAP. 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.
The Fund’s Board has designated DWS Investment Management Americas, Inc. (the “Advisor”) as the valuation designee for the Fund pursuant to Rule 2a-5 under the 1940 Act. The Advisor's Pricing Committee (the “Pricing Committee”) typically values securities using readily available market quotations or prices supplied by independent pricing services (which are considered fair values under Rule 2a-5). The Advisor has adopted fair valuation procedures that provide methodologies for fair valuing securities.
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 level assigned to the securities valuations may not be an indication of the risk or liquidity 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. Equity 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. Equity securities and ETFs are generally categorized as Level 1. 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 Pricing Committee and are generally categorized as Level 3. In accordance with the Fund’s valuation procedures, factors considered 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
| Deutsche DWS Variable Series II — DWS International Growth VIP |
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. The 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. Brown Brothers Harriman & Co., as lending agent, lends securities of the Fund to certain financial institutions under the terms of its securities lending agreement. During the term of the loans, the Fund continues to receive interest and dividends generated by the 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 and/or U.S. Treasury Securities 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 efforts to obtain additional collateral on the next business day to meet required amounts under the securities lending agreement. During the year ended December 31, 2022, the Fund invested the cash collateral into a joint trading account in DWS Government & Agency Securities Portfolio, an affiliated money market fund managed by DWS Investment Management Americas, Inc. DWS Investment Management Americas, Inc. receives a management/administration fee (0.07% annualized effective rate as of December 31, 2022) on the cash collateral invested in DWS Government & Agency Securities Portfolio. 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 at any time, and the borrower, after notice, is required to return borrowed securities within a standard time period. 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. If the Fund is not able to recover securities lent, the Fund may sell the collateral and purchase a replacement investment in the market, incurring the risk that the value of the replacement security is greater than the value of the collateral. 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.
As of December 31, 2022, the Fund had securities on loan, which were classified as common stocks in the Investment Portfolio. Due to the increased market values of securities on loan on December 31, 2022, the value of the related collateral was less than the value of securities on loan at period end. On the next business day, additional collateral was received, and the value of collateral exceeded the value of the securities on loan. As of period end, the remaining contractual maturity of the collateral agreements was overnight and continuous.
Taxes. The Fund's policy 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.
At December 31, 2022, the Fund had net tax basis capital loss carryforwards of approximately $1,481,000, including short-term losses ($839,000) and long-term losses ($642,000), which may be applied against realized net taxable capital gains indefinitely.
Additionally, the Fund may be subject to taxes imposed by the governments of countries in which it invests and are generally based on income and/or capital gains earned or repatriated, a portion of which may be recoverable. Based upon the current interpretation of the tax rules and regulations, estimated tax liabilities and recoveries on certain foreign securities are recorded on an accrual basis and are reflected as
Deutsche DWS Variable Series II — DWS International Growth VIP | |
components of interest income or net change in unrealized gain/loss on investments. Tax liabilities realized as a result of security sales are reflected as a component of net realized gain/loss on investments.
The Fund has reviewed the tax positions for the open tax years as of December 31, 2022 and has determined that no provision for income tax and/or uncertain tax positions 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 from net investment income of the Fund, if any, are 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 and the realized tax character on distributions from certain securities. 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.
At December 31, 2022, the Fund's components of distributable earnings (accumulated losses) on a net tax basis were as follows:
Undistributed ordinary income* | |
Capital loss carryforwards | |
Net unrealized appreciation (depreciation) on investments | |
At December 31, 2022, the aggregate cost of investments for federal income tax purposes was $17,689,054. The net unrealized appreciation for all investments based on tax cost was $1,487,505. This consisted of aggregate gross unrealized appreciation for all investments for which there was an excess of value over tax cost of $3,734,544 and aggregate gross unrealized depreciation for all investments for which there was an excess of tax cost over value of $2,247,039.
In addition, the tax character of distributions paid to shareholders by the Fund is summarized as follows:
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Distributions from ordinary income* | | |
Distributions from long-term capital gains | | |
| For tax purposes, short-term capital gain distributions are considered ordinary income distributions. |
Expenses. Expenses of the Trust arising in connection with a specific fund are allocated to that fund. Other Trust expenses which cannot be directly attributed to a fund are apportioned among the funds in the Trust based upon the relative net assets or other appropriate measures.
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. Proceeds from litigation payments, if any, are included in net realized gain (loss) from investments.
B.
Purchases and Sales of Securities
During the year ended December 31, 2022, purchases and sales of investment securities (excluding short-term investments) aggregated $8,471,841 and $3,627,708, respectively.
| Deutsche DWS Variable Series II — DWS International Growth VIP |
Management Agreement. Under the Investment Management Agreement with DWS Investment Management Americas, Inc. (“DIMA” or the “Advisor”), an indirect, wholly owned subsidiary of DWS Group GmbH & Co. KGaA (“DWS Group”), 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 average daily net assets of the Fund, computed and accrued daily and payable monthly at the annual rate (exclusive of any applicable waivers/reimbursements) of 0.62%.
For the period from January 1, 2022 through April 30, 2022, the Advisor had contractually agreed to waive its fees and/or reimburse certain operating expenses of the Fund to the extent necessary to maintain the total annual operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of each class as follows:
For the period from May 1, 2022 through September 30, 2022, the Advisor had contractually agreed to waive its fees and/or reimburse certain operating expenses of the Fund to the extent necessary to maintain the total annual operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of each class as follows:
Effective October 1, 2022 through September 30, 2023, the Advisor has contractually agreed to waive its fees and/or reimburse certain operating expenses of the Fund to the extent necessary to maintain the total annual operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of each class as follows:
For the year ended December 31, 2022, fees waived and/or expenses reimbursed for each class are as follows:
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 the Advisor an annual fee (“Administration Fee”) of 0.097% of the Fund’s average daily net assets, computed and accrued daily and payable monthly. For the year ended December 31, 2022, the Administration Fee was $21,583, of which $1,634 is unpaid.
Service Provider Fees. DWS Service Company (“DSC”), 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 DSC and SS&C GIDS, Inc. (“SS&C”) (name changed from DST Systems, Inc. effective January 1, 2023), DSC has delegated certain transfer agent, dividend-paying agent and shareholder service
Deutsche DWS Variable Series II — DWS International Growth VIP | |
agent functions to SS&C. DSC compensates SS&C out of the shareholder servicing fee it receives from the Fund. For the year ended December 31, 2022, the amounts charged to the Fund by DSC were as follows:
| | Unpaid at
December 31, 2022 |
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Distribution Service Agreement. Under the Fund’s Class B 12b-1 plan, DWS Distributors, Inc. (“DDI”) received a fee (“Distribution Service Fee”) of up to 0.25% of the average daily net assets of Class B shares. For the year ended December 31, 2022, the Distribution Service Fee aggregated $156, of which $6 is unpaid.
Other Service Fees. Under an agreement with the Fund, DIMA is compensated for providing regulatory filing services to the Fund. For the year ended December 31, 2022, the amount charged to the Fund by DIMA included in the Statement of Operations under “Reports to shareholders” aggregated $1,514, of which $164 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 Vehicles. The Fund may invest uninvested cash balances in DWS Central Cash Management Government Fund and DWS ESG Liquidity Fund, affiliated money market funds which are managed by the Advisor. Each affiliated money market fund is managed in accordance with Rule 2a-7 under the 1940 Act, which governs the quality, maturity, diversity and liquidity of instruments in which a money market fund may invest. DWS Central Cash Management Government Fund seeks to maintain a stable net asset value, and DWS ESG Liquidity Fund maintains a floating net asset value. The Fund indirectly bears its proportionate share of the expenses of each affiliated money market fund in which it invests. DWS Central Cash Management Government Fund does not pay the Advisor an investment management fee. To the extent that DWS ESG Liquidity Fund pays an investment management fee to the Advisor, the Advisor will waive an amount of the investment management fee payable to the Advisor by the Fund equal to the amount of the investment management fee payable on the Fund’s assets invested in DWS ESG Liquidity Fund.
At December 31, 2022, 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 28%, respectively. Two participating insurance companies were owners of record of 10% or more of the total outstanding Class B shares of the Fund, each owning 65% and 35%, respectively.
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 daily fluctuating rate per annum equal to the sum of 0.10% plus the higher of the Federal Funds Effective Rate and the Overnight Bank Funding Rate, plus 1.25%. 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 December 31, 2022.
| Deutsche DWS Variable Series II — DWS International Growth VIP |
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Deutsche DWS Variable Series II and Shareholders of DWS International Growth VIP:
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities of DWS International Growth VIP (the “Fund”) (one of the funds constituting Deutsche DWS Variable Series II) (the “Trust”), including the investment portfolio, as of December 31, 2022, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund (one of the funds constituting Deutsche DWS Variable Series II) at December 31, 2022, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and its financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Trust is not required to have, nor were we engaged to perform, an audit of the Trust’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2022, by correspondence with the custodian, brokers and others; when replies were not received from brokers and others, we performed other auditing procedures. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the auditor of one or more investment companies in the DWS family of funds since at least 1979, but we are unable to determine the specific year.
Boston, Massachusetts
February 13, 2023
Deutsche DWS Variable Series II — DWS International Growth VIP | |
Information About Your Fund’s Expenses (Unaudited)
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, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Fund limited these expenses; had it not done so, expenses would have
been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2022 to December 31, 2022).
The tables illustrate your Fund’s expenses in two ways:
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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.
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Hypothetical 5% Fund Return. This helps you to compare your Fund’s ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund’s actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The “Expenses Paid per $1,000” line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
Expenses and Value of a $1,000 Investment for the six months ended December 31, 2022
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Beginning Account Value 7/1/22 | | |
Ending Account Value 12/31/22 | | |
Expenses Paid per $1,000* | | |
Hypothetical 5% Fund Return | | |
Beginning Account Value 7/1/22 | | |
Ending Account Value 12/31/22 | | |
Expenses Paid per $1,000* | | |
| 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 184 (the number of days in the most recent six-month period), then divided by 365. |
Annualized Expense Ratios | | |
Deutsche DWS Variable Series II — DWS International Growth VIP | | |
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.
For an analysis of the fees associated with an investment in the Fund or similar funds, please refer to the current and hypothetical expense calculators for Variable Insurance Products which can be found at dws.com/calculators.
| Deutsche DWS Variable Series II — DWS International Growth VIP |
Tax Information (Unaudited)
The Fund paid distributions of $0.19 per share from net long-term capital gains during its year ended December 31, 2022.
For corporate shareholders, 3% of the ordinary dividends (i.e., income dividends plus short-term capital gains) paid during the Fund’s fiscal year ended December 31, 2022, qualified for the dividends received deduction.
The Fund paid foreign taxes of $40,327 and earned $178,227 of foreign source income during the year ended December 31, 2022. Pursuant to Section 853 of the Internal Revenue Code, the Fund designates $0.03 per share as foreign taxes paid and $0.12 per share as income earned from foreign sources for the year ended December 31, 2022.
Please consult a tax advisor if you have questions about federal or state income tax laws, or on how to prepare your tax returns. If you have specific questions about your account, please contact your insurance provider.
Proxy Voting
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 most recent 12-month period ended June 30 are available on our Web site — dws.com/en-us/resources/proxy-voting — or on the SEC’s Web site — 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.
Deutsche DWS Variable Series II — DWS International Growth VIP | |
Advisory Agreement Board Considerations and Fee Evaluation
The Board of Trustees (hereinafter referred to as the “Board” or “Trustees”) approved the renewal of DWS International Growth VIP's (the “Fund”) investment management agreement (the “Agreement”) with DWS Investment Management Americas, Inc. (“DIMA”) in September 2022.
In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:
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During the entire process, all of the Fund's Trustees were independent of DIMA and its affiliates (the “Independent Trustees”).
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The Board met frequently during the past year to discuss fund matters and dedicated a substantial amount of time to contract review matters. Over the course of several months, the Board reviewed extensive materials received from DIMA, independent third parties and independent counsel. These materials included an analysis of the Fund’s performance, fees and expenses, and profitability from a fee consultant retained by the Fund’s Independent Trustees (the “Fee Consultant”).
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The Board also received extensive information throughout the year regarding performance of the Fund.
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The Independent Trustees regularly met privately with counsel to discuss contract review and other matters. In addition, the Independent Trustees were advised by the Fee Consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the Fee Consultant in connection with their deliberations.
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In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's Rule 12b-1 plan, distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
In connection with the contract review process, the Board considered the factors discussed below, among others. The Board also considered that DIMA and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DIMA managed the Fund. DIMA is part of DWS Group GmbH & Co. KGaA (“DWS Group”). DWS Group is a global asset management business that offers a wide range of investing expertise and resources, including research capabilities in many countries throughout the world. In 2018, approximately 20% of DWS Group’s shares were sold in an initial public offering, with Deutsche Bank AG owning the remaining shares.
As part of the contract review process, the Board carefully considered the fees and expenses of each DWS fund overseen by the Board in light of the fund’s performance. In many cases, this led to the negotiation and implementation of expense caps.
While shareholders may focus primarily on fund performance and fees, the Fund’s Board considers these and many other factors, including the quality and integrity of DIMA’s personnel and administrative support services provided by DIMA, such as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DIMA provides portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DIMA provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel and the resources made available to such personnel. The Board also considered the risks to DIMA in sponsoring or managing the Fund, including financial, operational and reputational risks, the potential economic impact to DIMA from such risks and DIMA’s approach to addressing such risks. The Board reviewed the Fund’s performance over short-term and long-term periods and compared those returns to various agreed-upon performance measures, including market index(es) and a peer universe compiled using information supplied by Morningstar Direct (“Morningstar”), an independent fund data service. The Board also noted that it has put into place a process of identifying “Funds in Review” (e.g., funds performing poorly relative to a peer universe), and receives additional reporting from DIMA regarding such funds and, where appropriate, DIMA’s plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that, for the one-, three- and five-year periods ended December 31, 2021, the Fund’s performance (Class A shares) was in the 3rd quartile, 2nd quartile and 3rd quartile, respectively, of the applicable Morningstar universe (the 1st quartile being the
| Deutsche DWS Variable Series II — DWS International Growth VIP |
best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has outperformed its benchmark in the one-, three- and five-year periods ended December 31, 2021.
Fees and Expenses. The Board considered the Fund’s investment management fee schedule, operating expenses and total expense ratios, and comparative information provided by Broadridge Financial Solutions, Inc. (“Broadridge”) and the Fee Consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include a 0.097% fee paid to DIMA under the Fund’s administrative services agreement, were lower than the median (1st quartile) of the applicable Broadridge peer group (based on Broadridge data provided as of December 31, 2021). The Board noted that the Fund’s Class A shares total (net) operating expenses were expected to be higher than the median (3rd quartile) of the applicable Broadridge expense universe (based on Broadridge data provided as of December 31, 2021, and analyzing Broadridge expense universe Class A (net) expenses less any applicable 12b-1 fees) (“Broadridge Universe Expenses”). The Board also reviewed data comparing each other operational share class’s total (net) operating expenses to the applicable Broadridge Universe Expenses. The Board noted that the expense limitations agreed to by DIMA were expected to help the Fund’s total (net) operating expenses remain competitive. The Board considered the Fund’s management fee rate as compared to fees charged by DIMA to a comparable DWS U.S. registered fund (“DWS Funds”) and considered differences between the Fund and the comparable DWS Fund. The information requested by the Board as part of its review of fees and expenses also included information about institutional accounts (including any sub-advised funds and accounts) and funds offered primarily to European investors (“DWS Europe Funds”) managed by DWS Group. The Board noted that DIMA indicated that DWS Group does not manage any institutional accounts or DWS Europe Funds comparable to the Fund.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DIMA.
Profitability. The Board reviewed detailed information regarding revenues received by DIMA under the Agreement. The Board considered the estimated costs to DIMA, and pre-tax profits realized by DIMA, from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DIMA and its affiliates with respect to all fund services in totality and by fund. The Board and the Fee Consultant reviewed DIMA’s methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DIMA in connection with the management of the Fund were not unreasonable. The Board also reviewed certain publicly available information regarding the profitability of certain similar investment management firms. The Board noted that, while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DIMA and its affiliates’ overall profitability with respect to the DWS Funds (after taking into account distribution and other services provided to the funds by DIMA and its affiliates) was lower than the overall profitability levels of most comparable firms for which such data was available.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. In this regard, the Board observed that while the Fund’s current investment management fee schedule does not include breakpoints, the Fund’s fee schedule represents an appropriate sharing between the Fund and DIMA of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DIMA and Its Affiliates. The Board also considered the character and amount of other incidental or “fall-out” benefits received by DIMA and its affiliates, including any fees received by DIMA for administrative services provided to the Fund, any fees received by an affiliate of DIMA for transfer agency services provided to the Fund and any fees received by an affiliate of DIMA for distribution services. The Board also considered benefits to DIMA related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities. In addition, the Board considered the incidental public relations benefits to DIMA related to DWS Funds advertising and cross-selling opportunities among DIMA products and services. The Board considered these benefits in reaching its conclusion that the Fund’s management fees were reasonable.
Compliance. The Board considered the significant attention and resources dedicated by DIMA to its compliance processes in recent years. The Board noted in particular (i) the experience, seniority and time commitment of the individuals serving as DIMA’s and the Fund’s chief compliance officers and (ii) the
Deutsche DWS Variable Series II — DWS International Growth VIP | |
substantial commitment of resources by DIMA and its affiliates to compliance matters, including the retention of compliance personnel.
Based on all of the information considered and the conclusions reached, the Board determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and counsel present. It is possible that individual Independent Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.
| Deutsche DWS Variable Series II — DWS International Growth VIP |
Board Members and Officers
The following table presents certain information regarding the Board Members and Officers of the Trust/Corporation. Each Board Member’s year of birth is set forth in parentheses after his or her name. Unless otherwise noted, (i) each Board Member has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity; and (ii) the address of each Independent Board Member is c/o Keith R. Fox, DWS Funds Board Chair, c/o Thomas R. Hiller, Ropes & Gray LLP, Prudential Tower, 800 Boylston Street, Boston, MA 02199-3600. Except as otherwise noted below, the term of office for each Board Member is until the election and qualification of a successor, or until such Board Member sooner dies, resigns, is removed or as otherwise provided in the governing documents of the Trust/Corporation. Because the Fund does not hold an annual meeting of shareholders, each Board Member will hold office for an indeterminate period.
The Board Members may also serve in similar capacities with other funds in the fund complex. The number of funds in the DWS fund complex shown in the table below includes all registered open- and closed-end funds (including all of their portfolios) advised by the Advisor and any registered funds that have an investment advisor that is an affiliated person of the Advisor.
Independent Board Members/Independent Advisory Board Members
Name, Year of
Birth, Position
with the Trust/
Corporation
and Length of
| Business Experience and Directorships
During the Past Five Years | Number of
Funds in
DWS Fund
Complex
Overseen | Other
Directorships
Held by Board
Member |
Keith R. Fox, CFA (1954) Chairperson since 2017, and Board Member since 1996 | Managing General Partner, Exeter Capital Partners (a series of private investment funds) (since 1986). Directorships: Progressive International Corporation (kitchen goods designer and distributor); former Chairman, National Association of Small Business Investment Companies; Former Directorships: ICI Mutual Insurance Company; BoxTop Media Inc. (advertising); Sun Capital Advisers Trust (mutual funds) | | |
John W. Ballantine (1946) Board Member since 1999 | Retired; formerly, Executive Vice President and Chief Risk Management Officer, First Chicago NBD Corporation/The First National Bank of Chicago (1996–1998); Executive Vice President and Head of International Banking (1995–1996); Not-for-Profit Directorships: Window to the World Communications (public media); Life Director of Harris Theater for Music and Dance (Chicago); Life Director of Hubbard Street Dance Chicago; Former Directorships: Director and Chairman of the Board, Healthways, Inc.2 (population wellbeing and wellness services) (2003–2014); Stockwell Capital Investments PLC (private equity); Enron Corporation; FNB Corporation; Tokheim Corporation; First Oak Brook Bancshares, Inc.; Oak Brook Bank; Portland General Electric2 (utility company (2003–2021); and Prisma Energy International; Former Not-for-Profit Directorships: Public Radio International; Palm Beach Civic Assn. | | |
Dawn-Marie Driscoll (1946) Board Member since 1987 | Advisory Board and former Executive Fellow, Hoffman Center for Business Ethics, Bentley University; formerly: Partner, Palmer & Dodge (law firm) (1988–1990); Vice President of Corporate Affairs and General Counsel, Filene’s (retail) (1978–1988); Directorships: Trustee and former Chairman of the Board, Southwest Florida Community Foundation (charitable organization); Former Directorships: ICI Mutual Insurance Company (2007–2015); Sun Capital Advisers Trust (mutual funds) (2007–2012), Investment Company Institute (audit, executive, nominating committees) and Independent Directors Council (governance, executive committees) | | |
Richard J. Herring (1946) Board Member since 1990 | Jacob Safra Professor of International Banking and Professor of Finance, The Wharton School, University of Pennsylvania (since July 1972); formerly: Director, The Wharton Financial Institutions Center (1994–2020); Vice Dean and Director, Wharton Undergraduate Division (1995–2000) and Director, The Lauder Institute of International Management Studies (2000–2006); Member FDIC Systemic Risk Advisory Committee since 2011, member Systemic Risk Council since 2012 and member of the Advisory Board at the Yale Program on Financial Stability since 2013; Former Directorships: Co-Chair of the Shadow Financial Regulatory Committee (2003–2015), Executive Director of The Financial Economists Roundtable (2008–2015), Director of The Thai Capital Fund (2007–2013), Director of The Aberdeen Singapore Fund (2007–2018), Director, The Aberdeen Japan Fund (2007-2021) and Nonexecutive Director of Barclays Bank DE (2010–2018) | | |
Deutsche DWS Variable Series II — DWS International Growth VIP | |
Name, Year of Birth, Position with the Trust/ Corporation and Length of Time Served1 | Business Experience and Directorships During the Past Five Years | Number of Funds in DWS Fund Complex Overseen | Other Directorships Held by Board Member |
Chad D. Perry (1972) Board Member or Advisory | Executive Vice President, General Counsel and Secretary, Tanger Factory Outlet Centers, Inc.2 (since 2011); formerly Executive Vice President and Deputy General Counsel, LPL Financial Holdings Inc.2 (2006–2011); Senior Corporate Counsel, EMC Corporation (2005–2006); Associate, Ropes & Gray LLP (1997–2005) | | Director - Great Elm Capital Corp. (business development company) (since 2022) |
Rebecca W. Rimel (1951) Board Member since 1995 | Director, The Bridgespan Group (nonprofit organization) (since October 2020); formerly: Executive Vice President, The Glenmede Trust Company (investment trust and wealth management) (1983–2004); Board Member, Investor Education (charitable organization) (2004–2005); Former Directorships: Trustee, Executive Committee, Philadelphia Chamber of Commerce (2001–2007); Director, Viasys Health Care2 (January 2007–June 2007); Trustee, Thomas Jefferson Foundation (charitable organization) (1994–2012); President, Chief Executive Officer and Director (1994–2020) and Senior Advisor (2020-2021), The Pew Charitable Trusts (charitable organization); Director, BioTelemetry Inc.2 (acquired by Royal Philips in 2021) (healthcare) (2009–2021); Director, Becton Dickinson and Company2 (medical technology company) (2012-2022) | | |
Catherine Schrand (1964) Board Member since 2021* | Celia Z. Moh Professor of Accounting (since 2016) and Professor of Accounting (since 1994), The Wharton School, University of Pennsylvania; formerly Vice Dean, Wharton Doctoral Programs (2016–2019) | | |
William N. Searcy, Jr. (1946) Board Member since 1993 | Private investor since October 2003; formerly: Pension & Savings Trust Officer, Sprint Corporation2 (telecommunications) (November 1989–September 2003); Former Directorships: Trustee, Sun Capital Advisers Trust (mutual funds) (1998–2012) | | |
Officers5
Name, Year of Birth, Position
with the Trust/Corporation
and Length of Time Served6 | Business Experience and Directorships During the
Past Five Years |
Hepsen Uzcan7 (1974) President and Chief Executive Officer, 2017–present | Fund Administration (Head since 2017), DWS; Secretary, DWS USA Corporation (2018–present); Assistant Secretary, DWS Distributors, Inc. (2018–present); Director and Vice President, DWS Service Company (2018–present); Assistant Secretary, DWS Investment Management Americas, Inc. (2018–present); Director and President, DB Investment Managers, Inc. (2018–present); President and Chief Executive Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2017–present); formerly: Vice President for the Deutsche funds (2016–2017); Assistant Secretary for the DWS funds (2013–2019); Assistant Secretary, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2013–2020); Directorships: Interested Director, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (since June 25, 2020); ICI Mutual Insurance Company (since October 16, 2020); and Episcopalian Charities of New York (2018–present) |
John Millette8 (1962) Vice President and Secretary, 1999–present | Legal (Associate General Counsel), DWS; Chief Legal Officer, DWS Investment Management Americas, Inc. (2015–present); Director and Vice President, DWS Trust Company (2016–present); Secretary, DBX ETF Trust (2020–present); Vice President, DBX Advisors LLC (2021–present); Secretary, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. 2011–present); formerly: Secretary, Deutsche Investment Management Americas Inc. (2015–2017); and Assistant Secretary, DBX ETF Trust (2019–2020) |
Ciara Crawford9 (1984) Assistant Secretary, 2019–present | Fund Administration (Specialist), DWS (2015–present); formerly, Legal Assistant at Accelerated Tax Solutions |
Diane Kenneally8 (1966) Chief Financial Officer and Treasurer, 2018–present | Fund Administration Treasurer's Office (Co-Head since 2018), DWS; Treasurer, Chief Financial Officer and Controller, DBX ETF Trust (2019–present); Treasurer and Chief Financial Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2018–present); formerly: Assistant Treasurer for the DWS funds (2007–2018) |
Paul Antosca8 (1957) Assistant Treasurer, 2007–present | Fund Administration Tax (Head), DWS; and Assistant Treasurer, DBX ETF Trust (2019–present) |
Sheila Cadogan8 (1966) Assistant Treasurer, 2017–present | Fund Administration Treasurer's Office (Co-Head since 2018), DWS; Director and Vice President, DWS Trust Company (2018–present); Assistant Treasurer, DBX ETF Trust (2019–present); Assistant Treasurer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2018–present) |
Scott D. Hogan8 (1970) Chief Compliance Officer, 2016–present | Anti-Financial Crime & Compliance US (Senior Team Lead), DWS; Chief Compliance Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2016–present) |
| Deutsche DWS Variable Series II — DWS International Growth VIP |
Name, Year of Birth, Position with the Trust/Corporation and Length of Time Served6 | Business Experience and Directorships During the Past Five Years |
Caroline Pearson8 (1962) Chief Legal Officer, 2010–present | Legal (Senior Team Lead), DWS; Assistant Secretary, DBX ETF Trust (2020–present); Chief Legal Officer, DBX Advisors LLC (2020–present); Chief Legal Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2012–present); formerly: Secretary, Deutsche AM Distributors, Inc. (2002–2017); Secretary, Deutsche AM Service Company (2010–2017); and Chief Legal Officer, DBX Strategic Advisors LLC (2020–2021) |
Christian Rijs7 (1980) Anti-Money Laundering
Compliance Officer,
since October 6, 2021 | Senior Team Lead Anti-Financial Crime and Compliance, DWS; AML Officer, DWS Trust Company (since November 2, 2021); AML Officer, DBX ETF Trust (since October 21, 2021); AML Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (since November 12, 2021); formerly: DWS UK & Ireland Head of Anti-Financial Crime and MLRO |
| Ms. Schrand was an Advisory Board Member for certain funds in the DWS Fund Complex for the period from November 18, 2021 to December 31, 2022 and was elected as a Full Board Member as of January 1, 2023 for all funds in the DWS Fund Complex. |
| The length of time served represents the year in which the Board Member joined the board of one or more DWS funds currently overseen by the Board. |
| A publicly held company with securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. |
| Mr. Perry is an Advisory Board Member of Deutsche DWS Asset Allocation Trust, Deutsche DWS Equity 500 Index Portfolio, Deutsche DWS Global/International Fund, Inc., Deutsche DWS Income Trust, Deutsche DWS Institutional Funds, Deutsche DWS International Fund, Inc., Deutsche DWS Investment Trust, Deutsche DWS Investments VIT Funds, Deutsche DWS Money Market Trust, Deutsche DWS Municipal Trust, Deutsche DWS Portfolio Trust, Deutsche DWS Securities Trust, Deutsche DWS Tax Free Trust, Deutsche DWS Variable Series I and Government Cash Management Portfolio. Mr. Perry is a Board Member of each other Trust. |
| Mr. Perry oversees 21 funds in the DWS Fund Complex as a Board Member of various Trusts. Mr. Perry is an Advisory Board Member of various Trusts/Corporations comprised of 48 funds in the DWS Fund Complex. |
| As a result of their respective positions held with the Advisor or its affiliates, these individuals are considered “interested persons” of the Advisor within the meaning of the 1940 Act. Interested persons receive no compensation from the Fund. |
| The length of time served represents the year in which the officer was first elected in such capacity for one or more DWS funds. |
| Address: 875 Third Avenue, New York, NY 10022. |
| Address: 100 Summer Street, Boston, MA 02110. |
| Address: 5201 Gate Parkway, Jacksonville, FL 32256. |
Certain officers hold similar positions for other investment companies for which DIMA or an affiliate serves as the Advisor.
The Fund’s Statement of Additional Information (“SAI”) includes additional information about the Board Members. The SAI is available, without charge, upon request. If you would like to request a copy of the SAI, you may do so by calling the following toll-free number: (800) 728-3337.
Deutsche DWS Variable Series II — DWS International Growth VIP | |
VS2IG-2 (R-025830-13 2/23)
December 31, 2022
Annual Report
Deutsche DWS Variable Series II
DWS Small Mid Cap Growth VIP
Contents
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.
Stocks may decline in value. Smaller and medium company stocks tend to be more volatile than large company stocks. Investing in foreign securities presents certain risks, such as currency fluctuations, political and economic changes, and market risks.The Fund may lend securities to approved institutions. Please read the prospectus for details.
War, terrorism, sanctions, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and, in the future, may lead to significant disruptions in U.S. and world economies and markets, which may lead to increased market volatility and may have significant adverse effects on the Fund and its investments.
The brand DWS represents DWS Group GmbH & Co. KGaA and any of its subsidiaries such as DWS Distributors, Inc. which offers investment products or DWS Investment Management Americas, Inc. and RREEF America L.L.C. which offer advisory services.
DWS Distributors, Inc., 222 South Riverside Plaza, Chicago, IL 60606, (800) 621-1148
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
| Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP |
Performance SummaryDecember 31, 2022 (Unaudited)
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 does 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. 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, 2022 is 0.78% for Class A shares and may differ from the expense ratio disclosed in the Financial Highlights table in this report.
Generally accepted accounting principles require adjustments to be made to the net assets of the Fund at period end for financial reporting purposes only, and as such, the total return based on the unadjusted net asset value per share may differ from the total return reported in the financial highlights.
Growth of an Assumed $10,000 Investment
Yearly periods ended December 31
The Russell 2500TM 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.
|
DWS Small Mid Cap Growth VIP | | | | |
| | | | | |
Average annual total return | | | | |
Russell 2500 Growth Index | | | | | |
Average annual total return | | | | |
The growth of $10,000 is cumulative. |
Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP | |
Management Summary December 31, 2022 (Unaudited)
During the 12-month period ended December 31, 2022, the portfolio provided a total return of –28.02% (Class A shares, unadjusted for contract charges) compared with the –26.21% return of its benchmark, the Russell 2500™ Growth Index.
U.S. equities broadly posted significant declines in 2022, with growth-oriented stocks notably lagging their value counterparts. Historically high inflation and the resulting tightening of policy by the U.S. Federal Reserve (Fed) did the most to undermine market sentiment. Inflation had begun to move higher in late 2021 but spiked following Russia’s invasion of Ukraine in late February, with U.S. consumer price inflation exceeding 8% in March and peaking at 9.1% in June. The Fed responded with a series of sharp rate hikes, leaving the target range for its benchmark overnight lending rate at 4.25%–4.50% at year-end, up from 0.0%–0.25% entering 2022. The rise in rates made stocks — most notably those of growth companies with more distant prospective earnings — less attractive relative to bonds, and ultimately fueled fears of recession and concerns about weaker corporate earnings in 2023.
In sector terms, positive contributions to the portfolio’s performance relative to the benchmark were led by selection within health care, industrials and real estate, while selection detracted within information technology, consumer discretionary, energy and financials. In terms of individual contributors, positive contributions were led by Casey’s General Stores, Inc., a U.S. fuel station and convenience store operator which benefited from its expansion plans, same-store sales growth, and scale-related supply chain efficiencies aided by strong fuel margins. Aspen Technology, Inc. provides solutions to address complex processing environments where it is critical to optimize the asset design, operation and maintenance lifecycle to target safer and more sustainable operations. Emerson Electric Co.* offered to acquire and merge Aspen Technology with its own software business, resulting in strong share price appreciation. Managed care company Molina Healthcare, Inc. has continued to win contracts, most notably adding California counties and entering the Florida market. The company’s footprint expansion has come with limited additional costs, continuing management’s track record of controlling costs while growing the coverage base. On the downside, SiTime Corp. is a leading provider of silicon timing system solutions used in the production of computer chips. After raising guidance on strong customer demand, the company was forced to cut guidance based on weakening spending in the electric vehicle, cloud and internet of things segments. Varonis Systems, Inc. is a global cybersecurity software company focused on vulnerability management and intrusion detection. The company's results were negatively impacted by an extension of its sales cycle and weakness in the Israeli shekel relative to the U.S. dollar. Five9, Inc. is a cloud contact center software company which is focused on building efficiencies into communications software systems. Share weakness was initially driven by concerns around a slowing economy impacting sales growth and was then compounded by the announcement that the CEO who had driven accelerated growth was departing the company.
After an extended period in which high revenue growth and out-year profits were in favor, the market’s focus has shifted to currently profitable companies. Relative to the benchmark, the portfolio at period-end was overweight the profitability, earnings yield and value factors. Fund holdings were tilted toward stocks with lower market sensitivity relative to the benchmark. Our focus continues to be on finding innovative small- and mid-cap companies with strong management teams and robust business plans that are positioned to weather a downturn in economic conditions.
Peter Barsa, Senior Portfolio Manager Equity
Michael A. Sesser, CFA, Senior Portfolio Manager Equity
Portfolio Managers
The views expressed reflect those of the portfolio management team only through the end of the period of the report as stated on the cover. The management team’s views are subject to change at any time based on market and other conditions and should not be construed as a recommendation. Past performance is no guarantee of future results. Current and future portfolio holdings are subject to risk.
| Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP |
Terms to Know
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.
Contribution and detraction incorporate both an investment’s total return and its weighting in the Fund.
*
Not held at December 31, 2022.
Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP | |
Portfolio Summary(Unaudited)
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | | |
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Sector Diversification (As a % of Investment Portfolio excluding Exchange-Traded Funds, Cash Equivalents and Securities Lending Collateral) | | |
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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 posted on dws.com, and is available free of charge by contacting your financial intermediary, or if you are a direct investor, by calling (800) 728-3337. In addition, the portfolio holdings listing is filed with the SEC on the Fund’s Form N-PORT and will be available on the SEC’s Web site at sec.gov. Additional portfolio holdings for the Fund are also posted on dws.com from time to time. Please see the Fund’s current prospectus for more information.
| Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP |
Investment Portfolioas of December 31, 2022
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Communication Services 1.1% | |
Diversified Telecommunication Services 0.7% | |
Iridium Communications, Inc.* | | | |
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Take-Two Interactive Software, Inc.* | | | |
Consumer Discretionary 10.9% | |
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Diversified Consumer Services 0.4% | |
Bright Horizons Family Solutions, Inc.* | | | |
Hotels, Restaurants & Leisure 1.9% | |
Hilton Grand Vacations, Inc.* | | | |
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Camping World Holdings, Inc. "A" (a) | | | |
National Vision Holdings, Inc.* | | | |
The Children's Place, Inc.* | | | |
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Food & Staples Retailing 1.9% | |
Casey's General Stores, Inc. | | | |
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Spectrum Brands Holdings, Inc. | | | |
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Oil, Gas & Consumable Fuels | |
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Pinnacle Financial Partners, Inc. | | | |
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FactSet Research Systems, Inc. | | | |
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LPL Financial Holdings, Inc. | | | |
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Kinsale Capital Group, Inc. | | | |
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Apellis Pharmaceuticals, Inc.* | | | |
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Blueprint Medicines Corp.* | | | |
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Halozyme Therapeutics, Inc.* | | | |
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Kiniksa Pharmaceuticals Ltd. "A"* | | | |
Neurocrine Biosciences, Inc.* | | | |
Travere Therapeutics, Inc.* | | | |
Ultragenyx Pharmaceutical, Inc.* | | | |
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Health Care Equipment & Supplies 3.7% | |
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Globus Medical, Inc. "A"* | | | |
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Tandem Diabetes Care, Inc.* | | | |
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Health Care Providers & Services 9.4% | |
AMN Healthcare Services, Inc.* | | | |
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The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP | |
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Option Care Health, Inc.* | | | |
Privia Health Group, Inc.* | | | |
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Life Sciences Tools & Services 0.4% | |
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Aclaris Therapeutics, Inc.* | | | |
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Intra-Cellular Therapies, Inc.* | | | |
Ligand Pharmaceuticals, Inc.* | | | |
Pacira BioSciences, Inc.* | | | |
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Advanced Drainage Systems, Inc. | | | |
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Builders FirstSource, Inc.* | | | |
Masonite International Corp.* | | | |
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Commercial Services & Supplies 3.2% | |
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Construction & Engineering 0.5% | |
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Electrical Equipment 0.8% | |
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Thermon Group Holdings, Inc.* | | | |
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Professional Services 1.8% | |
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Trading Companies & Distributors 4.1% | |
H&E Equipment Services, Inc. | | | |
Rush Enterprises, Inc. "A" | | | |
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Information Technology 22.9% | |
Communications Equipment 1.7% | |
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Electronic Equipment, Instruments & Components 2.9% | |
Advanced Energy Industries, Inc. | | | |
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Broadridge Financial Solutions, Inc. | | | |
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Semiconductors & Semiconductor Equipment 4.3% | |
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Monolithic Power Systems, Inc. | | | |
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Ultra Clean Holdings, Inc.* | | | |
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Tyler Technologies, Inc.* | | | |
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Construction Materials 1.6% | |
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Containers & Packaging 0.8% | |
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Equity Real Estate Investment Trusts (REITs) 2.9% | |
Americold Realty Trust, Inc. | | | |
EastGroup Properties, Inc. | | | |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP |
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Essential Properties Realty Trust, Inc. | | | |
Four Corners Property Trust, Inc. | | | |
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Real Estate Management & Development 0.2% | |
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Total Common Stocks (Cost $34,067,725) | |
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OmniAb, Inc. $12.50 Earnout* (b) (c) | | | |
OmniAb, Inc. $15.00 Earnout* (b) (c) | | | |
Total Other Investments (Cost $0) | |
Securities Lending Collateral 1.5% |
DWS Government & Agency Securities Portfolio "DWS Government Cash Institutional Shares", 4.07% (d) (e)
(Cost $735,203) | | | |
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DWS Central Cash Management Government Fund, 4.2% (d) (Cost $1,969,280) | | | |
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Total Investment Portfolio (Cost $36,772,208) | | | |
Other Assets and Liabilities, Net | | | |
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A summary of the Fund’s transactions with affiliated investments during the year ended December 31, 2022 are as follows:
| | | Net Realized
Gain/
(Loss) ($) | Net Change in
Unrealized
Appreciation
(Depreciation) ($) | | Capital Gain
Distributions ($) | Number
of Shares
at
12/31/2022 | |
Securities Lending Collateral 1.5% |
DWS Government & Agency Securities Portfolio "DWS Government Cash Institutional Shares", 4.07% (d) (e) |
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DWS Central Cash Management Government Fund, 4.2% (d) |
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| Non-income producing security. |
| All or a portion of these securities were on loan. In addition, "Other Assets and Liabilities, Net" may include pending sales that are also on loan. The value of securities loaned at December 31, 2022 amounted to $721,552, which is 1.4% of net assets. |
| Earnout Shares: Will vest based upon the achievement of certain volume-weighted average trading prices (VWAP) for shares of OmniAb Inc. Earnout Shares are not transferrable until the vesting condition for the applicable tranche of Earnout Shares has been achieved. |
| Investment was valued using significant unobservable inputs. |
| Affiliated fund managed by DWS Investment Management Americas, Inc. The rate shown is the annualized seven-day yield at period end. |
| Represents cash collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates. |
| Represents the net increase (purchase cost) or decrease (sales proceeds) in the amount invested in cash collateral for the year ended December 31, 2022. |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP | |
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 level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2022 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.
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Short-Term Investments (a) | | | | |
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| See Investment Portfolio for additional detailed categorizations. |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP |
Statement of
Assets and Liabilities
as of December 31, 2022
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Investments in non-affiliated securities, at value (cost $34,067,725) — including $721,552 of securities loaned | |
Investment in DWS Government & Agency Securities Portfolio (cost $735,203)* | |
Investment in DWS Central Cash Management Government Fund (cost $1,969,280) | |
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Receivable for Fund shares sold | |
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Payable upon return of securities loaned | |
Payable for Fund shares redeemed | |
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Other accrued expenses and payables | |
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Distributable earnings (loss) | |
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Net Asset Value, offering and redemption price per share ($50,000,277 ÷ 4,175,946 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | |
| Represents collateral on securities loaned. |
for the year ended December 31, 2022
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Income distributions — DWS Central Cash Management Government Fund | |
Securities lending income, net of borrower rebates | |
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Trustees' fees and expenses | |
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Total expenses before expense reductions | |
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Total expenses after expense reductions | |
Net investment income (loss) | |
Realized and Unrealized Gain (Loss) | |
Net realized gain (loss) from: | |
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Change in net unrealized appreciation (depreciation) on: | |
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Net increase (decrease) in net assets resulting from operations | |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP | |
Statements of Changes in Net Assets
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Increase (Decrease) in Net Assets | | |
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Net investment income (loss) | | |
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Change in net unrealized appreciation
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Net increase (decrease) in net assets resulting from operations | | |
Distributions to shareholders: | | |
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Proceeds from shares sold | | |
Reinvestment of distributions | | |
Payments for shares redeemed | | |
Net increase (decrease) in net assets from Class A share transactions | | |
Increase (decrease) in net assets | | |
Net assets at beginning of period | | |
Net assets at end of period | | |
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Shares outstanding at beginning of period | | |
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Shares issued to shareholders in reinvestment of distributions | | |
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Net increase (decrease) in Class A shares | | |
Shares outstanding at end of period | | |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP |
Financial Highlights
DWS Small Mid Cap Growth VIP — Class A |
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Net asset value, beginning of period | | | | | |
Income (loss) from investment operations: | | | | | |
Net investment income (loss)a | | | | | |
Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
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Net asset value, end of period | | | | | |
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Ratios to Average Net Assets and Supplemental Data |
Net assets, end of period ($ millions) | | | | | |
Ratio of expenses before expense reductions (%)c | | | | | |
Ratio of expenses after expense reductions (%)c | | | | | |
Ratio of net investment income (loss) (%) | | | | | |
Portfolio turnover rate (%) | | | | | |
| Based on average shares outstanding during the period. |
| Total return would have been lower had certain expenses not been reduced. |
| Expense ratio does not reflect charges and fees 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. |
| Amount is less than $.005. |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP | |
Notes to Financial Statements
A.
Organization and Significant Accounting Policies
DWS Small Mid Cap Growth VIP (the “Fund”) is a diversified series of Deutsche 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 (“U.S. GAAP”) which require the use of management estimates. Actual results could differ from those estimates. The Fund qualifies as an investment company under Topic 946 of Accounting Standards Codification of U.S. GAAP. 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.
The Fund’s Board has designated DWS Investment Management Americas, Inc. (the “Advisor”) as the valuation designee for the Fund pursuant to Rule 2a-5 under the 1940 Act. The Advisor's Pricing Committee (the “Pricing Committee”) typically values securities using readily available market quotations or prices supplied by independent pricing services (which are considered fair values under Rule 2a-5). The Advisor has adopted fair valuation procedures that provide methodologies for fair valuing securities.
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 level assigned to the securities valuations may not be an indication of the risk or liquidity 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. Equity 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. Equity securities and ETFs are generally 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 Pricing Committee and are generally categorized as Level 3. In accordance with the Fund’s valuation procedures, factors considered 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
| Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP |
amount actually received. The 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. Deutsche Bank AG, as lending agent, lends securities of the Fund to certain financial institutions under the terms of its securities lending agreement. During the term of the loans, the Fund continues to receive interest and dividends generated by the 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 efforts to obtain additional collateral on the next business day to meet required amounts under the securities lending agreement. As of period end, any securities on loan were collateralized by cash. During the year ended December 31, 2022, the Fund invested the cash collateral into a joint trading account in DWS Government & Agency Securities Portfolio, an affiliated money market fund managed by DWS Investment Management Americas, Inc. DWS Investment Management Americas, Inc. receives a management/administration fee (0.07% annualized effective rate as of December 31, 2022) on the cash collateral invested in DWS Government & Agency Securities Portfolio. 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 at any time, and the borrower, after notice, is required to return borrowed securities within a standard time period. 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. If the Fund is not able to recover securities lent, the Fund may sell the collateral and purchase a replacement investment in the market, incurring the risk that the value of the replacement security is greater than the value of the collateral. 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.
As of December 31, 2022, the Fund had securities on loan, which were classified as common stocks in the Investment Portfolio. The value of the related collateral exceeded the value of the securities loaned at period end. As of period end, the remaining contractual maturity of the collateral agreements was overnight and continuous.
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, 2022 and has determined that no provision for income tax and/or uncertain tax positions 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 from net investment income of the Fund, if any, are 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, investments in limited partnerships and the realized tax character on distributions from certain securities. 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.
At December 31, 2022, the Fund's components of distributable earnings (accumulated losses) on a net tax basis were as follows:
Undistributed ordinary income* | |
Undistributed long-term capital gains | |
Net unrealized appreciation (depreciation) on investments | |
Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP | |
At December 31, 2022, the aggregate cost of investments for federal income tax purposes was $36,852,597. The net unrealized appreciation for all investments based on tax cost was $13,939,679. This consisted of aggregate gross unrealized appreciation for all investments for which there was an excess of value over tax cost of $18,374,593 and aggregate gross unrealized depreciation for all investments for which there was an excess of tax cost over value of $4,434,914.
In addition, the tax character of distributions paid to shareholders by the Fund is summarized as follows:
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Distributions from ordinary income* | | |
Distributions from long-term capital gains | | |
| For tax purposes, short-term capital gain distributions are considered ordinary income distributions. |
Expenses. Expenses of the Trust arising in connection with a specific fund are allocated to that fund. Other Trust expenses which cannot be directly attributed to a fund are apportioned among the funds in the Trust based upon the relative net assets or other appropriate measures.
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. Proceeds from litigation payments, if any, are included in net realized gain (loss) from investments.
B.
Purchases and Sales of Securities
During the year ended December 31, 2022, purchases and sales of investment securities (excluding short-term investments) aggregated $6,195,789 and $10,820,111, respectively.
Management Agreement. Under the Investment Management Agreement with DWS Investment Management Americas, Inc. (“DIMA” or the “Advisor”), an indirect, wholly owned subsidiary of DWS Group GmbH & Co. KGaA (“DWS Group”), 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 average daily net assets of the Fund, computed and accrued daily and payable monthly, at the following annual rates:
First $250 million of the Fund's average daily net assets | |
Next $750 million of such net assets | |
Over $1 billion of such net assets | |
Accordingly, for the year ended December 31, 2022, the fee pursuant to the Investment Management Agreement was equivalent to an annual rate (exclusive of any applicable waivers/reimbursements) of 0.55% of the Fund’s average daily net assets.
For the period from January 1, 2022 through April 30, 2022, the Advisor had contractually agreed to waive its fees and/or reimburse certain operating expenses to the extent necessary to maintain the total annual operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of Class A at 0.81%.
For the period from May 1, 2022 through September 30, 2022, the Advisor had contractually agreed to waive its fees and/or reimburse certain operating expenses to the extent necessary to maintain the total annual
| Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP |
operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of Class A at 0.82%.
Effective October 1, 2022 through September 30, 2023, the Advisor has contractually agreed to waive its fees and/or reimburse certain operating expenses to the extent necessary to maintain the total annual operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of Class A at 0.85%.
For the year ended December 31, 2022, fees waived and/or expenses reimbursed for Class A are $9,104.
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 the Advisor an annual fee (“Administration Fee”) of 0.097% of the Fund’s average daily net assets, computed and accrued daily and payable monthly. For the year ended December 31, 2022, the Administration Fee was $55,523, of which $4,191 is unpaid.
Service Provider Fees. DWS Service Company (“DSC“), 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 DSC and SS&C GIDS, Inc. (“SS&C”) (name changed from DST Systems, Inc. effective January 1, 2023), DSC has delegated certain transfer agent, dividend-paying agent and shareholder service agent functions to SS&C. DSC compensates SS&C out of the shareholder servicing fee it receives from the Fund. For the year ended December 31, 2022, the amounts charged to the Fund by DSC aggregated $499, of which $84 is unpaid.
Other Service Fees. Under an agreement with the Fund, DIMA is compensated for providing regulatory filing services to the Fund. For the year ended December 31, 2022, the amount charged to the Fund by DIMA included in the Statement of Operations under “Reports to shareholders” aggregated $932, of which $30 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 Vehicles. The Fund may invest uninvested cash balances in DWS Central Cash Management Government Fund and DWS ESG Liquidity Fund, affiliated money market funds which are managed by the Advisor. Each affiliated money market fund is managed in accordance with Rule 2a-7 under the 1940 Act, which governs the quality, maturity, diversity and liquidity of instruments in which a money market fund may invest. DWS Central Cash Management Government Fund seeks to maintain a stable net asset value, and DWS ESG Liquidity Fund maintains a floating net asset value. The Fund indirectly bears its proportionate share of the expenses of each affiliated money market fund in which it invests. DWS Central Cash Management Government Fund does not pay the Advisor an investment management fee. To the extent that DWS ESG Liquidity Fund pays an investment management fee to the Advisor, the Advisor will waive an amount of the investment management fee payable to the Advisor by the Fund equal to the amount of the investment management fee payable on the Fund’s assets invested in DWS ESG Liquidity Fund.
Securities Lending Agent Fees. Deutsche Bank AG serves as securities lending agent for the Fund. For the year ended December 31, 2022, the Fund incurred securities lending agent fees to Deutsche Bank AG in the amount of $2,611.
At December 31, 2022, one participating insurance company was owner of record of 10% or more of the total outstanding Class A shares of the Fund, owning 92%.
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 daily fluctuating rate per annum equal to the sum of 0.10% plus the higher of the Federal Funds Effective Rate and the Overnight Bank Funding Rate, plus 1.25%. 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 December 31, 2022.
Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP | |
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Deutsche DWS Variable Series II and Shareholders of DWS Small Mid Cap Growth VIP:
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities of DWS Small Mid Cap Growth VIP (the “Fund”) (one of the funds constituting Deutsche DWS Variable Series II) (the “Trust”), including the investment portfolio, as of December 31, 2022, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund (one of the funds constituting Deutsche DWS Variable Series II) at December 31, 2022, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and its financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Trust is not required to have, nor were we engaged to perform, an audit of the Trust’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2022, by correspondence with the custodian, brokers and others; when replies were not received from brokers and others, we performed other auditing procedures. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the auditor of one or more investment companies in the DWS family of funds since at least 1979, but we are unable to determine the specific year.
Boston, Massachusetts
February 13, 2023
| Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP |
Information About Your Fund’s Expenses (Unaudited)
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, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month
period, the Fund limited these expenses; had it not done so, expenses would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2022 to December 31, 2022).
The tables illustrate your Fund’s expenses in two ways:
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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.
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Hypothetical 5% Fund Return. This helps you to compare your Fund’s ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund’s actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The “Expenses Paid per $1,000” line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
Expenses and Value of a $1,000 Investment for the six months ended December 31, 2022
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Beginning Account Value 7/1/22 | |
Ending Account Value 12/31/22 | |
Expenses Paid per $1,000* | |
Hypothetical 5% Fund Return | |
Beginning Account Value 7/1/22 | |
Ending Account Value 12/31/22 | |
Expenses Paid per $1,000* | |
| Expenses are equal to the Fund's annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 (the number of days in the most recent six-month period), then divided by 365. |
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Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP | |
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.
For an analysis of the fees associated with an investment in the Fund or similar funds, please refer to the current and hypothetical expense calculators for Variable Insurance Products which can be found at dws.com/calculators.
Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP | |
Tax Information (Unaudited)
The Fund paid distributions of $1.80 per share from net long-term capital gains during its year ended December 31, 2022.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates $1,924,000 as capital gain dividends for its year ended December 31, 2022.
Please consult a tax advisor if you have questions about federal or state income tax laws, or on how to prepare your tax returns. If you have specific questions about your account, please contact your insurance provider.
Proxy Voting
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 most recent 12-month period ended June 30 are available on our Web site — dws.com/en-us/resources/proxy-voting — or on the SEC’s Web site — 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.
| Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP |
Advisory Agreement Board Considerations and Fee Evaluation
The Board of Trustees (hereinafter referred to as the “Board” or “Trustees”) approved the renewal of DWS Small Mid Cap Growth VIP's (the “Fund”) investment management agreement (the “Agreement”) with DWS Investment Management Americas, Inc. (“DIMA”) in September 2022.
In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:
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During the entire process, all of the Fund's Trustees were independent of DIMA and its affiliates (the “Independent Trustees”).
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The Board met frequently during the past year to discuss fund matters and dedicated a substantial amount of time to contract review matters. Over the course of several months, the Board reviewed extensive materials received from DIMA, independent third parties and independent counsel. These materials included an analysis of the Fund’s performance, fees and expenses, and profitability from a fee consultant retained by the Fund’s Independent Trustees (the “Fee Consultant”).
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The Board also received extensive information throughout the year regarding performance of the Fund.
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The Independent Trustees regularly met privately with counsel to discuss contract review and other matters. In addition, the Independent Trustees were advised by the Fee Consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the Fee Consultant in connection with their deliberations.
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In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
In connection with the contract review process, the Board considered the factors discussed below, among others. The Board also considered that DIMA and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DIMA managed the Fund. DIMA is part of DWS Group GmbH & Co. KGaA (“DWS Group”). DWS Group is a global asset management business that offers a wide range of investing expertise and resources, including research capabilities in many countries throughout the world. In 2018, approximately 20% of DWS Group’s shares were sold in an initial public offering, with Deutsche Bank AG owning the remaining shares.
As part of the contract review process, the Board carefully considered the fees and expenses of each DWS fund overseen by the Board in light of the fund’s performance. In many cases, this led to the negotiation and implementation of expense caps.
While shareholders may focus primarily on fund performance and fees, the Fund’s Board considers these and many other factors, including the quality and integrity of DIMA’s personnel and administrative support services provided by DIMA, such as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DIMA provides portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DIMA provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel and the resources made available to such personnel. The Board also considered the risks to DIMA in sponsoring or managing the Fund, including financial, operational and reputational risks, the potential economic impact to DIMA from such risks and DIMA’s approach to addressing such risks. The Board reviewed the Fund’s performance over short-term and long-term periods and compared those returns to various agreed-upon performance measures, including market index(es) and a peer universe compiled using information supplied by Morningstar Direct (“Morningstar”), an independent fund data service. The Board also noted that it has put into place a process of identifying “Funds in Review” (e.g., funds performing poorly relative to a peer universe), and receives additional reporting from DIMA regarding such funds and, where appropriate, DIMA’s plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that, for the one-, three- and five-year periods ended December 31, 2021, the Fund’s performance (Class A shares) was in the 1st quartile, 3rd quartile and 4th quartile, respectively, of the applicable Morningstar universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has
Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP | |
outperformed its benchmark in the one-year period and has underperformed its benchmark in the three- and five-year periods ended December 31, 2021.
Fees and Expenses. The Board considered the Fund’s investment management fee schedule, operating expenses and total expense ratios, and comparative information provided by Broadridge Financial Solutions, Inc. (“Broadridge”) and the Fee Consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include a 0.097% fee paid to DIMA under the Fund’s administrative services agreement, were lower than the median (1st quartile) of the applicable Broadridge peer group (based on Broadridge data provided as of December 31, 2021). The Board noted that the Fund’s Class A shares total (net) operating expenses were expected to be lower than the median (1st quartile) of the applicable Broadridge expense universe (based on Broadridge data provided as of December 31, 2021, and analyzing Broadridge expense universe Class A (net) expenses less any applicable 12b-1 fees). The Board noted that the expense limitation agreed to by DIMA was expected to help the Fund’s total (net) operating expenses remain competitive. The Board considered the Fund’s management fee rate as compared to fees charged by DIMA to a comparable DWS U.S. registered fund (“DWS Funds”) and considered differences between the Fund and the comparable DWS Fund. The information requested by the Board as part of its review of fees and expenses also included information about institutional accounts (including any sub-advised funds and accounts) and funds offered primarily to European investors (“DWS Europe Funds”) managed by DWS Group. The Board noted that DIMA indicated that DWS Group does not manage any institutional accounts or DWS Europe Funds comparable to the Fund.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DIMA.
Profitability. The Board reviewed detailed information regarding revenues received by DIMA under the Agreement. The Board considered the estimated costs to DIMA, and pre-tax profits realized by DIMA, from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DIMA and its affiliates with respect to all fund services in totality and by fund. The Board and the Fee Consultant reviewed DIMA’s methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DIMA in connection with the management of the Fund were not unreasonable. The Board also reviewed certain publicly available information regarding the profitability of certain similar investment management firms. The Board noted that, while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DIMA and its affiliates’ overall profitability with respect to the DWS Funds (after taking into account distribution and other services provided to the funds by DIMA and its affiliates) was lower than the overall profitability levels of most comparable firms for which such data was available.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund’s investment management fee schedule includes fee breakpoints. The Board concluded that the Fund’s fee schedule represents an appropriate sharing between the Fund and DIMA of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DIMA and Its Affiliates. The Board also considered the character and amount of other incidental or “fall-out” benefits received by DIMA and its affiliates, including any fees received by DIMA for administrative services provided to the Fund and any fees received by an affiliate of DIMA for transfer agency services provided to the Fund. The Board also considered benefits to DIMA related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities. In addition, the Board considered the incidental public relations benefits to DIMA related to DWS Funds advertising and cross-selling opportunities among DIMA products and services. The Board considered these benefits in reaching its conclusion that the Fund’s management fees were reasonable.
Compliance. The Board considered the significant attention and resources dedicated by DIMA to its compliance processes in recent years. The Board noted in particular (i) the experience, seniority and time commitment of the individuals serving as DIMA’s and the Fund’s chief compliance officers and (ii) the substantial commitment of resources by DIMA and its affiliates to compliance matters, including the retention of compliance personnel.
Based on all of the information considered and the conclusions reached, the Board determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination, the Board
| Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP |
did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and counsel present. It is possible that individual Independent Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.
Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP | |
Board Members and Officers
The following table presents certain information regarding the Board Members and Officers of the Trust/Corporation. Each Board Member’s year of birth is set forth in parentheses after his or her name. Unless otherwise noted, (i) each Board Member has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity; and (ii) the address of each Independent Board Member is c/o Keith R. Fox, DWS Funds Board Chair, c/o Thomas R. Hiller, Ropes & Gray LLP, Prudential Tower, 800 Boylston Street, Boston, MA 02199-3600. Except as otherwise noted below, the term of office for each Board Member is until the election and qualification of a successor, or until such Board Member sooner dies, resigns, is removed or as otherwise provided in the governing documents of the Trust/Corporation. Because the Fund does not hold an annual meeting of shareholders, each Board Member will hold office for an indeterminate period.
The Board Members may also serve in similar capacities with other funds in the fund complex. The number of funds in the DWS fund complex shown in the table below includes all registered open- and closed-end funds (including all of their portfolios) advised by the Advisor and any registered funds that have an investment advisor that is an affiliated person of the Advisor.
Independent Board Members/Independent Advisory Board Members
Name, Year of
Birth, Position
with the Trust/
Corporation
and Length of
| Business Experience and Directorships
During the Past Five Years | Number of
Funds in
DWS Fund
Complex
Overseen | Other
Directorships
Held by Board
Member |
Keith R. Fox, CFA (1954) Chairperson since 2017, and Board Member since 1996 | Managing General Partner, Exeter Capital Partners (a series of private investment funds) (since 1986). Directorships: Progressive International Corporation (kitchen goods designer and distributor); former Chairman, National Association of Small Business Investment Companies; Former Directorships: ICI Mutual Insurance Company; BoxTop Media Inc. (advertising); Sun Capital Advisers Trust (mutual funds) | | |
John W. Ballantine (1946) Board Member since 1999 | Retired; formerly, Executive Vice President and Chief Risk Management Officer, First Chicago NBD Corporation/The First National Bank of Chicago (1996–1998); Executive Vice President and Head of International Banking (1995–1996); Not-for-Profit Directorships: Window to the World Communications (public media); Life Director of Harris Theater for Music and Dance (Chicago); Life Director of Hubbard Street Dance Chicago; Former Directorships: Director and Chairman of the Board, Healthways, Inc.2 (population wellbeing and wellness services) (2003–2014); Stockwell Capital Investments PLC (private equity); Enron Corporation; FNB Corporation; Tokheim Corporation; First Oak Brook Bancshares, Inc.; Oak Brook Bank; Portland General Electric2 (utility company (2003–2021); and Prisma Energy International; Former Not-for-Profit Directorships: Public Radio International; Palm Beach Civic Assn. | | |
Dawn-Marie Driscoll (1946) Board Member since 1987 | Advisory Board and former Executive Fellow, Hoffman Center for Business Ethics, Bentley University; formerly: Partner, Palmer & Dodge (law firm) (1988–1990); Vice President of Corporate Affairs and General Counsel, Filene’s (retail) (1978–1988); Directorships: Trustee and former Chairman of the Board, Southwest Florida Community Foundation (charitable organization); Former Directorships: ICI Mutual Insurance Company (2007–2015); Sun Capital Advisers Trust (mutual funds) (2007–2012), Investment Company Institute (audit, executive, nominating committees) and Independent Directors Council (governance, executive committees) | | |
Richard J. Herring (1946) Board Member since 1990 | Jacob Safra Professor of International Banking and Professor of Finance, The Wharton School, University of Pennsylvania (since July 1972); formerly: Director, The Wharton Financial Institutions Center (1994–2020); Vice Dean and Director, Wharton Undergraduate Division (1995–2000) and Director, The Lauder Institute of International Management Studies (2000–2006); Member FDIC Systemic Risk Advisory Committee since 2011, member Systemic Risk Council since 2012 and member of the Advisory Board at the Yale Program on Financial Stability since 2013; Former Directorships: Co-Chair of the Shadow Financial Regulatory Committee (2003–2015), Executive Director of The Financial Economists Roundtable (2008–2015), Director of The Thai Capital Fund (2007–2013), Director of The Aberdeen Singapore Fund (2007–2018), Director, The Aberdeen Japan Fund (2007-2021) and Nonexecutive Director of Barclays Bank DE (2010–2018) | | |
| Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP |
Name, Year of Birth, Position with the Trust/ Corporation and Length of Time Served1 | Business Experience and Directorships During the Past Five Years | Number of Funds in DWS Fund Complex Overseen | Other Directorships Held by Board Member |
Chad D. Perry (1972) Board Member or Advisory | Executive Vice President, General Counsel and Secretary, Tanger Factory Outlet Centers, Inc.2 (since 2011); formerly Executive Vice President and Deputy General Counsel, LPL Financial Holdings Inc.2 (2006–2011); Senior Corporate Counsel, EMC Corporation (2005–2006); Associate, Ropes & Gray LLP (1997–2005) | | Director - Great Elm Capital Corp. (business development company) (since 2022) |
Rebecca W. Rimel (1951) Board Member since 1995 | Director, The Bridgespan Group (nonprofit organization) (since October 2020); formerly: Executive Vice President, The Glenmede Trust Company (investment trust and wealth management) (1983–2004); Board Member, Investor Education (charitable organization) (2004–2005); Former Directorships: Trustee, Executive Committee, Philadelphia Chamber of Commerce (2001–2007); Director, Viasys Health Care2 (January 2007–June 2007); Trustee, Thomas Jefferson Foundation (charitable organization) (1994–2012); President, Chief Executive Officer and Director (1994–2020) and Senior Advisor (2020-2021), The Pew Charitable Trusts (charitable organization); Director, BioTelemetry Inc.2 (acquired by Royal Philips in 2021) (healthcare) (2009–2021); Director, Becton Dickinson and Company2 (medical technology company) (2012-2022) | | |
Catherine Schrand (1964) Board Member since 2021* | Celia Z. Moh Professor of Accounting (since 2016) and Professor of Accounting (since 1994), The Wharton School, University of Pennsylvania; formerly Vice Dean, Wharton Doctoral Programs (2016–2019) | | |
William N. Searcy, Jr. (1946) Board Member since 1993 | Private investor since October 2003; formerly: Pension & Savings Trust Officer, Sprint Corporation2 (telecommunications) (November 1989–September 2003); Former Directorships: Trustee, Sun Capital Advisers Trust (mutual funds) (1998–2012) | | |
Officers5
Name, Year of Birth, Position
with the Trust/Corporation
and Length of Time Served6 | Business Experience and Directorships During the
Past Five Years |
Hepsen Uzcan7 (1974) President and Chief Executive Officer, 2017–present | Fund Administration (Head since 2017), DWS; Secretary, DWS USA Corporation (2018–present); Assistant Secretary, DWS Distributors, Inc. (2018–present); Director and Vice President, DWS Service Company (2018–present); Assistant Secretary, DWS Investment Management Americas, Inc. (2018–present); Director and President, DB Investment Managers, Inc. (2018–present); President and Chief Executive Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2017–present); formerly: Vice President for the Deutsche funds (2016–2017); Assistant Secretary for the DWS funds (2013–2019); Assistant Secretary, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2013–2020); Directorships: Interested Director, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (since June 25, 2020); ICI Mutual Insurance Company (since October 16, 2020); and Episcopalian Charities of New York (2018–present) |
John Millette8 (1962) Vice President and Secretary, 1999–present | Legal (Associate General Counsel), DWS; Chief Legal Officer, DWS Investment Management Americas, Inc. (2015–present); Director and Vice President, DWS Trust Company (2016–present); Secretary, DBX ETF Trust (2020–present); Vice President, DBX Advisors LLC (2021–present); Secretary, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. 2011–present); formerly: Secretary, Deutsche Investment Management Americas Inc. (2015–2017); and Assistant Secretary, DBX ETF Trust (2019–2020) |
Ciara Crawford9 (1984) Assistant Secretary, 2019–present | Fund Administration (Specialist), DWS (2015–present); formerly, Legal Assistant at Accelerated Tax Solutions |
Diane Kenneally8 (1966) Chief Financial Officer and Treasurer, 2018–present | Fund Administration Treasurer's Office (Co-Head since 2018), DWS; Treasurer, Chief Financial Officer and Controller, DBX ETF Trust (2019–present); Treasurer and Chief Financial Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2018–present); formerly: Assistant Treasurer for the DWS funds (2007–2018) |
Paul Antosca8 (1957) Assistant Treasurer, 2007–present | Fund Administration Tax (Head), DWS; and Assistant Treasurer, DBX ETF Trust (2019–present) |
Sheila Cadogan8 (1966) Assistant Treasurer, 2017–present | Fund Administration Treasurer's Office (Co-Head since 2018), DWS; Director and Vice President, DWS Trust Company (2018–present); Assistant Treasurer, DBX ETF Trust (2019–present); Assistant Treasurer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2018–present) |
Scott D. Hogan8 (1970) Chief Compliance Officer, 2016–present | Anti-Financial Crime & Compliance US (Senior Team Lead), DWS; Chief Compliance Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2016–present) |
Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP | |
Name, Year of Birth, Position with the Trust/Corporation and Length of Time Served6 | Business Experience and Directorships During the Past Five Years |
Caroline Pearson8 (1962) Chief Legal Officer, 2010–present | Legal (Senior Team Lead), DWS; Assistant Secretary, DBX ETF Trust (2020–present); Chief Legal Officer, DBX Advisors LLC (2020–present); Chief Legal Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2012–present); formerly: Secretary, Deutsche AM Distributors, Inc. (2002–2017); Secretary, Deutsche AM Service Company (2010–2017); and Chief Legal Officer, DBX Strategic Advisors LLC (2020–2021) |
Christian Rijs7 (1980) Anti-Money Laundering
Compliance Officer,
since October 6, 2021 | Senior Team Lead Anti-Financial Crime and Compliance, DWS; AML Officer, DWS Trust Company (since November 2, 2021); AML Officer, DBX ETF Trust (since October 21, 2021); AML Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (since November 12, 2021); formerly: DWS UK & Ireland Head of Anti-Financial Crime and MLRO |
| Ms. Schrand was an Advisory Board Member for certain funds in the DWS Fund Complex for the period from November 18, 2021 to December 31, 2022 and was elected as a Full Board Member as of January 1, 2023 for all funds in the DWS Fund Complex. |
| The length of time served represents the year in which the Board Member joined the board of one or more DWS funds currently overseen by the Board. |
| A publicly held company with securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. |
| Mr. Perry is an Advisory Board Member of Deutsche DWS Asset Allocation Trust, Deutsche DWS Equity 500 Index Portfolio, Deutsche DWS Global/International Fund, Inc., Deutsche DWS Income Trust, Deutsche DWS Institutional Funds, Deutsche DWS International Fund, Inc., Deutsche DWS Investment Trust, Deutsche DWS Investments VIT Funds, Deutsche DWS Money Market Trust, Deutsche DWS Municipal Trust, Deutsche DWS Portfolio Trust, Deutsche DWS Securities Trust, Deutsche DWS Tax Free Trust, Deutsche DWS Variable Series I and Government Cash Management Portfolio. Mr. Perry is a Board Member of each other Trust. |
| Mr. Perry oversees 21 funds in the DWS Fund Complex as a Board Member of various Trusts. Mr. Perry is an Advisory Board Member of various Trusts/Corporations comprised of 48 funds in the DWS Fund Complex. |
| As a result of their respective positions held with the Advisor or its affiliates, these individuals are considered “interested persons” of the Advisor within the meaning of the 1940 Act. Interested persons receive no compensation from the Fund. |
| The length of time served represents the year in which the officer was first elected in such capacity for one or more DWS funds. |
| Address: 875 Third Avenue, New York, NY 10022. |
| Address: 100 Summer Street, Boston, MA 02110. |
| Address: 5201 Gate Parkway, Jacksonville, FL 32256. |
Certain officers hold similar positions for other investment companies for which DIMA or an affiliate serves as the Advisor.
The Fund’s Statement of Additional Information (“SAI”) includes additional information about the Board Members. The SAI is available, without charge, upon request. If you would like to request a copy of the SAI, you may do so by calling the following toll-free number: (800) 728-3337.
| Deutsche DWS Variable Series II — DWS Small Mid Cap Growth VIP |
VS2SMCG-2 (R-025835-12 2/23)
December 31, 2022
Annual Report
Deutsche DWS Variable Series II
DWS Small Mid Cap Value VIP
Contents
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.
Stocks may decline in value. Smaller and medium company stocks tend to be more volatile than large company stocks. The impact of the use of quantitative models and the analysis of specific metrics on a stock’s performance can be difficult to predict, and stocks that previously possessed certain desirable quantitative characteristics may not continue to demonstrate those same characteristics in the future. Quantitative models also entail the risk that the models themselves may be limited or incorrect. Investing in foreign securities presents certain risks, such as currency fluctuations, political and economic changes, and market risks. The Fund may lend securities to approved institutions. Please read the prospectus for details.
War, terrorism, sanctions, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and, in the future, may lead to significant disruptions in U.S. and world economies and markets, which may lead to increased market volatility and may have significant adverse effects on the Fund and its investments.
The brand DWS represents DWS Group GmbH & Co. KGaA and any of its subsidiaries such as DWS Distributors, Inc. which offers investment products or DWS Investment Management Americas, Inc. and RREEF America L.L.C. which offer advisory services.
DWS Distributors, Inc., 222 South Riverside Plaza, Chicago, IL 60606, (800) 621-1148
NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
| Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP |
Performance SummaryDecember 31, 2022 (Unaudited)
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 does 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. 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, 2022 are 0.85% and 1.22% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.
Generally accepted accounting principles require adjustments to be made to the net assets of the Fund at period end for financial reporting purposes only, and as such, the total return based on the unadjusted net asset value per share may differ from the total return reported in the financial highlights.
Growth of an Assumed $10,000 Investment
Yearly periods ended December 31
Russell 2500™ Value Index is an unmanaged index measuring the small- to mid-cap U.S. equity value market.
Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index.
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DWS Small Mid Cap Value VIP | | | | |
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Average annual total return | | | | |
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Average annual total return | | | | |
DWS Small Mid Cap Value VIP | | | | |
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Average annual total return | | | | |
The growth of $10,000 is cumulative. |
Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP | |
Management Summary December 31, 2022 (Unaudited)
Class A shares of DWS Small/Mid Cap Value VIP returned –15.80% in 2022 (unadjusted for contract charges) and underperformed the –13.08% return of the Russell 2500™ Value Index.
The U.S. equity market suffered poor performance and elevated volatility in 2022. A dramatic acceleration of inflation prompted the U.S. Federal Reserve (Fed) to abandon its stimulative post-COVID policy stance in an effort to put the brakes on the economy. The Fed raised interest rates on seven separate occasions, bringing the fed funds rate from a range of 0.0%–0.25% at the start of 2022 to 4.25%–4.50% by year-end. This represented the largest move in short-term rates in more than 40 years. The spike in rates, together with expectations that tighter policy could lead to a sharp slowdown in growth and weaker corporate earnings in 2023, weighed heavily on stock prices. Geopolitical issues, particularly Russia’s invasion of Ukraine and the adverse economic impact of China’s zero-COVID policy, were additional headwinds for the markets.
These circumstances contributed to weak performance for small- and mid-cap stocks. In addition to being sensitive to shifts in investors’ appetite for risk, stocks in these categories tend to be more vulnerable to rising rates since they are more likely to require capital than established firms. On the positive side, the value style finished the year well ahead of growth. Higher rates reduce the value of future earnings when discounted back to today’s dollars, which hurt growth stocks but benefited shares of companies with higher current cash flows.
The Fund underperformed the index in the period, largely as a result of stock selection in the healthcare sector. Holdings in biotechnology stocks, in particular, weighed on results given the weakness in the broader category. Selection in financials was a notable detractor, as well. Much of the shortfall came from a position in Donnelly Financial Solutions, Inc.,* which declined in the first four months of the year prior to our selling it from the portfolio. The Fund’s holdings also lagged in consumer staples and utilities, but to a much lesser extent.
On the positive side, stock selection in the materials sector helped performance. Specifically, a holding in Steel Dynamics, Inc. gained ground amid broader strength in resource-related companies. A number of energy companies, including Targa Resources Corp. and Devon Energy Corp., also contributed positively thanks to rising oil prices and investors’ search for stocks with the ability to benefit from inflation pressures. Vivint Smart Home, Inc., which was bid for by a rival in early December, was the leading contributor in the Fund as a whole.
The market outlook remained extremely uncertain at year-end. The open-ended and data-dependent nature of Fed policy, unsteady economic conditions, and the potential for slower corporate earnings in 2023 were all important issues weighing on sentiment. As always, we believe the optimal way to navigate such a challenging backdrop is to maintain our disciplined strategy of investing based on factors that have historically led to outperformance within each of the market’s 35 industry groups over time. We think this objective, data-driven approach — which removes emotion from the decision-making process — is well suited for a time in which shifting macroeconomic trends make subjective forecasting exceptionally difficult.
Pankaj Bhatnagar, PhD, Head of Investment Strategy Equity
Arno V. Puskar, Senior Portfolio Manager Equity
Portfolio Managers
The views expressed reflect those of the portfolio management team only through the end of the period of the report as stated on the cover. The management team’s views are subject to change at any time based on market and other conditions and should not be construed as a recommendation. Past performance is no guarantee of future results. Current and future portfolio holdings are subject to risk.
Terms to Know
The Russell 2500 Value Index is an unmanaged index measuring the small- to mid-cap U.S. equity value market.
Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index.
Contribution and detraction incorporate both an investment’s total return and its weighting in the Fund.
*
Not held at December 31, 2022.
| Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP |
Portfolio Summary(Unaudited)
Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) | | |
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Sector Diversification (As a % of Investment Portfolio excluding Securities Lending Collateral and Cash Equivalents) | | |
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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 posted on dws.com, and is available free of charge by contacting your financial intermediary, or if you are a direct investor, by calling (800) 728-3337. In addition, the portfolio holdings listing is filed with the SEC on the Fund’s Form N-PORT and will be available on the SEC’s Web site at sec.gov. Additional portfolio holdings for the Fund are also posted on dws.com from time to time. Please see the Fund’s current prospectus for more information.
Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP | |
Investment Portfolioas of December 31, 2022
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Communication Services 3.4% | |
Diversified Telecommunication Services 0.8% | |
Liberty Latin America Ltd. "A"* | | | |
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Madison Square Garden Sports Corp. | | | |
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Interpublic Group of Companies, Inc. | | | |
Nexstar Media Group, Inc. | | | |
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Wireless Telecommunication Services 0.3% | |
Telephone & Data Systems, Inc. | | | |
Consumer Discretionary 12.3% | |
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American Axle & Manufacturing Holdings, Inc.* | | | |
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Winnebago Industries, Inc. | | | |
Diversified Consumer Services 2.8% | |
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Hotels, Restaurants & Leisure 0.6% | |
International Game Technology PLC | | | |
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Beazer Homes U.S.A., Inc.* | | | |
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Internet & Direct Marketing Retail 0.5% | |
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TravelCenters of America, Inc.* | | | |
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Textiles, Apparel & Luxury Goods 1.8% | |
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Food & Staples Retailing 0.5% | |
Performance Food Group Co.* | | | |
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Darling Ingredients, Inc.* | | | |
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Central Garden & Pet Co.* | | | |
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Herbalife Nutrition Ltd.* | | | |
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Energy Equipment & Services 1.1% | |
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NexTier Oilfield Solutions, Inc.* | | | |
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Oil, Gas & Consumable Fuels 3.6% | |
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Kinetik Holdings, Inc. (a) | | | |
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Columbia Banking System, Inc. | | | |
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Simmons First National Corp. "A" | | | |
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Credit Acceptance Corp.* (a) | | | |
Diversified Financial Services 2.2% | |
A-Mark Precious Metals, Inc. | | | |
Apollo Global Management, Inc. | | | |
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The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP |
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Mortgage Real Estate Investment Trusts (REITs) 0.8% | |
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Sana Biotechnology, Inc.* (a) | | | |
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Health Care Equipment & Supplies 0.6% | |
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Health Care Providers & Services 2.2% | |
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Health Care Technology 0.1% | |
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Life Sciences Tools & Services 1.1% | |
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Reata Pharmaceuticals, Inc. "A"* (a) | | | |
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Huntington Ingalls Industries, Inc. | | | |
Air Freight & Logistics 0.7% | |
Atlas Air Worldwide Holdings, Inc.* | | | |
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Electrical Equipment 3.0% | |
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Professional Services 2.9% | |
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Science Applications International Corp. | | | |
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Knight-Swift Transportation Holdings, Inc. | | | |
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Trading Companies & Distributors 2.2% | |
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Information Technology 8.3% | |
Communications Equipment 0.5% | |
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Electronic Equipment, Instruments & Components 2.8% | |
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AvidXchange Holdings, Inc.* | | | |
Semiconductors & Semiconductor Equipment 2.0% | |
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The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP | |
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Containers & Packaging 0.9% | |
Graphic Packaging Holding Co. | | | |
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Equity Real Estate Investment Trusts (REITs) 10.9% | |
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Gaming and Leisure Properties, Inc. | | | |
Highwoods Properties, Inc. | | | |
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Real Estate Management & Development 0.6% | |
Kennedy-Wilson Holdings, Inc. | | | |
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Northwest Natural Holding Co. | | | |
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Total Common Stocks (Cost $69,776,646) | |
Securities Lending Collateral 3.3% |
DWS Government & Agency Securities Portfolio "DWS Government Cash Institutional Shares", 4.07% (b) (c)
(Cost $2,566,790) | | | |
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Total Investment Portfolio (Cost $72,343,436) | | | |
Other Assets and Liabilities, Net | | | |
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A summary of the Fund’s transactions with affiliated investments during the year ended December 31, 2022 are as follows:
| | | Net Realized
Gain/
(Loss) ($) | Net Change in
Unrealized
Appreciation
(Depreciation) ($) | | Capital Gain
Distributions ($) | Number
of Shares
at
12/31/2022 | |
Securities Lending Collateral 3.3% |
DWS Government & Agency Securities Portfolio "DWS Government Cash Institutional Shares", 4.07% (b) (c) |
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DWS Central Cash Management Government Fund, 4.2% (b) |
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| Non-income producing security. |
| All or a portion of these securities were on loan. In addition, "Other Assets and Liabilities, Net" may include pending sales that are also on loan. The value of securities loaned at December 31, 2022 amounted to $2,484,956, which is 3.1% of net assets. |
| Affiliated fund managed by DWS Investment Management Americas, Inc. The rate shown is the annualized seven-day yield at period end. |
| Represents cash collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates. |
| Represents the net increase (purchase cost) or decrease (sales proceeds) in the amount invested in cash collateral for the year ended December 31, 2022. |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP |
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 level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities.
The following is a summary of the inputs used as of December 31, 2022 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.
| See Investment Portfolio for additional detailed categorizations. |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP | |
Statement of
Assets and Liabilities
as of December 31, 2022
| |
Investments in non-affiliated securities, at value (cost $69,776,646) — including $2,484,956 of securities loaned | |
Investment in DWS Government & Agency Securities Portfolio (cost $2,566,790)* | |
Receivable for investments sold | |
Receivable for Fund shares sold | |
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Payable upon return of securities loaned | |
Payable for Fund shares redeemed | |
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Other accrued expenses and payables | |
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Distributable earnings (loss) | |
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Net Asset Value, offering and redemption price per share ($63,631,797 ÷ 5,000,004 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | |
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Net Asset Value, offering and redemption price per share ($15,605,661 ÷ 1,226,929 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) | |
| Represents collateral on securities loaned. |
for the year ended December 31, 2022
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Dividends (net of foreign taxes withheld of $314) | |
Income distributions — DWS Central Cash Management Government Fund | |
Securities lending income, net of borrower rebates | |
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Record keeping fee (Class B) | |
Distribution service fee (Class B) | |
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Trustees' fees and expenses | |
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Total expenses before expense reductions | |
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Total expenses after expense reductions | |
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Realized and Unrealized Gain (Loss) | |
Net realized gain (loss) from investments | |
Change in net unrealized appreciation (depreciation) on investments | |
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Net increase (decrease) in net assets resulting from operations | |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP |
Statements of Changes in Net Assets
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Increase (Decrease) in Net Assets | | |
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Change in net unrealized appreciation
(depreciation) | | |
Net increase (decrease) in net assets resulting from operations | | |
Distributions to shareholders: | | |
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Proceeds from shares sold | | |
Reinvestment of distributions | | |
Payments for shares redeemed | | |
Net increase (decrease) in net assets from Class A share transactions | | |
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Proceeds from shares sold | | |
Reinvestment of distributions | | |
Payments for shares redeemed | | |
Net increase (decrease) in net assets from Class B share transactions | | |
Increase (decrease) in net assets | | |
Net assets at beginning of period | | |
Net assets at end of period | | |
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Shares outstanding at beginning of period | | |
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Shares issued to shareholders in reinvestment of distributions | | |
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Net increase (decrease) in Class A shares | | |
Shares outstanding at end of period | | |
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Shares outstanding at beginning of period | | |
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Shares issued to shareholders in reinvestment of distributions | | |
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Net increase (decrease) in Class B shares | | |
Shares outstanding at end of period | | |
The accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP | |
Financial Highlights
DWS Small Mid Cap Value VIP — Class A |
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Net asset value, beginning of period | | | | | |
Income (loss) from investment operations: | | | | | |
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Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
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Net asset value, end of period | | | | | |
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Ratios to Average Net Assets and Supplemental Data |
Net assets, end of period ($ millions) | | | | | |
Ratio of expenses before expense reductions (%)d | | | | | |
Ratio of expenses after expense reductions (%)d | | | | | |
Ratio of net investment income (%) | | | | | |
Portfolio turnover rate (%) | | | | | |
| Based on average shares outstanding during the period. |
| Includes proceeds from a non-recurring litigation payment amounting to $0.14 per share and 1.07% of average daily net assets, for the year ended December 31, 2019. |
| Total return would have been lower had certain expenses not been reduced. |
| Expense ratio does not reflect charges and fees associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. |
The accompanying notes are an integral part of the financial statements.
| Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP |
DWS Small Mid Cap Value VIP — Class B |
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Net asset value, beginning of period | | | | | |
Income (loss) from investment operations: | | | | | |
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Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
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Net asset value, end of period | | | | | |
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Ratios to Average Net Assets and Supplemental Data |
Net assets, end of period ($ millions) | | | | | |
Ratio of expenses before expense reductions (%)d | | | | | |
Ratio of expenses after expense reductions (%)d | | | | | |
Ratio of net investment income (%) | | | | | |
Portfolio turnover rate (%) | | | | | |
| Based on average shares outstanding during the period. |
| Includes proceeds from a non-recurring litigation payment amounting to $0.14 per share and 1.07% of average daily net assets, for the year ended December 31, 2019. |
| Total return would have been lower had certain expenses not been reduced. |
| Expense ratio does not reflect charges and fees 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 accompanying notes are an integral part of the financial statements.
Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP | |
Notes to Financial Statements
A.
Organization and Significant Accounting Policies
DWS Small Mid Cap Value VIP (the “Fund”) is a diversified series of Deutsche 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). Class B shares are subject to Rule 12b-1 distribution fees under the 1940 Act and recordkeeping fees equal to an annual rate of up to 0.25% and of up to 0.15%, respectively, 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 12b-1 distribution fees 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 (“U.S. GAAP”) which require the use of management estimates. Actual results could differ from those estimates. The Fund qualifies as an investment company under Topic 946 of Accounting Standards Codification of U.S. GAAP. 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.
The Fund’s Board has designated DWS Investment Management Americas, Inc. (the “Advisor”) as the valuation designee for the Fund pursuant to Rule 2a-5 under the 1940 Act. The Advisor's Pricing Committee (the “Pricing Committee”) typically values securities using readily available market quotations or prices supplied by independent pricing services (which are considered fair values under Rule 2a-5). The Advisor has adopted fair valuation procedures that provide methodologies for fair valuing securities.
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 level assigned to the securities valuations may not be an indication of the risk or liquidity 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. 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. Equity securities are generally 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 Pricing Committee and are generally categorized as Level 3. In accordance with the Fund’s valuation procedures, factors considered 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.
| Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP |
Disclosure about the classification of fair value measurements is included in a table following the Fund's Investment Portfolio.
Securities Lending. Brown Brothers Harriman & Co., as lending agent, lends securities of the Fund to certain financial institutions under the terms of its securities lending agreement. During the term of the loans, the Fund continues to receive interest and dividends generated by the 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 and/or U.S. Treasury Securities 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 efforts to obtain additional collateral on the next business day to meet required amounts under the securities lending agreement. During the year ended December 31, 2022, the Fund invested the cash collateral into a joint trading account in DWS Government & Agency Securities Portfolio, an affiliated money market fund managed by DWS Investment Management Americas, Inc. DWS Investment Management Americas, Inc. receives a management/administration fee (0.07% annualized effective rate as of December 31, 2022) on the cash collateral invested in DWS Government & Agency Securities Portfolio. 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 at any time, and the borrower, after notice, is required to return borrowed securities within a standard time period. 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. If the Fund is not able to recover securities lent, the Fund may sell the collateral and purchase a replacement investment in the market, incurring the risk that the value of the replacement security is greater than the value of the collateral. 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.
As of December 31, 2022, the Fund had securities on loan, which were classified as common stocks in the Investment Portfolio. The value of the related collateral exceeded the value of the securities loaned at period end. As of period end, the remaining contractual maturity of the collateral agreements was overnight and continuous.
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, 2022 and has determined that no provision for income tax and/or uncertain tax positions 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 from net investment income of the Fund, if any, are 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 and the realized tax character on distributions from certain securities. 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.
At December 31, 2022, the Fund's components of distributable earnings (accumulated losses) on a net tax basis were as follows:
Undistributed ordinary income* | |
Undistributed long-term capital gains | |
Net unrealized appreciation (depreciation) on investments | |
At December 31, 2022, the aggregate cost of investments for federal income tax purposes was $72,469,377. The net unrealized appreciation for all investments based on tax cost was $8,796,959. This
Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP | |
consisted of aggregate gross unrealized appreciation for all investments for which there was an excess of value over tax cost of $15,731,206 and aggregate gross unrealized depreciation for all investments for which there was an excess of tax cost over value of $6,934,247.
In addition, the tax character of distributions paid to shareholders by the Fund is summarized as follows:
| |
| | |
Distributions from ordinary income* | | |
Distributions from long-term capital gains | | |
| For tax purposes, short-term capital gain distributions are considered ordinary income distributions. |
Expenses. Expenses of the Trust arising in connection with a specific fund are allocated to that fund. Other Trust expenses which cannot be directly attributed to a fund are apportioned among the funds in the Trust based upon the relative net assets or other appropriate measures.
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 at its fiscal year end 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.
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. Proceeds from litigation payments, if any, are included in net realized gain (loss) from investments.
B.
Purchases and Sales of Securities
During the year ended December 31, 2022, purchases and sales of investment securities (excluding short-term investments) aggregated $28,945,499 and $35,480,096, respectively.
Management Agreement. Under the Investment Management Agreement with DWS Investment Management Americas, Inc. (“DIMA” or the “Advisor”), an indirect, wholly owned subsidiary of DWS Group GmbH & Co. KGaA (“DWS Group”), 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 of the Fund’s average daily net assets | |
Next $750 million of such net assets | |
Next $1.5 billion of such net assets | |
Next $2.5 billion of such net assets | |
Next $2.5 billion of such net assets | |
Next $2.5 billion of such net assets | |
Next $2.5 billion of such net assets | |
Over $12.5 billion of such net assets | |
| Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP |
Accordingly, for the year ended December 31, 2022, the fee pursuant to the Investment Management Agreement was equivalent to an annual rate (exclusive of any applicable waivers/reimbursements) of 0.65% of the Fund’s average daily net assets.
For the period from January 1, 2022 through September 30, 2022, the Advisor had contractually agreed to waive its fees and/or reimburse certain operating expenses of the Fund to the extent necessary to maintain the total annual operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of each class as follows:
Effective October 1, 2022 through September 30, 2023, the Advisor has contractually agreed to waive its fees and/or reimburse certain operating expenses of the Fund to the extent necessary to maintain the total annual operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest expense) of each class as follows:
For the year ended December 31, 2022, fees waived and/or expenses reimbursed for each class are as follows:
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 the Advisor an annual fee (“Administration Fee”) of 0.097% of the Fund’s average daily net assets, computed and accrued daily and payable monthly. For the year ended December 31, 2022, the Administration Fee was $85,109, of which $6,715 is unpaid.
Service Provider Fees. DWS Service Company (“DSC”), 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 DSC and SS&C GIDS, Inc. (“SS&C”) (name changed from DST Systems, Inc. effective January 1, 2023), DSC has delegated certain transfer agent, dividend-paying agent and shareholder service agent functions to SS&C. DSC compensates SS&C out of the shareholder servicing fee it receives from the Fund. For the year ended December 31, 2022, the amounts charged to the Fund by DSC were as follows:
| | Unpaid at
December 31, 2022 |
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Distribution Service Agreement. Under the Fund’s Class B 12b-1 plan, DWS Distributors, Inc. (“DDI”) received a fee (“Distribution Service Fee”) of up to 0.25% of average daily net assets of Class B shares. For the year ended December 31, 2022, the Distribution Service Fee aggregated $44,294, of which $3,402 is unpaid.
Other Service Fees. Under an agreement with the Fund, DIMA is compensated for providing regulatory filing services to the Fund. For the year ended December 31, 2022, the amount charged to the Fund by DIMA included in the Statement of Operations under “Reports to shareholders” aggregated $1,414, of which $91 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 Vehicles. The Fund may invest uninvested cash balances in DWS Central Cash Management Government Fund and DWS ESG Liquidity Fund, affiliated money market funds which are managed by the Advisor. Each affiliated money market fund is managed in accordance with Rule 2a-7 under
Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP | |
the 1940 Act, which governs the quality, maturity, diversity and liquidity of instruments in which a money market fund may invest. DWS Central Cash Management Government Fund seeks to maintain a stable net asset value, and DWS ESG Liquidity Fund maintains a floating net asset value. The Fund indirectly bears its proportionate share of the expenses of each affiliated money market fund in which it invests. DWS Central Cash Management Government Fund does not pay the Advisor an investment management fee. To the extent that DWS ESG Liquidity Fund pays an investment management fee to the Advisor, the Advisor will waive an amount of the investment management fee payable to the Advisor by the Fund equal to the amount of the investment management fee payable on the Fund’s assets invested in DWS ESG Liquidity Fund.
At December 31, 2022, two participating insurance companies were owners of record of 10% or more of the
total outstanding Class A shares of the Fund, each owning 66% and 10%, respectively. Four participating insurance companies were owners of record of 10% or more of the total outstanding Class B shares of the Fund, each owning 25%, 18%, 17% and 16%, respectively.
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 daily fluctuating rate per annum equal to the sum of 0.10% plus the higher of the Federal Funds Effective Rate and the Overnight Bank Funding Rate, plus 1.25%. 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 December 31, 2022.
| Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP |
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Deutsche DWS Variable Series II and Shareholders of DWS Small Mid Cap Value VIP:
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities of DWS Small Mid Cap Value VIP (the “Fund”) (one of the funds constituting Deutsche DWS Variable Series II) (the “Trust”), including the investment portfolio, as of December 31, 2022, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund (one of the funds constituting Deutsche DWS Variable Series II) at December 31, 2022, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and its financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Trust is not required to have, nor were we engaged to perform, an audit of the Trust’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2022, by correspondence with the custodian, brokers and others; when replies were not received from brokers and others, we performed other auditing procedures. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the auditor of one or more investment companies in the DWS family of funds since at least 1979, but we are unable to determine the specific year.
Boston, Massachusetts
February 13, 2023
Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP | |
Information About Your Fund’s Expenses (Unaudited)
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, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Fund limited these expenses; had it not done so, expenses would have
been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (July 1, 2022 to December 31, 2022).
The tables illustrate your Fund’s expenses in two ways:
—
Actual Fund Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Fund using the Fund’s actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the “Expenses Paid per $1,000” line under the share class you hold.
—
Hypothetical 5% Fund Return. This helps you to compare your Fund’s ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund’s actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The “Expenses Paid per $1,000” line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
Expenses and Value of a $1,000 Investment for the six months ended December 31, 2022
| | |
Beginning Account Value 7/1/22 | | |
Ending Account Value 12/31/22 | | |
Expenses Paid per $1,000* | | |
Hypothetical 5% Fund Return | | |
Beginning Account Value 7/1/22 | | |
Ending Account Value 12/31/22 | | |
Expenses Paid per $1,000* | | |
| 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 184 (the number of days in the most recent six-month period), then divided by 365. |
Annualized Expense Ratios | | |
Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP | | |
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.
For an analysis of the fees associated with an investment in the Fund or similar funds, please refer to the current and hypothetical expense calculators for Variable Insurance Products which can be found at dws.com/calculators.
| Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP |
Tax Information (Unaudited)
The Fund paid distributions of $0.20 per share from net long-term capital gains during its year ended December 31, 2022.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates $3,414,000 as capital gain dividends for its year ended December 31, 2022.
For corporate shareholders, 100% of the ordinary dividends (i.e., income dividends plus short-term capital gains) paid during the Fund’s fiscal year ended December 31, 2022, qualified for the dividends received deduction.
Please consult a tax advisor if you have questions about federal or state income tax laws, or on how to prepare your tax returns. If you have specific questions about your account, please contact your insurance provider.
Proxy Voting
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 most recent 12-month period ended June 30 are available on our Web site — dws.com/en-us/resources/proxy-voting — or on the SEC’s Web site — 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.
Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP | |
Advisory Agreement Board Considerations and Fee Evaluation
The Board of Trustees (hereinafter referred to as the “Board” or “Trustees”) approved the renewal of DWS Small Mid Cap Value VIP's (the “Fund”) investment management agreement (the “Agreement”) with DWS Investment Management Americas, Inc. (“DIMA”) in September 2022.
In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:
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During the entire process, all of the Fund's Trustees were independent of DIMA and its affiliates (the “Independent Trustees”).
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The Board met frequently during the past year to discuss fund matters and dedicated a substantial amount of time to contract review matters. Over the course of several months, the Board reviewed extensive materials received from DIMA, independent third parties and independent counsel. These materials included an analysis of the Fund’s performance, fees and expenses, and profitability from a fee consultant retained by the Fund’s Independent Trustees (the “Fee Consultant”).
—
The Board also received extensive information throughout the year regarding performance of the Fund.
—
The Independent Trustees regularly met privately with counsel to discuss contract review and other matters. In addition, the Independent Trustees were advised by the Fee Consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the Fee Consultant in connection with their deliberations.
—
In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's Rule 12b-1 plan, distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.
In connection with the contract review process, the Board considered the factors discussed below, among others. The Board also considered that DIMA and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DIMA managed the Fund. DIMA is part of DWS Group GmbH & Co. KGaA (“DWS Group”). DWS Group is a global asset management business that offers a wide range of investing expertise and resources, including research capabilities in many countries throughout the world. In 2018, approximately 20% of DWS Group’s shares were sold in an initial public offering, with Deutsche Bank AG owning the remaining shares.
As part of the contract review process, the Board carefully considered the fees and expenses of each DWS fund overseen by the Board in light of the fund’s performance. In many cases, this led to the negotiation and implementation of expense caps.
While shareholders may focus primarily on fund performance and fees, the Fund’s Board considers these and many other factors, including the quality and integrity of DIMA’s personnel and administrative support services provided by DIMA, such as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DIMA provides portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DIMA provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel and the resources made available to such personnel. The Board also considered the risks to DIMA in sponsoring or managing the Fund, including financial, operational and reputational risks, the potential economic impact to DIMA from such risks and DIMA’s approach to addressing such risks. The Board reviewed the Fund’s performance over short-term and long-term periods and compared those returns to various agreed-upon performance measures, including market index(es) and a peer universe compiled using information supplied by Morningstar Direct (“Morningstar”), an independent fund data service. The Board also noted that it has put into place a process of identifying “Funds in Review” (e.g., funds performing poorly relative to a peer universe), and receives additional reporting from DIMA regarding such funds and, where appropriate, DIMA’s plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that, for the one-, three- and five-year periods ended December 31, 2021, the Fund’s performance (Class A shares) was in the 3rd quartile, 4th quartile and 4th quartile, respectively, of the applicable Morningstar universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has
| Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP |
outperformed its benchmark in the one-year period and has underperformed its benchmark in the three- and five-year periods ended December 31, 2021. The Board noted the disappointing investment performance of the Fund in recent periods and continued to discuss with senior management of DIMA the factors contributing to such underperformance and actions being taken to improve performance. The Board noted certain changes to the Fund’s strategy to permit the expanded use of derivatives. The Board recognized the efforts by DIMA in recent years to enhance its investment platform and improve long-term performance across the DWS fund complex.
Fees and Expenses. The Board considered the Fund’s investment management fee schedule, operating expenses and total expense ratios, and comparative information provided by Broadridge Financial Solutions, Inc. (“Broadridge”) and the Fee Consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include a 0.097% fee paid to DIMA under the Fund’s administrative services agreement, were lower than the median (2nd quartile) of the applicable Broadridge peer group (based on Broadridge data provided as of December 31, 2021). The Board noted that the Fund’s Class A shares total (net) operating expenses were expected to be lower than the median (2nd quartile) of the applicable Broadridge expense universe (based on Broadridge data provided as of December 31, 2021, and analyzing Broadridge expense universe Class A (net) expenses less any applicable 12b-1 fees) (“Broadridge Universe Expenses”). The Board also reviewed data comparing each other operational share class’s total (net) operating expenses to the applicable Broadridge Universe Expenses. The Board noted that the expense limitations agreed to by DIMA were expected to help the Fund’s total (net) operating expenses remain competitive. The Board considered the Fund’s management fee rate as compared to fees charged by DIMA to comparable DWS U.S. registered funds (“DWS Funds”), noting that DIMA indicated that it does not provide services to any other comparable DWS Funds. The information requested by the Board as part of its review of fees and expenses also included information about institutional accounts (including any sub-advised funds and accounts) and funds offered primarily to European investors (“DWS Europe Funds”) managed by DWS Group. The Board noted that DIMA indicated that DWS Group does not manage any institutional accounts or DWS Europe Funds comparable to the Fund.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DIMA.
Profitability. The Board reviewed detailed information regarding revenues received by DIMA under the Agreement. The Board considered the estimated costs to DIMA, and pre-tax profits realized by DIMA, from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DIMA and its affiliates with respect to all fund services in totality and by fund. The Board and the Fee Consultant reviewed DIMA’s methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DIMA in connection with the management of the Fund were not unreasonable. The Board also reviewed certain publicly available information regarding the profitability of certain similar investment management firms. The Board noted that, while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DIMA and its affiliates’ overall profitability with respect to the DWS Funds (after taking into account distribution and other services provided to the funds by DIMA and its affiliates) was lower than the overall profitability levels of most comparable firms for which such data was available.
Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund’s investment management fee schedule includes fee breakpoints. The Board concluded that the Fund’s fee schedule represents an appropriate sharing between the Fund and DIMA of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DIMA and Its Affiliates. The Board also considered the character and amount of other incidental or “fall-out” benefits received by DIMA and its affiliates, including any fees received by DIMA for administrative services provided to the Fund, any fees received by an affiliate of DIMA for transfer agency services provided to the Fund and any fees received by an affiliate of DIMA for distribution services. The Board also considered benefits to DIMA related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities. In addition, the Board considered the incidental public relations benefits to DIMA related to DWS Funds advertising and cross-selling opportunities among DIMA
Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP | |
products and services. The Board considered these benefits in reaching its conclusion that the Fund’s management fees were reasonable.
Compliance. The Board considered the significant attention and resources dedicated by DIMA to its compliance processes in recent years. The Board noted in particular (i) the experience, seniority and time commitment of the individuals serving as DIMA’s and the Fund’s chief compliance officers and (ii) the substantial commitment of resources by DIMA and its affiliates to compliance matters, including the retention of compliance personnel.
Based on all of the information considered and the conclusions reached, the Board determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and counsel present. It is possible that individual Independent Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.
| Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP |
Board Members and Officers
The following table presents certain information regarding the Board Members and Officers of the Trust/Corporation. Each Board Member’s year of birth is set forth in parentheses after his or her name. Unless otherwise noted, (i) each Board Member has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity; and (ii) the address of each Independent Board Member is c/o Keith R. Fox, DWS Funds Board Chair, c/o Thomas R. Hiller, Ropes & Gray LLP, Prudential Tower, 800 Boylston Street, Boston, MA 02199-3600. Except as otherwise noted below, the term of office for each Board Member is until the election and qualification of a successor, or until such Board Member sooner dies, resigns, is removed or as otherwise provided in the governing documents of the Trust/Corporation. Because the Fund does not hold an annual meeting of shareholders, each Board Member will hold office for an indeterminate period.
The Board Members may also serve in similar capacities with other funds in the fund complex. The number of funds in the DWS fund complex shown in the table below includes all registered open- and closed-end funds (including all of their portfolios) advised by the Advisor and any registered funds that have an investment advisor that is an affiliated person of the Advisor.
Independent Board Members/Independent Advisory Board Members
Name, Year of
Birth, Position
with the Trust/
Corporation
and Length of
| Business Experience and Directorships
During the Past Five Years | Number of
Funds in
DWS Fund
Complex
Overseen | Other
Directorships
Held by Board
Member |
Keith R. Fox, CFA (1954) Chairperson since 2017, and Board Member since 1996 | Managing General Partner, Exeter Capital Partners (a series of private investment funds) (since 1986). Directorships: Progressive International Corporation (kitchen goods designer and distributor); former Chairman, National Association of Small Business Investment Companies; Former Directorships: ICI Mutual Insurance Company; BoxTop Media Inc. (advertising); Sun Capital Advisers Trust (mutual funds) | | |
John W. Ballantine (1946) Board Member since 1999 | Retired; formerly, Executive Vice President and Chief Risk Management Officer, First Chicago NBD Corporation/The First National Bank of Chicago (1996–1998); Executive Vice President and Head of International Banking (1995–1996); Not-for-Profit Directorships: Window to the World Communications (public media); Life Director of Harris Theater for Music and Dance (Chicago); Life Director of Hubbard Street Dance Chicago; Former Directorships: Director and Chairman of the Board, Healthways, Inc.2 (population wellbeing and wellness services) (2003–2014); Stockwell Capital Investments PLC (private equity); Enron Corporation; FNB Corporation; Tokheim Corporation; First Oak Brook Bancshares, Inc.; Oak Brook Bank; Portland General Electric2 (utility company (2003–2021); and Prisma Energy International; Former Not-for-Profit Directorships: Public Radio International; Palm Beach Civic Assn. | | |
Dawn-Marie Driscoll (1946) Board Member since 1987 | Advisory Board and former Executive Fellow, Hoffman Center for Business Ethics, Bentley University; formerly: Partner, Palmer & Dodge (law firm) (1988–1990); Vice President of Corporate Affairs and General Counsel, Filene’s (retail) (1978–1988); Directorships: Trustee and former Chairman of the Board, Southwest Florida Community Foundation (charitable organization); Former Directorships: ICI Mutual Insurance Company (2007–2015); Sun Capital Advisers Trust (mutual funds) (2007–2012), Investment Company Institute (audit, executive, nominating committees) and Independent Directors Council (governance, executive committees) | | |
Richard J. Herring (1946) Board Member since 1990 | Jacob Safra Professor of International Banking and Professor of Finance, The Wharton School, University of Pennsylvania (since July 1972); formerly: Director, The Wharton Financial Institutions Center (1994–2020); Vice Dean and Director, Wharton Undergraduate Division (1995–2000) and Director, The Lauder Institute of International Management Studies (2000–2006); Member FDIC Systemic Risk Advisory Committee since 2011, member Systemic Risk Council since 2012 and member of the Advisory Board at the Yale Program on Financial Stability since 2013; Former Directorships: Co-Chair of the Shadow Financial Regulatory Committee (2003–2015), Executive Director of The Financial Economists Roundtable (2008–2015), Director of The Thai Capital Fund (2007–2013), Director of The Aberdeen Singapore Fund (2007–2018), Director, The Aberdeen Japan Fund (2007-2021) and Nonexecutive Director of Barclays Bank DE (2010–2018) | | |
Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP | |
Name, Year of Birth, Position with the Trust/ Corporation and Length of Time Served1 | Business Experience and Directorships During the Past Five Years | Number of Funds in DWS Fund Complex Overseen | Other Directorships Held by Board Member |
Chad D. Perry (1972) Board Member or Advisory | Executive Vice President, General Counsel and Secretary, Tanger Factory Outlet Centers, Inc.2 (since 2011); formerly Executive Vice President and Deputy General Counsel, LPL Financial Holdings Inc.2 (2006–2011); Senior Corporate Counsel, EMC Corporation (2005–2006); Associate, Ropes & Gray LLP (1997–2005) | | Director - Great Elm Capital Corp. (business development company) (since 2022) |
Rebecca W. Rimel (1951) Board Member since 1995 | Director, The Bridgespan Group (nonprofit organization) (since October 2020); formerly: Executive Vice President, The Glenmede Trust Company (investment trust and wealth management) (1983–2004); Board Member, Investor Education (charitable organization) (2004–2005); Former Directorships: Trustee, Executive Committee, Philadelphia Chamber of Commerce (2001–2007); Director, Viasys Health Care2 (January 2007–June 2007); Trustee, Thomas Jefferson Foundation (charitable organization) (1994–2012); President, Chief Executive Officer and Director (1994–2020) and Senior Advisor (2020-2021), The Pew Charitable Trusts (charitable organization); Director, BioTelemetry Inc.2 (acquired by Royal Philips in 2021) (healthcare) (2009–2021); Director, Becton Dickinson and Company2 (medical technology company) (2012-2022) | | |
Catherine Schrand (1964) Board Member since 2021* | Celia Z. Moh Professor of Accounting (since 2016) and Professor of Accounting (since 1994), The Wharton School, University of Pennsylvania; formerly Vice Dean, Wharton Doctoral Programs (2016–2019) | | |
William N. Searcy, Jr. (1946) Board Member since 1993 | Private investor since October 2003; formerly: Pension & Savings Trust Officer, Sprint Corporation2 (telecommunications) (November 1989–September 2003); Former Directorships: Trustee, Sun Capital Advisers Trust (mutual funds) (1998–2012) | | |
Officers5
Name, Year of Birth, Position
with the Trust/Corporation
and Length of Time Served6 | Business Experience and Directorships During the
Past Five Years |
Hepsen Uzcan7 (1974) President and Chief Executive Officer, 2017–present | Fund Administration (Head since 2017), DWS; Secretary, DWS USA Corporation (2018–present); Assistant Secretary, DWS Distributors, Inc. (2018–present); Director and Vice President, DWS Service Company (2018–present); Assistant Secretary, DWS Investment Management Americas, Inc. (2018–present); Director and President, DB Investment Managers, Inc. (2018–present); President and Chief Executive Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2017–present); formerly: Vice President for the Deutsche funds (2016–2017); Assistant Secretary for the DWS funds (2013–2019); Assistant Secretary, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2013–2020); Directorships: Interested Director, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (since June 25, 2020); ICI Mutual Insurance Company (since October 16, 2020); and Episcopalian Charities of New York (2018–present) |
John Millette8 (1962) Vice President and Secretary, 1999–present | Legal (Associate General Counsel), DWS; Chief Legal Officer, DWS Investment Management Americas, Inc. (2015–present); Director and Vice President, DWS Trust Company (2016–present); Secretary, DBX ETF Trust (2020–present); Vice President, DBX Advisors LLC (2021–present); Secretary, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. 2011–present); formerly: Secretary, Deutsche Investment Management Americas Inc. (2015–2017); and Assistant Secretary, DBX ETF Trust (2019–2020) |
Ciara Crawford9 (1984) Assistant Secretary, 2019–present | Fund Administration (Specialist), DWS (2015–present); formerly, Legal Assistant at Accelerated Tax Solutions |
Diane Kenneally8 (1966) Chief Financial Officer and Treasurer, 2018–present | Fund Administration Treasurer's Office (Co-Head since 2018), DWS; Treasurer, Chief Financial Officer and Controller, DBX ETF Trust (2019–present); Treasurer and Chief Financial Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2018–present); formerly: Assistant Treasurer for the DWS funds (2007–2018) |
Paul Antosca8 (1957) Assistant Treasurer, 2007–present | Fund Administration Tax (Head), DWS; and Assistant Treasurer, DBX ETF Trust (2019–present) |
Sheila Cadogan8 (1966) Assistant Treasurer, 2017–present | Fund Administration Treasurer's Office (Co-Head since 2018), DWS; Director and Vice President, DWS Trust Company (2018–present); Assistant Treasurer, DBX ETF Trust (2019–present); Assistant Treasurer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2018–present) |
Scott D. Hogan8 (1970) Chief Compliance Officer, 2016–present | Anti-Financial Crime & Compliance US (Senior Team Lead), DWS; Chief Compliance Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2016–present) |
| Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP |
Name, Year of Birth, Position with the Trust/Corporation and Length of Time Served6 | Business Experience and Directorships During the Past Five Years |
Caroline Pearson8 (1962) Chief Legal Officer, 2010–present | Legal (Senior Team Lead), DWS; Assistant Secretary, DBX ETF Trust (2020–present); Chief Legal Officer, DBX Advisors LLC (2020–present); Chief Legal Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2012–present); formerly: Secretary, Deutsche AM Distributors, Inc. (2002–2017); Secretary, Deutsche AM Service Company (2010–2017); and Chief Legal Officer, DBX Strategic Advisors LLC (2020–2021) |
Christian Rijs7 (1980) Anti-Money Laundering
Compliance Officer,
since October 6, 2021 | Senior Team Lead Anti-Financial Crime and Compliance, DWS; AML Officer, DWS Trust Company (since November 2, 2021); AML Officer, DBX ETF Trust (since October 21, 2021); AML Officer, The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc. (since November 12, 2021); formerly: DWS UK & Ireland Head of Anti-Financial Crime and MLRO |
| Ms. Schrand was an Advisory Board Member for certain funds in the DWS Fund Complex for the period from November 18, 2021 to December 31, 2022 and was elected as a Full Board Member as of January 1, 2023 for all funds in the DWS Fund Complex. |
| The length of time served represents the year in which the Board Member joined the board of one or more DWS funds currently overseen by the Board. |
| A publicly held company with securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. |
| Mr. Perry is an Advisory Board Member of Deutsche DWS Asset Allocation Trust, Deutsche DWS Equity 500 Index Portfolio, Deutsche DWS Global/International Fund, Inc., Deutsche DWS Income Trust, Deutsche DWS Institutional Funds, Deutsche DWS International Fund, Inc., Deutsche DWS Investment Trust, Deutsche DWS Investments VIT Funds, Deutsche DWS Money Market Trust, Deutsche DWS Municipal Trust, Deutsche DWS Portfolio Trust, Deutsche DWS Securities Trust, Deutsche DWS Tax Free Trust, Deutsche DWS Variable Series I and Government Cash Management Portfolio. Mr. Perry is a Board Member of each other Trust. |
| Mr. Perry oversees 21 funds in the DWS Fund Complex as a Board Member of various Trusts. Mr. Perry is an Advisory Board Member of various Trusts/Corporations comprised of 48 funds in the DWS Fund Complex. |
| As a result of their respective positions held with the Advisor or its affiliates, these individuals are considered “interested persons” of the Advisor within the meaning of the 1940 Act. Interested persons receive no compensation from the Fund. |
| The length of time served represents the year in which the officer was first elected in such capacity for one or more DWS funds. |
| Address: 875 Third Avenue, New York, NY 10022. |
| Address: 100 Summer Street, Boston, MA 02110. |
| Address: 5201 Gate Parkway, Jacksonville, FL 32256. |
Certain officers hold similar positions for other investment companies for which DIMA or an affiliate serves as the Advisor.
The Fund’s Statement of Additional Information (“SAI”) includes additional information about the Board Members. The SAI is available, without charge, upon request. If you would like to request a copy of the SAI, you may do so by calling the following toll-free number: (800) 728-3337.
Deutsche DWS Variable Series II — DWS Small Mid Cap Value VIP | |
VS2SMCV-2 (R-025829-12 2/23)
| | |
| | (b) Not applicable |
| | |
| ITEM 2. | CODE OF ETHICS |
| | |
| | As of the end of the period covered by this report, the registrant has adopted a code of ethics, as defined in Item 2 of Form N-CSR that applies to its Principal Executive Officer and Principal Financial Officer. There have been no amendments to, or waivers from, a provision of the code of ethics during the period covered by this report that would require disclosure under Item 2. A copy of the code of ethics is filed as an exhibit to this Form N-CSR. |
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| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT |
| | |
| | The fund’s audit committee is comprised solely of trustees who are "independent" (as such term has been defined by the Securities and Exchange Commission ("SEC") in regulations implementing Section 407 of the Sarbanes-Oxley Act (the "Regulations")). The fund’s Board of Trustees has determined that there are several "audit committee financial experts" (as such term has been defined by the Regulations) serving on the fund’s audit committee including Ms. Catherine Schrand, the chair of the fund’s audit committee. An “audit committee financial expert” is not an “expert” for any purpose, including for purposes of Section 11 of the Securities Act of 1933 and the designation or identification of a person as an “audit committee financial expert” does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the audit committee and board of directors in the absence of such designation or identification. |
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| ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
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Deutsche DWS Variable Series II
form n-csr disclosure re: AUDIT FEES
The following table shows the amount of fees that Ernst & Young LLP (“EY”), the Fund’s Independent Registered Public Accounting Firm, billed to the Fund during the Fund’s last two fiscal years. The Audit Committee approved in advance all audit services and non-audit services that EY provided to the Fund.
Services that the Fund’s Independent Registered Public Accounting Firm Billed to the Fund
Fiscal Year
Ended
December 31, | Audit Fees Billed to Fund | Audit-Related
Fees Billed to Fund | Tax Fees Billed to Fund | All
Other Fees Billed to Fund |
| 2022 | $387,811 | $0 | $61,246 | $0 |
| 2021 | $408,222 | $0 | $67,461 | $0 |
The above “Tax Fees” were billed for professional services rendered for tax preparation.
Services that the Fund’s Independent Registered Public Accounting Firm Billed to the Adviser and Affiliated Fund Service Providers
The following table shows the amount of fees billed by EY to DWS Investment Management Americas, Inc. (“DIMA” or the “Adviser”), and any entity controlling, controlled by or under common control with DIMA (“Control Affiliate”) that provides ongoing services to the Fund (“Affiliated Fund Service Provider”), for engagements directly related to the Fund’s operations and financial reporting, during the Fund’s last two fiscal years.
Fiscal Year
Ended
December 31, | Audit-Related
Fees Billed to Adviser and Affiliated Fund Service Providers | Tax Fees Billed to Adviser and Affiliated Fund Service Providers | All
Other Fees Billed to Adviser and Affiliated Fund Service Providers |
| 2022 | $0 | $148,212 | $0 |
| 2021 | $0 | $461,717 | $0 |
The above “Tax Fees” were billed in connection with tax compliance services and agreed upon procedures.
Non-Audit Services
The following table shows the amount of fees that EY billed during the Fund’s last two fiscal years for non-audit services. The Audit Committee pre-approved all non-audit services that EY provided to the Adviser and any Affiliated Fund Service Provider that related directly to the Fund’s operations and financial reporting. The Audit Committee requested and received information from EY about any non-audit services that EY rendered during the Fund’s last fiscal year to the Adviser and any Affiliated Fund Service Provider. The Committee considered this information in evaluating EY’s independence.
Fiscal Year
Ended
December 31, | Total
Non-Audit Fees Billed to Fund
(A) | Total Non-Audit Fees billed to Adviser and Affiliated Fund Service Providers (engagements related directly to the operations and financial reporting of the Fund)
(B) | Total Non-Audit Fees billed to Adviser and Affiliated Fund Service Providers (all other engagements)
(C) | Total of
(A), (B) and (C) |
| 2022 | $61,246 | $148,212 | $0 | $209,458 |
| 2021 | $67,461 | $461,717 | $0 | $529,178 |
All other engagement fees were billed for services in connection with agreed upon procedures and tax compliance for DIMA and other related entities.
Audit Committee Pre-Approval Policies and Procedures. Generally, each Fund’s Audit Committee must pre approve (i) all services to be performed for a Fund by a Fund’s Independent Registered Public Accounting Firm and (ii) all non-audit services to be performed by a Fund’s Independent Registered Public Accounting Firm for the DIMA Entities with respect to operations and financial reporting of the Fund, except that the Chairperson or Vice Chairperson of each Fund’s Audit Committee may grant the pre-approval for non-audit services described in items (i) and (ii) above for non-prohibited services for engagements of less than $100,000. All such delegated pre approvals shall be presented to each Fund’s Audit Committee no later than the next Audit Committee meeting.
There were no amounts that were approved by the Audit Committee pursuant to the de minimis exception under Rule 2-01 of Regulation S-X.
According to the registrant’s principal Independent Registered Public Accounting Firm, substantially all of the principal Independent Registered Public Accounting Firm's hours spent on auditing the registrant's financial statements were attributed to work performed by full-time permanent employees of the principal Independent Registered Public Accounting Firm.
***
In connection with the audit of the 2021 and 2022 financial statements, the Fund entered into an engagement letter with EY. The terms of the engagement letter required by EY, and agreed to by the Audit Committee, include a provision mandating the use of mediation and arbitration to resolve any controversy or claim between the parties arising out of or relating to the engagement letter or services provided thereunder.
***
Pursuant to PCAOB Rule 3526, EY is required to describe in writing to the Fund’s Audit Committee, on at least an annual basis, all relationships between EY, or any of its affiliates, and the DWS Funds, including the Fund, or persons in financial reporting oversight roles at the DWS Funds that, as of the date of the communication, may reasonably be thought to bear on EY’s independence. Pursuant to PCAOB Rule 3526, EY has reported the matters set forth below that may reasonably be thought to bear on EY’s independence. With respect to each reported matter in the aggregate, EY advised the Audit Committee that, after careful consideration of the facts and circumstances and the applicable independence rules, it concluded that the matters do not and will not impair EY’s ability to exercise objective and impartial judgement in connection with the audits of the financial statements for the Fund and a reasonable investor with knowledge of all relevant facts and circumstances would conclude that EY has been and is capable of exercising objective and impartial judgment on all issues encompassed within EY’s audit engagements. EY also confirmed to the Audit Committee that it can continue to act as the Independent Registered Public Accounting Firm for the Fund.
| · | EY advised the Fund’s Audit Committee that various covered persons within EY and EY’s affiliates held investments in, or had other financial relationships with, entities within the DWS Funds “investment company complex” (as defined in Regulation S-X) (the “DWS Funds Complex”). EY informed the Audit Committee that these investments and financial relationships were inconsistent with Rule 2-01(c)(1) of Regulation S-X. EY reported that all breaches have been resolved and that none of the breaches involved any professionals who were part of the audit engagement team for the Fund or in the position to influence the audit engagement team for the Fund. |
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| ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS |
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| | Not applicable |
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| ITEM 6. | SCHEDULE OF INVESTMENTS |
| | |
| | Not applicable |
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| ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES |
| | |
| | Not applicable |
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| ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES |
| | |
| | Not applicable |
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| ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS |
| | |
| | Not applicable |
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| ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
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| | 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 Keith R. Fox, DWS Funds Board Chair, c/o Thomas R. Hiller, Ropes & Gray LLP, Prudential Tower, 800 Boylston Street, Boston, MA 02199-3600. |
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| ITEM 11. | CONTROLS AND PROCEDURES |
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| | (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. |
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| | (b) | There have been no changes in the registrant’s internal control over financial reporting that occurred during 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. |
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| ITEM 12. | Disclosure of Securities Lending Activities for Closed-End Management Investment Companies |
| | |
| | Not applicable |
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| ITEM 13. | EXHIBITS |
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| | (a)(1) | Code of Ethics pursuant to Item 2 of Form N-CSR is filed and attached hereto as EX-99.CODE ETH. |
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| | (a)(2) | 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. |
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| | (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. |
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: | Deutsche DWS Variable Series II |
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| By: | /s/Hepsen Uzcan Hepsen Uzcan President |
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| Date: | 2/15/2023 |
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/Hepsen Uzcan Hepsen Uzcan President |
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| Date: | 2/15/2023 |
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| By: | /s/Diane Kenneally Diane Kenneally Chief Financial Officer and Treasurer |
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| Date: | 2/15/2023 |
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