UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-08326
MFS VARIABLE INSURANCE TRUST
(Exact name of registrant as specified in charter)
111 Huntington Avenue, Boston, Massachusetts 02199
(Address of principal executive offices) (Zip code)
Susan S. Newton
Massachusetts Financial Services Company
111 Huntington Avenue
Boston, Massachusetts 02199
(Name and address of agents for service)
Registrant’s telephone number, including area code: (617) 954-5000
Date of fiscal year end: December 31
Date of reporting period: December 31, 2012
| ITEM 1. | REPORTS TO STOCKHOLDERS. |
ANNUAL REPORT
December 31, 2012
MFS® RESEARCH SERIES
MFS® Variable Insurance Trust
VFR-ANN
MFS® RESEARCH SERIES
CONTENTS
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ NO BANK OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Research Series
LETTER FROM THE CHAIRMAN AND CEO
Dear Contract Owners:
The global market outlook for 2013 is one of cautious optimism. While we are seeing some positive economic trends in the United States, Europe and China, the overall environment remains challenging. In the United States, the recent fiscal cliff agreement was received positively by investors, even though it mostly addressed pressing taxation issues and did not resolve additional concerns, including the need for spending cuts and a large-scale reduction of the federal debt. These issues will be front and center again in the spring. Despite the ongoing uncertainty, economic tailwinds are gathering strength as the U.S. housing and job markets are improving and consumer confidence is rising.
Overseas, the debt crisis continues to weigh heavily on eurozone markets, with even Germany — long an economic stalwart — experiencing some contraction. These ongoing challenges could be a drag on global market performance this year. In Asia, manufacturing activity has accelerated in emerging markets such as China and India, and we are seeing signs of stabilized loan growth in China, a leading indicator of that country’s economic health. In contrast, Japan’s economy is contracting sharply under deflationary pressures. Nevertheless, Japanese markets have responded favorably to early actions by the new government, which appears determined to act aggressively, along with the Bank of Japan, to stimulate growth.
As always, managing risk in the face of uncertainty remains a top priority for investors. At MFS®, our uniquely collaborative investment process revolves around global research and our disciplined risk management approach. Our global team of investment professionals shares ideas and evaluates opportunities across continents, investment disciplines and asset classes — all with a goal of building better insights, and ultimately better results, for our clients.
We remain mindful of the many economic challenges investors face today, and believe it is more important than ever to maintain a long-term view, employ time-tested principles, such as asset allocation and diversification, and work closely with investment advisors to identify and pursue the most suitable opportunities.
Respectfully,
Robert J. Manning
Chairman and Chief Executive Officer
MFS Investment Management®
February 15, 2013
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
MFS Research Series
PORTFOLIO COMPOSITION
Portfolio structure
| | | | |
| Top ten holdings | | | | |
| Apple, Inc. | | | 4.8% | |
| Exxon Mobil Corp. | | | 4.0% | |
| Danaher Corp. | | | 2.3% | |
| JPMorgan Chase & Co. | | | 2.1% | |
| Pfizer, Inc. | | | 2.0% | |
| Google, Inc., “A” | | | 2.0% | |
| Johnson & Johnson | | | 1.9% | |
| Oracle Corp. | | | 1.5% | |
| Visa, Inc., “A” | | | 1.5% | |
| Philip Morris International, Inc. | | | 1.5% | |
| | | | |
| Global equity sectors | | | | |
| Technology | | | 17.8% | |
| Financial Services | | | 15.8% | |
| Capital Goods | | | 14.9% | |
| Energy | | | 14.2% | |
| Health Care | | | 11.9% | |
| Consumer Cyclicals | | | 11.4% | |
| Consumer Staples | | | 8.3% | |
| Telecommunications/Cable Telelvision | | | 4.5% | |
Percentages are based on net assets as of 12/31/12.
The portfolio is actively managed and current holdings may be different.
2
MFS Research Series
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2012, Initial Class shares of the MFS Research Series (“fund”) provided a total return of 17.27%, while Service Class shares of the fund provided a total return of 16.90%. These compare with a return of 16.00% over the same period for the fund’s benchmark, the Standard & Poor’s 500 Stock Index (“S&P 500 Index”).
Market Environment
The beginning of the period was characterized by a risk-on sentiment as a result of additional liquidity measures by the Federal Reserve Bank (“Fed”) and the European Central Bank (“ECB”) as well as a commensurate improvement in macroeconomic conditions. During this time, global equity valuations rose, credit spreads contracted, and high-quality sovereign yields increased modestly.
During the middle of the period, however, conditions worsened, driven by broadly weaker global macroeconomic indicators, as well as renewed concerns over the eurozone’s capacity and determination to address its ongoing crisis. Despite this deterioration, broad market sentiment remained relatively resilient as equity markets generally maintained gains and credit spreads did not indicate deterioration.
However, this renewed weakness in the fundamentals precipitated a further round of monetary easing by both the Fed (through a third round of quantitative easing) and the ECB (through a new bond purchase facility) in the second half of the period, which soon instilled additional confidence in risk markets. Nonetheless, towards the end of the period, weaker equity earnings reports and declining forward guidance caused market sentiment to soften. In addition, as we moved toward year end, the fiscal cliff negotiations between the Republicans in the U.S. Congress and President Obama were a particular source of market attention, where uncertainty surrounding the fiscal negotiations continued right up to the end-of-year deadline.
Contributors to Performance
Strong stock selection in the technology sector was a primary factor that contributed to performance relative to the S&P 500 Index. Holdings of software giant Apple, specialized payment products and services provider FleetCor Technologies, and on-line auctioneer eBay benefited relative results as all three stocks outperformed the benchmark over the period. Shares of Apple traded higher throughout most of the period due to continued strong demand for its iPhone and iPad products as well as favorable rulings for the firm’s patent infringement lawsuit against Samsung allowing the company to solidify its market share in the smartphone and tablet markets. Shares of FleetCor Technologies traded higher due to favorable acquisition activity and fuel spreads positively affecting earnings. Avoiding shares of semiconductor company Intel, and the fund’s short position in computer maker Dell (h), also supported relative results.
Stock selection in the health care sector positively affected relative returns. Holdings of biotech firm Gilead Sciences boosted relative performance. The company’s shares traded higher during the period, bolstered by strong sales of its HIV-related products and favorable testing results of its Hepatitis C drug.
Stock selection in the energy sector also supported relative results. However, there were no individual stocks within this sector that were among the fund’s top relative contributors for the period.
Elsewhere, holding shares of news and entertainment company News Corp. and global payments firms, Visa and Discover Financial Services, also strengthened relative returns. The fund’s timing in the ownership of fast food giant McDonald’s also helped as the stock posted weak performance for the year.
Detractors from Performance
Stock selection in the financial services sector held back relative performance. Not holding shares of Bank of America, and the fund’s timing in the ownership of Citigroup and Wells Fargo, hindered relative performance as all three banks turned in strong performance during the period.
In other sectors, holdings of computer products and services provider Hewlett-Packard, oil and gas exploration and production company Occidental Petroleum, logistics firm Expeditors International of Washington, global energy and petrochemicals company Royal Dutch Shell (b)(h) (Netherlands), and mining equipment manufacturer Joy Global hurt relative returns. Shares of Hewlett-Packard traded lower as the company continued to work through its restructuring efforts. Shares of Occidental Petroleum came under
3
MFS Research Series
Management Review – continued
pressure as investors appeared to have been concerned about management’s plans to increase capital expenditures and how that will impact the bottom-line. The timing of the fund’s ownership in shares of home improvement chain Home Depot (h) and internet retailer Amazon.com also weighed on relative results.
Respectfully,
Joseph MacDougall
Portfolio Manager
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio manager only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
4
MFS Research Series
PERFORMANCE SUMMARY THROUGH 12/31/12
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/12
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 7/26/95 | | 17.27% | | 2.45% | | 8.20% | | |
| | | Service Class | | 5/01/00 | | 16.90% | | 2.19% | | 7.92% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Standard & Poor’s 500 Stock Index (f) | | 16.00% | | 1.66% | | 7.10% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Standard & Poor’s 500 Stock Index – a market capitalization-weighted index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Research Series
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2012 through December 31, 2012
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2012 through December 31, 2012.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | | Beginning
Account Value
7/01/12 | | | Ending
Account Value
12/31/12 | | | Expenses Paid
During Period (p)
7/01/12-12/31/12 | |
| Initial Class | | Actual | | | 0.88% | | | | $1,000.00 | | | | $1,076.42 | | | | $4.59 | |
| | Hypothetical (h) | | | 0.88% | | | | $1,000.00 | | | | $1,020.71 | | | | $4.47 | |
| Service Class | | Actual | | | 1.11% | | | | $1,000.00 | | | | $1,074.63 | | | | $5.79 | |
| | Hypothetical (h) | | | 1.11% | | | | $1,000.00 | | | | $1,019.56 | | | | $5.63 | |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
Expenses Impacting Table
Expense ratios include up to 0.01% of investment related expenses from short sale dividend and interest expenses.
6
MFS Research Series
PORTFOLIO OF INVESTMENTS – 12/31/12
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 98.3% | |
| Aerospace – 2.9% | | | | | | | | |
| Honeywell International, Inc. | | | 122,670 | | | $ | 7,785,865 | |
| Precision Castparts Corp. | | | 44,720 | | | | 8,470,862 | |
| United Technologies Corp. | | | 60,420 | | | | 4,955,044 | |
| | | | | | | | |
| | | | | | $ | 21,211,771 | |
| | | | | | | | |
| Alcoholic Beverages – 0.3% | |
| Diageo PLC | | | 77,371 | | | $ | 2,252,465 | |
| | | | | | | | |
| Apparel Manufacturers – 1.8% | |
| Guess?, Inc. | | | 125,990 | | | $ | 3,091,795 | |
| Li & Fung Ltd. | | | 1,040,000 | | | | 1,868,362 | |
| NIKE, Inc., “B” | | | 76,580 | | | | 3,951,528 | |
| VF Corp. | | | 26,490 | | | | 3,999,195 | |
| | | | | | | | |
| | | | | | $ | 12,910,880 | |
| | | | | | | | |
| Automotive – 1.2% | | | | | | | | |
| Delphi Automotive PLC (a) | | | 137,260 | | | $ | 5,250,195 | |
| General Motors Co. (a) | | | 125,960 | | | | 3,631,427 | |
| | | | | | | | |
| | | | | | $ | 8,881,622 | |
| | | | | | | | |
| Biotechnology – 1.7% | | | | | | | | |
| Celgene Corp. (a) | | | 62,380 | | | $ | 4,910,554 | |
| Gilead Sciences, Inc. (a) | | | 71,250 | | | | 5,233,313 | |
| ViroPharma, Inc. (a) | | | 88,060 | | | | 2,004,246 | |
| | | | | | | | |
| | | | | | $ | 12,148,113 | |
| | | | | | | | |
| Broadcasting – 2.1% | | | | | | | | |
| News Corp., “A” | | | 360,860 | | | $ | 9,216,364 | |
| Walt Disney Co. | | | 125,360 | | | | 6,241,674 | |
| | | | | | | | |
| | | | | | $ | 15,458,038 | |
| | | | | | | | |
| Brokerage & Asset Managers – 1.3% | | | | | |
| BlackRock, Inc. | | | 23,791 | | | $ | 4,917,838 | |
| Franklin Resources, Inc. | | | 33,730 | | | | 4,239,861 | |
| | | | | | | | |
| | | | | | $ | 9,157,699 | |
| | | | | | | | |
| Business Services – 1.5% | | | | | | | | |
| Accenture PLC, “A” | | | 93,260 | | | $ | 6,201,790 | |
| FleetCor Technologies, Inc. (a) | | | 92,800 | | | | 4,978,720 | |
| | | | | | | | |
| | | | | | $ | 11,180,510 | |
| | | | | | | | |
| Cable TV – 1.8% | | | | | | | | |
| Charter Communications, Inc., “A” (a) | | | 10,800 | | | $ | 823,392 | |
| Comcast Corp., “Special A” | | | 218,230 | | | | 7,845,368 | |
| Time Warner Cable, Inc. | | | 42,550 | | | | 4,135,435 | |
| | | | | | | | |
| | | | | | $ | 12,804,195 | |
| | | | | | | | |
| Chemicals – 1.0% | | | | | | | | |
| 3M Co. | | | 21,720 | | | $ | 2,016,702 | |
| Celanese Corp. | | | 119,110 | | | | 5,303,968 | |
| | | | | | | | |
| | | | | | $ | 7,320,670 | |
| | | | | | | | |
| Computer Software – 4.2% | | | | | | | | |
| Autodesk, Inc. (a) | | | 54,140 | | | $ | 1,913,849 | |
| Check Point Software Technologies Ltd. (a) | | | 65,640 | | | | 3,127,090 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Computer Software – continued | |
| Citrix Systems, Inc. (a) | | | 74,010 | | | $ | 4,866,158 | |
| Microsoft Corp. | | | 24,860 | | | | 664,508 | |
| Oracle Corp. | | | 334,030 | | | | 11,129,880 | |
| Salesforce.com, Inc. (a) | | | 37,720 | | | | 6,340,732 | |
| TIBCO Software, Inc. (a) | | | 98,740 | | | | 2,173,267 | |
| | | | | | | | |
| | | | | | $ | 30,215,484 | |
| | | | | | | | |
| Computer Software – Systems – 6.5% | | | | | |
| Apple, Inc. (s) | | | 65,000 | | | $ | 34,646,950 | |
| EMC Corp. (a) | | | 303,580 | | | | 7,680,574 | |
| Hewlett-Packard Co. | | | 332,060 | | | | 4,731,855 | |
| | | | | | | | |
| | | | | | $ | 47,059,379 | |
| | | | | | | | |
| Construction – 1.0% | | | | | | | | |
| Stanley Black & Decker, Inc. | | | 93,790 | | | $ | 6,937,646 | |
| | | | | | | | |
| Consumer Products – 1.8% | | | | | | | | |
| Colgate-Palmolive Co. | | | 71,100 | | | $ | 7,432,794 | |
| International Flavors & Fragrances, Inc. | | | 81,600 | | | | 5,429,664 | |
| | | | | | | | |
| | | | | | $ | 12,862,458 | |
| | | | | | | | |
| Consumer Services – 0.5% | | | | | | | | |
| Priceline.com, Inc. (a) | | | 5,880 | | | $ | 3,652,656 | |
| | | | | | | | |
| Containers – 0.4% | | | | | | | | |
| Packaging Corp. of America | | | 68,140 | | | $ | 2,621,346 | |
| | | | | | | | |
| Electrical Equipment – 2.8% | | | | | | | | |
| Danaher Corp. | | | 302,970 | | | $ | 16,936,023 | |
| W.W. Grainger, Inc. | | | 18,660 | | | | 3,776,224 | |
| | | | | | | | |
| | | | | | $ | 20,712,247 | |
| | | | | | | | |
| Electronics – 1.8% | | | | | | | | |
| Altera Corp. | | | 134,970 | | | $ | 4,648,367 | |
| ASML Holding N.V. | | | 11,445 | | | | 737,172 | |
| JDS Uniphase Corp. (a) | | | 199,940 | | | | 2,707,188 | |
| Microchip Technology, Inc. | | | 149,700 | | | | 4,878,723 | |
| | | | | | | | |
| | | | | | $ | 12,971,450 | |
| | | | | | | | |
| Energy – Independent – 3.7% | | | | | | | | |
| Cabot Oil & Gas Corp. | | | 97,840 | | | $ | 4,866,562 | |
| EOG Resources, Inc. | | | 36,810 | | | | 4,446,280 | |
| EQT Corp. | | | 60,800 | | | | 3,585,984 | |
| Noble Energy, Inc. | | | 34,200 | | | | 3,479,508 | |
| Occidental Petroleum Corp. | | | 84,360 | | | | 6,462,820 | |
| Pioneer Natural Resources Co. | | | 40,240 | | | | 4,289,182 | |
| | | | | | | | |
| | | | | | $ | 27,130,336 | |
| | | | | | | | |
| Energy – Integrated – 4.0% | | | | | | | | |
| Exxon Mobil Corp. (s) | | | 340,040 | | | $ | 29,430,462 | |
| | | | | | | | |
| Engineering – Construction – 0.7% | | | | | | | | |
| Fluor Corp. | | | 87,140 | | | $ | 5,118,604 | |
| | | | | | | | |
7
MFS Research Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Food & Beverages – 4.1% | | | | | | | | |
| Coca-Cola Co. | | | 273,840 | | | $ | 9,926,700 | |
| Coca-Cola Enterprises, Inc. | | | 131,390 | | | | 4,169,005 | |
| General Mills, Inc. | | | 104,520 | | | | 4,223,653 | |
| Groupe Danone | | | 37,267 | | | | 2,462,217 | |
| Mead Johnson Nutrition Co., “A” | | | 40,740 | | | | 2,684,359 | |
| Mondelez International, Inc. | | | 239,980 | | | | 6,112,290 | |
| | | | | | | | |
| | | | | | $ | 29,578,224 | |
| | | | | | | | |
| Food & Drug Stores – 0.7% | | | | | | | | |
| CVS Caremark Corp. | | | 107,460 | | | $ | 5,195,691 | |
| | | | | | | | |
| Gaming & Lodging – 0.3% | | | | | | | | |
| Las Vegas Sands Corp. | | | 22,320 | | | $ | 1,030,291 | |
| Sands China Ltd. | | | 282,400 | | | | 1,264,971 | |
| | | | | | | | |
| | | | | | $ | 2,295,262 | |
| | | | | | | | |
| General Merchandise – 2.0% | | | | | | | | |
| Hudson’s Bay Co. | | | 105,400 | | | $ | 1,771,678 | |
| Kohl’s Corp. | | | 60,230 | | | | 2,588,685 | |
| Target Corp. | | | 171,260 | | | | 10,133,454 | |
| | | | | | | | |
| | | | | | $ | 14,493,817 | |
| | | | | | | | |
| Health Maintenance Organizations – 0.8% | | | | | |
| UnitedHealth Group, Inc. | | | 107,430 | | | $ | 5,827,003 | |
| | | | | | | | |
| Insurance – 3.1% | | | | | | | | |
| ACE Ltd. | | | 102,040 | | | $ | 8,142,792 | |
| American International Group, Inc. (a) | | | 170,050 | | | | 6,002,765 | |
| Everest Re Group Ltd. | | | 32,940 | | | | 3,621,753 | |
| MetLife, Inc. | | | 144,390 | | | | 4,756,207 | |
| | | | | | | | |
| | | | | | $ | 22,523,517 | |
| | | | | | | | |
| Internet – 3.1% | | | | | | | | |
| eBay, Inc. (a) | | | 132,280 | | | $ | 6,748,926 | |
| Google, Inc., “A” (a) | | | 20,090 | | | | 14,251,243 | |
| Rackspace Hosting, Inc. (a) | | | 22,350 | | | | 1,659,934 | |
| | | | | | | | |
| | | | | | $ | 22,660,103 | |
| | | | | | | | |
| Machinery & Tools – 2.1% | | | | | | | | |
| Eaton Corp. PLC | | | 84,800 | | | $ | 4,596,160 | |
| Joy Global, Inc. | | | 86,140 | | | | 5,494,009 | |
| Roper Industries, Inc. | | | 45,490 | | | | 5,071,225 | |
| | | | | | | | |
| | | | | | $ | 15,161,394 | |
| | | | | | | | |
| Major Banks – 5.5% | | | | | | | | |
| Goldman Sachs Group, Inc. | | | 39,820 | | | $ | 5,079,439 | |
| JPMorgan Chase & Co. (s) | | | 339,390 | | | | 14,922,978 | |
| PNC Financial Services Group, Inc. | | | 97,390 | | | | 5,678,811 | |
| State Street Corp. | | | 105,770 | | | | 4,972,248 | |
| Wells Fargo & Co. | | | 272,070 | | | | 9,299,353 | |
| | | | | | | | |
| | | | | | $ | 39,952,829 | |
| | | | | | | | |
| Medical & Health Technology & Services – 1.8% | | | | | |
| AmerisourceBergen Corp. | | | 108,910 | | | $ | 4,702,734 | |
| Cerner Corp. (a) | | | 30,630 | | | | 2,378,113 | |
| Express Scripts Holding Co. (a) | | | 107,790 | | | | 5,820,660 | |
| | | | | | | | |
| | | | | | $ | 12,901,507 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Medical Equipment – 2.3% | | | | | | | | |
| Abbott Laboratories (a)(w) | | | 45,200 | | | $ | 1,419,280 | |
| Covidien PLC | | | 104,640 | | | | 6,041,914 | |
| St. Jude Medical, Inc. | | | 114,390 | | | | 4,134,055 | |
| Thermo Fisher Scientific, Inc. | | | 82,840 | | | | 5,283,535 | |
| | | | | | | | |
| | | | | | $ | 16,878,784 | |
| | | | | | | | |
| Natural Gas – Distribution – 0.6% | | | | | | | | |
| Spectra Energy Corp. | | | 162,220 | | | $ | 4,441,584 | |
| | | | | | | | |
| Natural Gas – Pipeline – 0.4% | | | | | | | | |
| Kinder Morgan, Inc. | | | 93,278 | | | $ | 3,295,512 | |
| | | | | | | | |
| Network & Telecom – 0.7% | | | | | | | | |
| Finisar Corp. (a) | | | 110,690 | | | $ | 1,804,247 | |
| Fortinet, Inc. (a) | | | 144,130 | | | | 3,036,819 | |
| | | | | | | | |
| | | | | | $ | 4,841,066 | |
| | | | | | | | |
| Oil Services – 2.3% | | | | | | | | |
| Cameron International Corp. (a) | | | 99,820 | | | $ | 5,635,837 | |
| Dresser-Rand Group, Inc. (a) | | | 77,090 | | | | 4,327,832 | |
| FMC Technologies, Inc. (a) | | | 49,700 | | | | 2,128,651 | |
| Schlumberger Ltd. | | | 67,530 | | | | 4,679,154 | |
| | | | | | | | |
| | | | | | $ | 16,771,474 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 5.3% | |
| American Express Co. | | | 102,340 | | | $ | 5,882,503 | |
| Citigroup, Inc. | | | 230,410 | | | | 9,115,020 | |
| Discover Financial Services | | | 119,270 | | | | 4,597,858 | |
| Fifth Third Bancorp | | | 260,240 | | | | 3,953,046 | |
| SunTrust Banks, Inc. | | | 141,470 | | | | 4,010,674 | |
| Visa, Inc., “A” | | | 71,590 | | | | 10,851,612 | |
| | | | | | | | |
| | | | | | $ | 38,410,713 | |
| | | | | | | | |
| Pharmaceuticals – 5.3% | | | | | | | | |
| Eli Lilly & Co. | | | 71,550 | | | $ | 3,528,846 | |
| Johnson & Johnson | | | 200,000 | | | | 14,020,000 | |
| Merck & Co., Inc. | | | 51,790 | | | | 2,120,282 | |
| Perrigo Co. | | | 22,720 | | | | 2,363,562 | |
| Pfizer, Inc. | | | 585,020 | | | | 14,672,302 | |
| Valeant Pharmaceuticals International, Inc. (a) | | | 36,120 | | | | 2,158,892 | |
| | | | | | | | |
| | | | | | $ | 38,863,884 | |
| | | | | | | | |
| Railroad & Shipping – 0.9% | | | | | | | | |
| Union Pacific Corp. | | | 50,310 | | | $ | 6,324,973 | |
| | | | | | | | |
| Real Estate – 0.6% | | | | | | | | |
| Vornado Realty Trust, REIT | | | 53,310 | | | $ | 4,269,065 | |
| | | | | | | | |
| Restaurants – 1.5% | | | | | | | | |
| McDonald’s Corp. | | | 79,630 | | | $ | 7,024,162 | |
| Starbucks Corp. | | | 75,150 | | | | 4,029,543 | |
| | | | | | | | |
| | | | | | $ | 11,053,705 | |
| | | | | | | | |
| Specialty Chemicals – 0.9% | | | | | | | | |
| Airgas, Inc. | | | 68,380 | | | $ | 6,242,410 | |
| | | | | | | | |
8
MFS Research Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Specialty Stores – 2.5% | | | | | | | | |
| Amazon.com, Inc. (a) | | | 20,440 | | | $ | 5,133,302 | |
| AutoZone, Inc. (a) | | | 10,880 | | | | 3,856,198 | |
| Bed Bath & Beyond, Inc. (a) | | | 61,560 | | | | 3,441,819 | |
| Tiffany & Co. | | | 60,600 | | | | 3,474,804 | |
| Urban Outfitters, Inc. (a) | | | 63,930 | | | | 2,516,285 | |
| | | | | | | | |
| | | | | | $ | 18,422,408 | |
| | | | | | | | |
| Telecommunications – Wireless – 0.7% | | | | | |
| American Tower Corp., REIT | | | 36,900 | | | $ | 2,851,263 | |
| SBA Communications Corp. (a) | | | 17,060 | | | | 1,211,601 | |
| Vodafone Group PLC, ADR | | | 56,130 | | | | 1,413,915 | |
| | | | | | | | |
| | | | | | $ | 5,476,779 | |
| | | | | | | | |
| Telephone Services – 2.0% | | | | | | | | |
| AT&T, Inc. | | | 190,530 | | | $ | 6,422,766 | |
| Frontier Communications Corp. | | | 244,540 | | | | 1,046,631 | |
| Verizon Communications, Inc. | | | 167,090 | | | | 7,229,984 | |
| | | | | | | | |
| | | | | | $ | 14,699,381 | |
| | | | | | | | |
| Tobacco – 2.1% | | | | | | | | |
| Lorillard, Inc. | | | 39,150 | | | $ | 4,567,630 | |
| Philip Morris International, Inc. | | | 128,880 | | | | 10,779,523 | |
| | | | | | | | |
| | | | | | $ | 15,347,153 | |
| | | | | | | | |
| Trucking – 1.0% | | | | | | | | |
| Expeditors International of Washington, Inc. | | | 179,140 | | | $ | 7,084,987 | |
| | | | | | | | |
| Utilities – Electric Power – 2.7% | | | | | | | | |
| AES Corp. | | | 195,930 | | | $ | 2,096,451 | |
| American Electric Power Co., Inc. | | | 80,270 | | | | 3,425,924 | |
| CMS Energy Corp. | | | 243,500 | | | | 5,936,530 | |
| Duke Energy Corp. | | | 35,030 | | | | 2,234,914 | |
| Edison International | | | 131,050 | | | | 5,922,150 | |
| | | | | | | | |
| | | | | | $ | 19,615,969 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $676,810,977) | | | | | | $ | 714,667,225 | |
| | | | | | | | |
|
| CONVERTIBLE PREFERRED STOCKS – 0.5% | |
| Utilities – Electric Power – 0.5% | | | | | | | | |
PPL Corp., 9.5%
(Identified Cost, $3,227,740) | | | 59,946 | | | $ | 3,135,775 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | |
Issuer | | Strike Price | | | First Exercise | | | Shares/Par | | | Value ($) | |
| | | | | | | | | | | | | | | | |
| WARRANTS – 0.0% | | | | | |
| Natural Gas – Pipeline – 0.0% | | | | | | | | | |
Kinder Morgan, Inc.
(1 share for 1 warrant) (a) (Identified Cost, $29,358) | | $ | 40 | | | | 2/15/12 | | | | 15,411 | | | $ | 58,254 | |
| | | | | | | | | | | | | | | | |
| |
| MONEY MARKET FUNDS – 1.1% | | | | | |
| MFS Institutional Money Market Portfolio, 0.16%, at Cost and Net Asset Value (v) | | | | 8,219,431 | | | $ | 8,219,431 | |
| | | | | | | | | | | | | | | | |
Total Investments
(Identified Cost, $688,287,506) | | | | | | | $ | 726,080,685 | |
| | | | | | | | | | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.1% | | | | | | | | 792,856 | |
| | | | | | | | | | | | | | | | |
| Net Assets – 100.0% | | | | | | | $ | 726,873,541 | |
| | | | | | | | | | | | | | | | |
| (a) | | Non-income producing security. |
| (s) | | Security or a portion of the security was pledged to cover collateral requirements for securities sold short. At December 31, 2012, the fund had no short sales outstanding. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
| (w) | | When-issued security. At December 31, 2012, the fund had sufficient cash and/or securities at least equal to the value of the when-issued security. |
At December 31, 2012, the fund had cash collateral of $3,536 and other liquid securities with an aggregate value of $568,658 to cover any commitments for securities sold short. Cash collateral is comprised of “Deposits with brokers” in the Statement of Assets and Liabilities. At December 31, 2012, the fund had no short sales outstanding.
The following abbreviations are used in this report and are defined:
| ADR | | American Depositary Receipt |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
See Notes to Financial Statements
9
MFS Research Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | | | | |
At 12/31/12 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $680,068,075) | | | $717,861,254 | | | | | |
Underlying affiliated funds, at cost and value | | | 8,219,431 | | | | | |
Total investments, at value (identified cost, $688,287,506) | | | $726,080,685 | | | | | |
Cash | | | 27,141 | | | | | |
Deposits with brokers | | | 3,536 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 2,051,899 | | | | | |
Fund shares sold | | | 223,184 | | | | | |
Interest and dividends | | | 598,046 | | | | | |
Other assets | | | 5,863 | | | | | |
Total assets | | | | | | | $728,990,354 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Fund shares reacquired | | | $541,446 | | | | | |
When-issued investments purchased | | | 1,383,150 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 60,136 | | | | | |
Shareholder servicing costs | | | 776 | | | | | |
Distribution and/or service fees | | | 7,203 | | | | | |
Payable for independent Trustees’ compensation | | | 17 | | | | | |
Accrued expenses and other liabilities | | | 124,085 | | | | | |
Total liabilities | | | | | | | $2,116,813 | |
Net assets | | | | | | | $726,873,541 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $703,453,384 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 37,793,380 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (16,679,743 | ) | | | | |
Undistributed net investment income | | | 2,306,520 | | | | | |
Net assets | | | | | | | $726,873,541 | |
Shares of beneficial interest outstanding | | | | | | | 33,354,798 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $460,833,935 | | | | 21,096,100 | | | | $21.84 | |
Service Class | | | 266,039,606 | | | | 12,258,698 | | | | 21.70 | |
See Notes to Financial Statements
10
MFS Research Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | | | | | | |
| Year ended 12/31/12 | | | | | | | | |
| Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $4,383,427 | | | | | |
Interest | | | 6,448 | | | | | |
Dividends from underlying affiliated funds | | | 4,064 | | | | | |
Foreign taxes withheld | | | (14,754 | ) | | | | |
Total investment income | | | | | | | $4,379,185 | |
Expenses | | | | | | | | |
Management fee | | | $1,695,072 | | | | | |
Distribution and/or service fees | | | 96,515 | | | | | |
Shareholder servicing costs | | | 20,966 | | | | | |
Administrative services fee | | | 41,867 | | | | | |
Independent Trustees’ compensation | | | 5,654 | | | | | |
Custodian fee | | | 30,940 | | | | | |
Shareholder communications | | | 60,474 | | | | | |
Audit and tax fees | | | 53,651 | | | | | |
Legal fees | | | 26,526 | | | | | |
Dividend and interest expense on securities sold short | | | 20,000 | | | | | |
Miscellaneous | | | 20,425 | | | | | |
Total expenses | | | | | | | $2,072,090 | |
Fees paid indirectly | | | (11 | ) | | | | |
Reduction of expenses by investment adviser | | | (670 | ) | | | | |
Net expenses | | | | | | | $2,071,409 | |
Net investment income | | | | | | | $2,307,776 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $18,646,650 | | | | | |
Written options | | | 8,538 | | | | | |
Securities sold short | | | (145,401 | ) | | | | |
Foreign currency | | | (276 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $18,509,511 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $15,912,962 | | | | | |
Written options | | | 63,775 | | | | | |
Securities sold short | | | 59,060 | | | | | |
Translation of assets and liabilities in foreign currencies | | | 213 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $16,036,010 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $34,545,521 | |
Change in net assets from operations | | | | | | | $36,853,297 | |
See Notes to Financial Statements
11
MFS Research Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | | | |
For years ended 12/31 | | | 2012 | | | | 2011 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $2,307,776 | | | | $1,480,417 | |
Net realized gain (loss) on investments and foreign currency | | | 18,509,511 | | | | 10,557,510 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 16,036,010 | | | | (12,321,464 | ) |
Change in net assets from operations | | | $36,853,297 | | | | $(283,537 | ) |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(1,473,011 | ) | | | $(1,601,688 | ) |
Change in net assets from fund share transactions | | | $510,586,595 | | | | $(19,927,763 | ) |
Total change in net assets | | | $545,966,881 | | | | $(21,812,988 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 180,906,660 | | | | 202,719,648 | |
At end of period (including undistributed net investment income of $2,306,520 and
$1,472,031, respectively) | | | $726,873,541 | | | | $180,906,660 | |
See Notes to Financial Statements
12
MFS Research Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $18.78 | | | | $19.04 | | | | $16.57 | | | | $12.90 | | | | $20.28 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.22 | | | | $0.15 | | | | $0.15 | | | | $0.15 | | | | $0.18 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 3.01 | | | | (0.24 | ) | | | 2.47 | | | | 3.72 | | | | (7.47 | ) |
Total from investment operations | | | $3.23 | | | | $(0.09 | ) | | | $2.62 | | | | $3.87 | | | | $(7.29 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.17 | ) | | | $(0.17 | ) | | | $(0.15 | ) | | | $(0.20 | ) | | | $(0.09 | ) |
Net asset value, end of period (x) | | | $21.84 | | | | $18.78 | | | | $19.04 | | | | $16.57 | | | | $12.90 | |
Total return (%) (k)(r)(s)(x) | | | 17.22 | | | | (0.45 | ) | | | 15.90 | | | | 30.54 | | | | (36.09 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.88 | | | | 0.88 | | | | 0.89 | | | | 0.90 | | | | 0.88 | |
Expenses after expense reductions (f) | | | 0.88 | | | | 0.88 | | | | 0.89 | | | | 0.90 | | | | 0.88 | |
Net investment income | | | 1.06 | | | | 0.79 | | | | 0.86 | | | | 1.05 | | | | 1.04 | |
Portfolio turnover | | | 83 | | | | 70 | | | | 71 | | | | 107 | | | | 123 | |
Net assets at end of period (000 omitted) | | | $460,834 | | | | $160,892 | | | | $182,895 | | | | $180,229 | | | | $149,517 | |
| Supplemental Ratios (%): | | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets after expense reductions excluding short sale dividend and interest expense (f) | | | 0.87 | | | | 0.86 | | | | 0.89 | | | | 0.90 | | | | N/A | |
See Notes to Financial Statements
13
MFS Research Series
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $18.67 | | | | $18.93 | | | | $16.48 | | | | $12.82 | | | | $20.16 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.18 | | | | $0.10 | | | | $0.10 | | | | $0.11 | | | | $0.13 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 2.97 | | | | (0.24 | ) | | | 2.47 | | | | 3.71 | | | | (7.42 | ) |
Total from investment operations | | | $3.15 | | | | $(0.14 | ) | | | $2.57 | | | | $3.82 | | | | $(7.29 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.12 | ) | | | $(0.12 | ) | | | $(0.12 | ) | | | $(0.16 | ) | | | $(0.05 | ) |
Net asset value, end of period (x) | | | $21.70 | | | | $18.67 | | | | $18.93 | | | | $16.48 | | | | $12.82 | |
Total return (%) (k)(r)(s)(x) | | | 16.90 | | | | (0.69 | ) | | | 15.64 | | | | 30.20 | | | | (36.25 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.11 | | | | 1.13 | | | | 1.14 | | | | 1.15 | | | | 1.14 | |
Expenses after expense reductions (f) | | | 1.11 | | | | 1.13 | | | | 1.14 | | | | 1.15 | | | | 1.13 | |
Net investment income | | | 0.82 | | | | 0.55 | | | | 0.61 | | | | 0.80 | | | | 0.78 | |
Portfolio turnover | | | 83 | | | | 70 | | | | 71 | | | | 107 | | | | 123 | |
Net assets at end of period (000 omitted) | | | $266,040 | | | | $20,015 | | | | $19,825 | | | | $17,196 | | | | $12,951 | |
| Supplemental Ratios (%): | | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets after expense reductions
excluding short sale dividend and interest expense (f) | | | 1.11 | | | | 1.11 | | | | 1.14 | | | | 1.15 | | | | N/A | |
| (d) | | Per share data is based on average shares outstanding. |
| (f) | | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (r) | | Certain expenses have been reduced without which performance would have been lower. |
| (s) | | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. Excluding the effect of the proceeds received from a non-recurring litigation settlement against Enron Corp., the Initial Class and Service Class total returns for the year ended December 31, 2008 would have each been lower by approximately 0.82%. Excluding the effect of the proceeds received from a non-recurring litigation settlement against Tyco International Ltd., the Initial Class and Service Class total returns for the year ended December 31, 2010 would have each been lower by approximately 0.60%. |
| (x) | | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
14
MFS Research Series
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Research Series (the fund) is a series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In this reporting period the fund adopted Financial Accounting Standards Board (FASB) Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 seeks to improve the comparability of fair value measurements as presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) by providing common requirements for fair value measurement and disclosure.
In December 2011, the FASB issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods, ASU 2011-11 is intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. Although still evaluating the potential impacts of ASU 2011-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Equity securities held short, for which there were no sales reported for that day, are generally valued at the last quoted daily ask quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Exchange-traded options are generally valued at the last sale or official closing price as provided by a third-party pricing service on the exchange on which such options are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as provided by a third-party pricing service on the exchange on which such options are primarily traded. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. Foreign currency options are generally valued at valuations provided by a third-party pricing service. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the
15
MFS Research Series
Notes to Financial Statements – continued
business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of December 31, 2012 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $700,804,492 | | | | $— | | | | $— | | | | $700,804,492 | |
Canada | | | 3,930,570 | | | | — | | | | — | | | | 3,930,570 | |
United Kingdom | | | 1,413,915 | | | | 2,252,465 | | | | — | | | | 3,666,380 | |
Hong Kong | | | — | | | | 3,133,333 | | | | — | | | | 3,133,333 | |
Israel | | | 3,127,090 | | | | — | | | | — | | | | 3,127,090 | |
France | | | — | | | | 2,462,217 | | | | — | | | | 2,462,217 | |
Netherlands | | | 737,172 | | | | — | | | | — | | | | 737,172 | |
| Mutual Funds | | | 8,219,431 | | | | — | | | | — | | | | 8,219,431 | |
| Total Investments | | | $718,232,670 | | | | $7,848,015 | | | | $— | | | | $726,080,685 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $5,595,550 would have been considered level 1 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Derivatives – The fund uses derivatives for different purposes, primarily to increase or decrease exposure to a particular market or segment of the market, or security, to increase or decrease interest rate or currency exposure, or as alternatives to direct investments. Derivatives are used for hedging or non-hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. When the fund uses derivatives as an investment to increase market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative’s original cost.
The derivative instruments used by the fund were written options and purchased options. At December 31, 2012, the fund did not have any outstanding derivative instruments.
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2012 as reported in the Statement of Operations:
| | | | | | | | |
| Risk | | Investments (Purchased Options) | | | Written Options | |
| Equity | | $ | (151,242 | ) | | $ | 8,538 | |
16
MFS Research Series
Notes to Financial Statements – continued
The following table presents, by major type of derivative contract, the change in unrealized appreciation (depreciation) on derivatives held by the fund for the year ended December 31, 2012 as reported in the Statement of Operations:
| | | | |
| Risk | | Written Options | |
| Equity | | $ | 63,775 | |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an International Swaps and Derivatives Association (ISDA) Master Agreement on a bilateral basis with each of the counterparties with whom it undertakes a significant volume of transactions. The ISDA Master Agreement gives each party to the agreement the right to terminate all transactions traded under such agreement if there is a certain deterioration in the credit quality of the other party. The ISDA Master Agreement gives the fund the right, upon an event of default by the applicable counterparty or a termination of the agreement, to close out all transactions traded under such agreement and to net amounts owed under each transaction to one net amount payable by one party to the other. This right to close out and net payments across all transactions traded under the ISDA Master Agreement could result in a reduction of the fund’s credit risk to such counterparty equal to any amounts payable by the fund under the applicable transactions, if any. However, absent an event of default by the counterparty or a termination of the agreement, the ISDA Master Agreement does not result in an offset of reported amounts of assets and liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearing house for exchange traded derivatives (i.e., futures contracts and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forward foreign currency exchange contracts, swap agreements and over-the-counter options). For derivatives traded under an ISDA Master Agreement, the collateral requirements are netted across all transactions traded under such agreement and one amount is posted from one party to the other to collateralize such obligations. Cash collateral that has been pledged to cover obligations of the fund under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as “Deposits with brokers.” Securities collateral pledged for the same purpose, if any, is noted in the Portfolio of Investments.
Written Options – In exchange for a premium, the fund wrote call options on securities that it anticipated the price would decline and also wrote put options on securities that it anticipated the price would increase. At the time the option was written, the fund believed the premium received exceeded the potential loss that could result from adverse price changes in the options’ underlying securities. In a written option, the fund as the option writer grants the buyer the right to purchase from, or sell to, the fund a specified number of shares or units of a particular security, currency or index at a specified price within a specified period of time.
The premium received is initially recorded as a liability in the Statement of Assets and Liabilities. The option is subsequently marked-to-market daily with the difference between the premium received and the market value of the written option being recorded as unrealized appreciation or depreciation. When a written option expires, the fund realizes a gain equal to the amount of the premium received. The difference between the premium received and the amount paid on effecting a closing transaction is considered a realized gain or loss. When a written call option is exercised, the premium received is offset against the proceeds to determine the realized gain or loss. When a written put option is exercised, the premium reduces the cost basis of the security purchased by the fund.
At the initiation of the written option contract, for exchange traded options, the fund is required to deposit securities or cash as collateral with the custodian for the benefit of the broker. For over-the-counter options, the fund may post collateral subject to the terms of an ISDA Master Agreement as generally described above if the market value of the options contract moves against it. The fund, as writer of an option, may have no control over whether the underlying securities may be sold (call) or purchased (put) and, as a result, bears the market risk of an unfavorable change in the price of the securities underlying the written option. Losses from writing options can exceed the premium received and can exceed the potential loss from an ordinary buy and sell transaction. Although the fund’s market risk may be significant, the maximum counterparty credit risk to the fund is equal to the market value of any collateral posted to the broker. For over-the-counter options, this risk is mitigated in cases where there is an ISDA Master Agreement between the fund and the counterparty providing for netting as described above.
17
MFS Research Series
Notes to Financial Statements – continued
Written Options
| | | | | | | | |
| | | Number of
contracts | | | Premiums
received | |
| Outstanding, beginning of period | | | 67 | | | | $23,427 | |
| Options written | | | 114 | | | | 10,211 | |
| Options closed | | | (48 | ) | | | (7,597 | ) |
| Options exercised | | | (102 | ) | | | (23,641 | ) |
| Options expired | | | (31 | ) | | | (2,400 | ) |
| Outstanding, end of period | | | — | | | | $— | |
Purchased Options – The fund purchased call and put options for a premium. Purchased call and put options entitle the holder to buy and sell a specified number of shares or units of a particular security, currency or index at a specified price at a specified date or within a specified period of time. Purchasing call options may hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or increase the fund’s exposure to an underlying instrument. Purchasing put options may hedge against an anticipated decline in the value of portfolio securities or currency or decrease the fund’s exposure to an underlying instrument.
The premium paid is initially recorded as an investment in the Statement of Assets and Liabilities. That investment is subsequently marked-to-market daily with the difference between the premium paid and the market value of the purchased option being recorded as unrealized appreciation or depreciation. Premiums paid for purchased call and put options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased call option, the premium paid is added to the cost of the security or financial instrument purchased. Upon the exercise or closing of a purchased put option, the premium paid is offset against the proceeds on the sale of the underlying security or financial instrument in order to determine the realized gain or loss on investments.
Whether or not the option is exercised, the fund’s maximum risk of loss from purchasing an option is the amount of premium paid. All option contracts involve credit risk if the counterparty to the option contract fails to perform. For over-the-counter options, this risk is mitigated in cases where there is an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and for posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.
Short Sales – The fund entered into short sales whereby it sells a security it does not own in anticipation of a decline in the value of that security. The fund will realize a gain if the security price decreases and a loss if the security price increases between the date of the short sale and the date on which the fund replaces the borrowed security. Losses from short sales can exceed the proceeds of the security sold; and they can also exceed the potential loss from an ordinary buy and sell transaction. The amount of any premium, dividends, or interest the fund may be required to pay in connection with a short sale will be recognized as a fund expense. During the year ended December 31, 2012, this expense amounted to $20,000. The fund segregates cash or marketable securities in an amount that, when combined with the amount of proceeds from the short sale deposited with the broker, at least equals the current market value of the security sold short. At December 31, 2012, the fund had no short sales outstanding.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2012, there were no securities on loan or collateral outstanding.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Some securities may be purchased on a “when-issued” or “forward delivery” basis, which means that the securities will be delivered to the fund at a future date, usually beyond customary settlement time. Dividends received in cash are recorded on
18
MFS Research Series
Notes to Financial Statements – continued
the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
The fund purchased or sold debt securities on a when-issued or delayed delivery basis, or in a “To Be Announced” (TBA) or “forward commitment” transaction with delivery or payment to occur at a later date beyond the normal settlement period. TBA securities resulting from these transactions are included in the Portfolio of Investments. At the time a fund enters into a commitment to purchase or sell a security, the transaction is recorded and the value of the security acquired is reflected in the fund’s net asset value. The price of such security and the date that the security will be delivered and paid for are fixed at the time the transaction is negotiated. The value of the security may vary with market fluctuations. No interest accrues to the fund until payment takes place. At the time that a fund enters into this type of transaction, the fund is required to have sufficient cash and/or liquid securities to cover its commitments. Losses may arise due to changes in the value of the underlying securities or if the counterparty does not perform under the contract’s terms, or if the issuer does not issue the securities due to political, economic or other factors. Additionally, losses may arise due to declines in the value of the securities prior to settlement date.
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount, for the year ended December 31, 2012, is shown as a reduction of total expenses in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Foreign taxes have been accrued by the fund in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/12 | | | 12/31/11 | |
| Ordinary income (including any short-term capital gains) | | | $1,473,011 | | | | $1,601,688 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/12 | | | | |
| Cost of investments | | | $688,479,879 | |
| Gross appreciation | | | 45,119,883 | |
| Gross depreciation | | | (7,519,077 | ) |
| Net unrealized appreciation (depreciation) | | | $37,600,806 | |
| Undistributed ordinary income | | | 2,760,030 | |
| Undistributed long-term capital gain | | | 398,673 | |
| Capital loss carryforwards | | | (17,267,993 | ) |
| Other temporary differences | | | (71,359 | ) |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized after December 31, 2010 may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
19
MFS Research Series
Notes to Financial Statements �� continued
As of December 31, 2012, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | | |
| Pre-enactment losses: | | | | |
| 12/31/17 | | | $(17,267,993 | ) |
The availability of $10,944,648 of the capital loss carryforwards of MFS Research Series may be limited in a given year due to the acquisition of SC Davis Venture Value Fund on December 7, 2012.
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/12 | | | Year ended
12/31/11 | |
| Initial Class | | | $1,340,066 | | | | $1,473,743 | |
| Service Class | | | 132,945 | | | | 127,945 | |
| Total | | | $1,473,011 | | | | $1,601,688 | |
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
| | | | |
| First $1 billion of average daily net assets | | | 0.75% | |
| Average daily net assets in excess of $1 billion | | | 0.65% | |
The management fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.75% of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2012, the fee was $19,686, which equated to 0.0087% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2012, these costs amounted to $1,280.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.0185% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the
20
MFS Research Series
Notes to Financial Statements – continued
Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended December 31, 2012, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $1,595 and are included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $670, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
Purchases and sales of investments, other than purchased option transactions, short sales, and short-term obligations, aggregated $268,654,763 and $165,563,109, respectively. Purchases exclude the value of securities acquired in connection with the SC Davis Venture Value Fund. (See Note 8.)
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 6,498,659 | | | | $139,065,054 | | | | 1,101,108 | | | | $20,631,224 | |
Service Class | | | 532,555 | | | | 11,233,338 | | | | 194,431 | | | | 3,679,825 | |
| | | 7,031,214 | | | | $150,298,392 | | | | 1,295,539 | | | | $24,311,049 | |
| Shares issued in connection with acquisition of SC Davis Venture Value Fund | | | | | | | | | | | | | | | | |
Initial Class | | | 7,909,441 | | | | $170,764,822 | | | | | | | | | |
Service Class | | | 10,939,229 | | | | 234,646,460 | | | | | | | | | |
| | | 18,848,670 | | | | $405,411,282 | | | | | | | | | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 63,601 | | | | $1,340,066 | | | | 82,194 | | | | $1,473,743 | |
Service Class | | | 6,346 | | | | 132,945 | | | | 7,172 | | | | 127,945 | |
| | | 69,947 | | | | $1,473,011 | | | | 89,366 | | | | $1,601,688 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (1,941,319 | ) | | | $(40,506,604 | ) | | | (2,224,124 | ) | | | $(42,513,132 | ) |
Service Class | | | (291,546 | ) | | | (6,089,486 | ) | | | (177,010 | ) | | | (3,327,368 | ) |
| | | (2,232,865 | ) | | | $(46,596,090 | ) | | | (2,401,134 | ) | | | $(45,840,500 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | 12,530,382 | | | | $270,663,338 | | | | (1,040,822 | ) | | | $(20,408,165 | ) |
Service Class | | | 11,186,584 | | | | 239,923,257 | | | | 24,593 | | | | 480,402 | |
| | | 23,716,966 | | | | $510,586,595 | | | | (1,016,229 | ) | | | $(19,927,763 | ) |
The fund is one of several mutual funds in which the MFS funds-of-funds may invest. The MFS funds-of-funds do not invest in the underlying MFS funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio, the MFS Growth Allocation Portfolio, and the MFS Conservative Allocation Portfolio were the owners of record of approximately 22%, 8%, and 8%, respectively, of the value of outstanding voting shares of the fund.
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2012, the fund’s commitment fee and interest expense were $1,225 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
21
MFS Research Series
Notes to Financial Statements – continued
| (7) | | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 63 | | | | 100,289,599 | | | | (92,070,231 | ) | | | 8,219,431 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $4,064 | | | | $8,219,431 | |
At close of business on December 7, 2012, the fund with net assets of approximately $313,994,783, acquired all of the assets and liabilities of SC Davis Venture Value Fund, a series of Sun Capital Advisers Trust. The purpose of the transaction was to provide shareholders of the SC Davis Venture Value Fund the opportunity to participate in a larger combined portfolio with a similar investment objective and similar investment policies and strategies. The acquisition was accomplished by a tax-free exchange of approximately 18,848,670 shares of the fund (valued at approximately $405,411,282) for all of the assets and liabilities of SC Davis Venture Value Fund. SC Davis Venture Value Fund then distributed the shares of the fund that SC Davis Venture Value Fund received from the fund to its shareholders. SC Davis Venture Value Fund’s investments on that date were valued at approximately $397,521,486 with a cost basis of approximately $385,723,569. For financial reporting purposes, assets received and shares issued by the fund were recorded at fair value; however, the cost basis of the investments received from SC Davis Venture Value Fund were carried forward to align ongoing reporting of the fund’s realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes. Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of SC Davis Venture Value Fund that have been included in the fund’s Statement of Operations since December 7, 2012.
Assuming the acquisition had been completed on January 1, 2012, the fund’s pro forma results of operations for the year ended December 31, 2012 are as follows:
| | | | |
| Net investment income | | | $6,113,494 | |
| Net realized and unrealized gain (loss) on investments and foreign currency | | | 113,070,857 | |
| Change in net assets from operations | | | $119,184,351 | |
22
MFS Research Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of
MFS Research Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Research Series (the “Fund”) (one of the series comprising MFS Variable Insurance Trust) as of December 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Research Series as of December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2013
23
MFS Research Series
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 1, 2013, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES | | | | | | | | |
Robert J. Manning (k) (age 49) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Chief Executive Officer and Director; President (until December 2009); Chief Investment Officer (until July 2010) | | N/A |
| | | | |
| INDEPENDENT TRUSTEES | | | | | | | | |
David H. Gunning (age 70) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman; Portman Limited (mining), Director (until 2008) |
| | | | |
Robert E. Butler (age 71) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 57) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 71) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 68) | | Trustee | | December 2004 | | Private investor; Rouse Properties Inc. (real estate), Director | | N/A |
| | | | |
John P. Kavanaugh (age 58) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
J. Dale Sherratt (age 74) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner | | N/A |
| | | | |
Laurie J. Thomsen
(age 55) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 71) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
John M. Corcoran (k) (age 47) | | President | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) | | N/A |
| | | | |
| Christopher R. Bohane (k) (age 39) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kino Clark (k) (age 44) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 53) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
| | | | |
Ethan D. Corey (k) (age 49) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
24
MFS Research Series
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
David L. DiLorenzo (k) (age 44) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Robyn L. Griffin (age 37) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 39) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 62) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 42) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 42) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 60) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Frank L. Tarantino (age 68) | | Independent
Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 52) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. For the period October 2008, until January 2012, Mr. Corcoran served as Treasurer of the Funds. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2013, the Trustees served as board members of 143 funds within the MFS Family of Funds.
25
MFS Research Series
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Manager Joseph MacDougall | | |
26
MFS Research Series
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2012 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2011 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2011, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 2nd quintile for the one-year period and the 1st quintile for the five-year period ended December 31, 2011 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
27
MFS Research Series
Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each higher than the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to institutional accounts, if any. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund is likely to benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2012.
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of the MFS Web site (mfs.com).
28
MFS Research Series
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling
1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 100% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
29
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
30
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. • MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. • MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. • MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
31
ANNUAL REPORT
December 31, 2012
MFS® CORE EQUITY SERIES
MFS® Variable Insurance Trust
VVS-ANN
MFS® CORE EQUITY SERIES
CONTENTS
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ NO BANK OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Core Equity Series
LETTER FROM THE CHAIRMAN AND CEO
Dear Contract Owners:
The global market outlook for 2013 is one of cautious optimism. While we are seeing some positive economic trends in the United States, Europe and China, the overall environment remains challenging. In the United States, the recent fiscal cliff agreement was received positively by investors, even though it mostly addressed pressing taxation issues and did not resolve additional concerns, including the need for spending cuts and a large-scale reduction of the federal debt. These issues will be front and center again in the spring. Despite the ongoing uncertainty, economic tailwinds are gathering strength as the U.S. housing and job markets are improving and consumer confidence is rising.
Overseas, the debt crisis continues to weigh heavily on eurozone markets, with even Germany — long an economic stalwart — experiencing some contraction. These ongoing challenges could be a drag on global market performance this year. In Asia, manufacturing activity has accelerated in emerging markets such as China and India, and we are seeing signs of stabilized loan growth in China, a leading indicator of that country’s economic health. In contrast, Japan’s economy is contracting sharply under deflationary pressures. Nevertheless, Japanese markets have responded favorably to early actions by the new government, which appears determined to act aggressively, along with the Bank of Japan, to stimulate growth.
As always, managing risk in the face of uncertainty remains a top priority for investors. At MFS®, our uniquely collaborative investment process revolves around global research and our disciplined risk management approach. Our global team of investment professionals shares ideas and evaluates opportunities across continents, investment disciplines and asset classes — all with a goal of building better insights, and ultimately better results, for our clients.
We remain mindful of the many economic challenges investors face today, and believe it is more important than ever to maintain a long-term view, employ time-tested principles, such as asset allocation and diversification, and work closely with investment advisors to identify and pursue the most suitable opportunities.
Respectfully,
Robert J. Manning
Chairman and Chief Executive Officer
MFS Investment Management®
February 15, 2013
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
MFS Core Equity Series
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | | | |
| Top ten holdings (i) | | | | |
| Exxon Mobil Corp. | | | 5.0% | |
| Apple, Inc. | | | 4.2% | |
| Pfizer, Inc. | | | 2.2% | |
| ACE Ltd. | | | 2.1% | |
| Philip Morris International, Inc. | | | 1.6% | |
| JPMorgan Chase & Co. | | | 1.5% | |
| Google, Inc., “A” | | | 1.4% | |
| Visa, Inc., “A” | | | 1.2% | |
| Verizon Communications, Inc. | | | 1.2% | |
| Oracle Corp. | | | 1.2% | |
| | | | |
| Equity sectors (i) | | | | |
| Financial Services | | | 17.7% | |
| Technology (s) | | | 15.7% | |
| Health Care | | | 10.7% | |
| Energy | | | 9.8% | |
| Industrial Goods & Services | | | 7.8% | |
| Consumer Staples | | | 7.4% | |
| Utilities & Communications | | | 6.7% | |
| Leisure | | | 6.3% | |
| Retailing | | | 6.0% | |
| Basic Materials | | | 3.8% | |
| Special Products & Services | | | 2.5% | |
| Autos & Housing | | | 2.3% | |
| Transportation | | | 2.1% | |
| (i) | For purposes of this presentation, the components include the market value of securities, less any securities sold short, and reflect the impact of the equivalent exposure of derivative positions. These amounts may be negative from time to time. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than market value. |
| (s) | Includes securities sold short. |
Percentages are based on net assets as of 12/31/12.
The portfolio is actively managed and current holdings may be different.
2
MFS Core Equity Series
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2012, Initial Class shares of the MFS Core Equity Series (“fund”) provided a total return of 16.23%, while Service Class shares of the fund provided a total return of 15.95%. These compare with a return of 16.42% over the same period for the fund’s benchmark, the Russell 3000 Index.
Market Environment
The beginning of the period was characterized by a risk-on sentiment as a result of additional liquidity measures by the Federal Reserve Bank (“Fed”) and the European Central Bank (“ECB”) as well as a commensurate improvement in macroeconomic conditions. During this time, global equity valuations rose, credit spreads contracted, and high-quality sovereign yields increased modestly.
During the middle of the period, however, conditions worsened, driven by broadly weaker global macroeconomic indicators, as well as renewed concerns over the eurozone’s capacity and determination to address its ongoing crisis. Despite this deterioration, broad market sentiment remained relatively resilient as equity markets generally maintained gains and credit spreads did not indicate deterioration.
However, this renewed weakness in the fundamentals precipitated a further round of monetary easing by both the Fed (through a third round of quantitative easing) and the ECB (through a new bond purchase facility) in the second half of the period, which soon instilled additional confidence in risk markets. Nonetheless, towards the end of the period, weaker equity earnings reports and declining forward guidance caused market sentiment to soften. In addition, as we moved toward year end, the fiscal cliff negotiations between the Republicans in the U.S. Congress and President Obama were a particular source of market attention, where uncertainty surrounding the fiscal negotiations continued right up to the end-of-year deadline.
Detractors from Performance
Security selection in the financial services sector detracted from performance relative to the Russell 3000 Index. Not owning shares of strong-performing financial services firm Bank of America, as well as timing of ownership in shares of global bank Citigroup, held back relative results. Shares of Bank of America traded higher as the company reported earnings results that beat analysts’ expectations which appeared to have demonstrated the effectiveness of the bank’s cost-cutting efforts. The fund’s holdings of financial services company EuroDekania Management Ltd. (b) also hurt relative returns.
Stock selection in the basic materials sector hindered relative performance during the quarter. There were no individual holdings within this sector that were among the fund’s top relative detractors for the period.
Elsewhere, holding shares of computer products and service provider Hewlett-Packard Co., higher education company DeVry (h), mining equipment manufacturer Joy Global, Israeli-headquartered security software provider Check Point Software Technologies (b), semiconductor manufacturer Microchip Technology, and integrated oil and gas company Exxon Mobil weakened relative returns. Shares of Check Point Software Technologies traded lower as stronger competitive forces in its industry and a challenging global economic landscape weighed on the firm’s profitability.
The fund’s cash and/or cash equivalents position was also a detractor from relative performance. The fund strives to be fully invested and generally holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Contributors to Performance
Stock selection in the technology sector was a positive factor for relative performance. Within this sector, the fund’s holdings of computer and personal electronics maker Apple and information technology infrastructure management provider SolarWinds aided relative results as both stocks outperformed the benchmark. Shares of Apple traded higher throughout most of the period due to continued strong demand for its iPhone and iPad products as well as favorable rulings for the firm’s patent infringement lawsuit against Samsung allowing the company to solidify its market share in the smartphone and tablet markets. The fund’s avoidance of poor-performing semiconductor company Intel also helped relative results.
Security selection in the leisure sector contributed to relative performance, led by the fund’s holdings of media and entertainment company News Corp. and credit ratings and data analytics provider Moody’s.
3
MFS Core Equity Series
Management Review – continued
Elsewhere, the fund’s overweight positions in specialized payment products and services provider FleetCor Technologies, auto parts manufacturer Delphi Automotive, biotech firm Gilead Sciences, global payments technology company Visa, Inc., and global financial services firm JPMorgan Chase strengthened relative returns. Visa’s shares traded higher over the period as consumer spending improved relative to prior years, allowing the company to consistently beat earnings expectations throughout the year.
Respectfully,
Joseph MacDougall
Portfolio Manager
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio manager only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
4
MFS Core Equity Series
PERFORMANCE SUMMARY THROUGH 12/31/12
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/12
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 8/14/96 | | 16.23% | | 1.67% | | 7.19% | | |
| | | Service Class | | 5/01/00 | | 15.95% | | 1.43% | | 6.92% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Russell 3000 Index (f) | | 16.42% | | 2.04% | | 7.68% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Russell 3000 Index – constructed to provide a comprehensive barometer for the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Core Equity Series
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2012 through December 31, 2012
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2012 through December 31, 2012.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | | Beginning
Account Value
7/01/12 | | | Ending Account Value
12/31/12 | | | Expenses Paid
During Period (p)
7/01/12-12/31/12 | |
| Initial Class | | Actual | | | 0.90% | | | | $1,000.00 | | | | $1,076.60 | | | | $4.70 | |
| | Hypothetical (h) | | | 0.90% | | | | $1,000.00 | | | | $1,020.61 | | | | $4.57 | |
| Service Class | | Actual | | | 1.15% | | | | $1,000.00 | | | | $1,075.68 | | | | $6.00 | |
| | Hypothetical (h) | | | 1.15% | | | | $1,000.00 | | | | $1,019.36 | | | | $5.84 | |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS Core Equity Series
PORTFOLIO OF INVESTMENTS – 12/31/12
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 98.8% | | | | | |
| Aerospace – 3.1% | | | | | | | | |
| Embraer S.A., ADR | | | 3,280 | | | $ | 93,506 | |
| Honeywell International, Inc. | | | 9,420 | | | | 597,887 | |
| Lockheed Martin Corp. | | | 1,840 | | | | 169,814 | |
| Precision Castparts Corp. | | | 2,230 | | | | 422,407 | |
| United Technologies Corp. | | | 6,200 | | | | 508,462 | |
| | | | | | | | |
| | | | | | $ | 1,792,076 | |
| | | | | | | | |
| Apparel Manufacturers – 1.3% | | | | | | | | |
| Guess?, Inc. | | | 8,160 | | | $ | 200,246 | |
| NIKE, Inc., “B” | | | 5,760 | | | | 297,216 | |
| VF Corp. | | | 1,520 | | | | 229,474 | |
| | | | | | | | |
| | | | | | $ | 726,936 | |
| | | | | | | | |
| Automotive – 1.5% | | | | | | | | |
| Delphi Automotive PLC (a) | | | 14,970 | | | $ | 572,603 | |
| General Motors Co. (a) | | | 9,660 | | | | 278,498 | |
| | | | | | | | |
| | | | | | $ | 851,101 | |
| | | | | | | | |
| Biotechnology – 1.9% | | | | | | | | |
| Biogen Idec, Inc. (a) | | | 1,690 | | | $ | 247,872 | |
| Celgene Corp. (a) | | | 4,020 | | | | 316,454 | |
| Gilead Sciences, Inc. (a) | | | 4,210 | | | | 309,225 | |
| ViroPharma, Inc. (a) | | | 9,660 | | | | 219,862 | |
| | | | | | | | |
| | | | | | $ | 1,093,413 | |
| | | | | | | | |
| Broadcasting – 2.0% | | | | | | | | |
| Interpublic Group of Companies, Inc. | | | 7,640 | | | $ | 84,193 | |
| News Corp., “A” | | | 22,370 | | | | 571,330 | |
| Walt Disney Co. | | | 9,780 | | | | 486,946 | |
| | | | | | | | |
| | | | | | $ | 1,142,469 | |
| | | | | | | | |
| Brokerage & Asset Managers – 1.1% | | | | | |
| BlackRock, Inc. | | | 974 | | | $ | 201,336 | |
| Franklin Resources, Inc. | | | 800 | | | | 100,560 | |
| FXCM, Inc. “A” | | | 6,850 | | | | 68,980 | |
| GFI Group, Inc. | | | 14,030 | | | | 45,457 | |
| NASDAQ OMX Group, Inc. | | | 7,672 | | | | 191,877 | |
| | | | | | | | |
| | | | | | $ | 608,210 | |
| | | | | | | | |
| Business Services – 1.7% | | | | | | | | |
| Accenture PLC, “A” | | | 3,550 | | | $ | 236,075 | |
| Automatic Data Processing, Inc. | | | 4,680 | | | | 266,807 | |
| FleetCor Technologies, Inc. (a) | | | 6,040 | | | | 324,046 | |
| Performant Financial Corp. (a) | | | 13,530 | | | | 136,653 | |
| | | | | | | | |
| | | | | | $ | 963,581 | |
| | | | | | | | |
| Cable TV – 1.3% | | | | | | | | |
| Comcast Corp., “Special A” | | | 11,040 | | | $ | 396,888 | |
| Time Warner Cable, Inc. | | | 3,520 | | | | 342,109 | |
| | | | | | | | |
| | | | | | $ | 738,997 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Chemicals – 0.9% | | | | | | | | |
| Celanese Corp. | | | 7,270 | | | $ | 323,733 | |
| PPG Industries, Inc. | | | 1,230 | | | | 166,481 | |
| | | | | | | | |
| | | | | | $ | 490,214 | |
| | | | | | | | |
| Computer Software – 4.6% | | | | | | | | |
| Autodesk, Inc. (a) | | | 4,040 | | | $ | 142,814 | |
| Check Point Software Technologies Ltd. (a) | | | 9,180 | | | | 437,335 | |
| Citrix Systems, Inc. (a) | | | 5,530 | | | | 363,598 | |
| Microsoft Corp. | | | 2,680 | | | | 71,636 | |
| Nuance Communications, Inc. (a) | | | 6,410 | | | | 143,071 | |
| Oracle Corp. | | | 20,000 | | | | 666,400 | |
| Salesforce.com, Inc. (a) | | | 2,980 | | | | 500,938 | |
| SolarWinds, Inc. (a) | | | 3,160 | | | | 165,742 | |
| TIBCO Software, Inc. (a) | | | 5,540 | | | | 121,935 | |
| | | | | | | | |
| | | | | | $ | 2,613,469 | |
| | | | | | | | |
| Computer Software – Systems – 6.2% | | | | | |
| Apple, Inc. (s) | | | 4,500 | | | $ | 2,398,635 | |
| EMC Corp. (a) | | | 20,560 | | | | 520,168 | |
| FleetMatics Group PLC (a) | | | 3,520 | | | | 88,563 | |
| Hewlett-Packard Co. | | | 21,980 | | | | 313,215 | |
| International Business Machines Corp. | | | 300 | | | | 57,465 | |
| Verifone Systems, Inc. (a) | | | 5,590 | | | | 165,911 | |
| | | | | | | | |
| | | | | | $ | 3,543,957 | |
| | | | | | | | |
| Construction – 0.8% | | | | | | | | |
| Eagle Materials, Inc. | | | 1,470 | | | $ | 85,995 | |
| Stanley Black & Decker, Inc. | | | 5,150 | | | | 380,946 | |
| | | | | | | | |
| | | | | | $ | 466,941 | |
| | | | | | | | |
| Consumer Products – 2.0% | | | | | | | | |
| Colgate-Palmolive Co. | | | 5,880 | | | $ | 614,695 | |
| International Flavors & Fragrances, Inc. | | | 3,660 | | | | 243,536 | |
| Newell Rubbermaid, Inc. | | | 12,290 | | | | 273,698 | |
| | | | | | | | |
| | | | | | $ | 1,131,929 | |
| | | | | | | | |
| Consumer Services – 0.8% | | | | | | | | |
| Grand Canyon Education, Inc. (a) | | | 2,840 | | | $ | 66,655 | |
| Priceline.com, Inc. (a) | | | 590 | | | | 366,508 | |
| | | | | | | | |
| | | | | | $ | 433,163 | |
| | | | | | | | |
| Containers – 1.2% | | | | | | | | |
| Packaging Corp. of America | | | 6,200 | | | $ | 238,514 | |
| Silgan Holdings, Inc. | | | 10,210 | | | | 424,634 | |
| | | | | | | | |
| | | | | | $ | 663,148 | |
| | | | | | | | |
| Electrical Equipment – 1.9% | | | | | | | | |
| AMETEK, Inc. | | | 6,585 | | | $ | 247,398 | |
| Danaher Corp. | | | 10,460 | | | | 584,714 | |
| Sensata Technologies Holding B.V. (a) | | | 4,010 | | | | 130,245 | |
| W.W. Grainger, Inc. | | | 620 | | | | 125,469 | |
| | | | | | | | |
| | | | | | $ | 1,087,826 | |
| | | | | | | | |
7
MFS Core Equity Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Electronics – 2.5% | | | | | | | | |
| Altera Corp. | | | 16,100 | | | $ | 554,484 | |
| ASML Holding N.V. | | | 2,926 | | | | 188,464 | |
| KLA-Tencor Corp. | | | 1,110 | | | | 53,014 | |
| Linear Technology Corp. | | | 5,370 | | | | 184,191 | |
| Microchip Technology, Inc. | | | 13,350 | | | | 435,077 | |
| | | | | | | | |
| | | | | | $ | 1,415,230 | |
| | | | | | | | |
| Energy – Independent – 3.2% | | | | | | | | |
| Cabot Oil & Gas Corp. | | | 4,550 | | | $ | 226,317 | |
| Concho Resources, Inc. (a) | | | 1,740 | | | | 140,174 | |
| CONSOL Energy, Inc. | | | 1,510 | | | | 48,471 | |
| EOG Resources, Inc. | | | 1,880 | | | | 227,085 | |
| EQT Corp. | | | 3,670 | | | | 216,457 | |
| Noble Energy, Inc. | | | 3,520 | | | | 358,125 | |
| Occidental Petroleum Corp. | | | 2,490 | | | | 190,759 | |
| Peabody Energy Corp. | | | 1,660 | | | | 44,173 | |
| Pioneer Natural Resources Co. | | | 2,290 | | | | 244,091 | |
| SM Energy Co. | | | 1,904 | | | | 99,408 | |
| | | | | | | | |
| | | | | | $ | 1,795,060 | |
| | | | | | | | |
| Energy – Integrated – 5.0% | | | | | | | | |
| Exxon Mobil Corp. (s) | | | 32,650 | | | $ | 2,825,858 | |
| | | | | | | | |
| Food & Beverages – 3.1% | | | | | | | | |
| Coca-Cola Co. | | | 16,950 | | | $ | 614,438 | |
| Coca-Cola Enterprises, Inc. | | | 6,100 | | | | 193,553 | |
| General Mills, Inc. | | | 8,440 | | | | 341,060 | |
| Mead Johnson Nutrition Co., “A” | | | 3,020 | | | | 198,988 | |
| Mondelez International, Inc. | | | 16,350 | | | | 416,435 | |
| | | | | | | | |
| | | | | | $ | 1,764,474 | |
| | | | | | | | |
| Food & Drug Stores – 1.0% | | | | | | | | |
| CVS Caremark Corp. | | | 9,190 | | | $ | 444,337 | |
| Kroger Co. | | | 4,290 | | | | 111,626 | |
| | | | | | | | |
| | | | | | $ | 555,963 | |
| | | | | | | | |
| Gaming & Lodging – 0.6% | | | | | | | | |
| Las Vegas Sands Corp. | | | 5,220 | | | $ | 240,955 | |
| Wynn Resorts Ltd. | | | 1,010 | | | | 113,615 | |
| | | | | | | | |
| | | | | | $ | 354,570 | |
| | | | | | | | |
| General Merchandise – 1.1% | | | | | | | | |
| Target Corp. | | | 10,830 | | | $ | 640,811 | |
| | | | | | | | |
| Health Maintenance Organizations – 0.8% | | | | | |
| Aetna, Inc. | | | 8,900 | | | $ | 412,070 | |
| UnitedHealth Group, Inc. | | | 490 | | | | 26,578 | |
| | | | | | | | |
| | | | | | $ | 438,648 | |
| | | | | | | | |
| Insurance – 3.9% | | | | | | | | |
| ACE Ltd. | | | 14,940 | | | $ | 1,192,212 | |
| American International Group, Inc. (a) | | | 11,430 | | | | 403,479 | |
| MetLife, Inc. | | | 13,470 | | | | 443,702 | |
| Validus Holdings Ltd. | | | 4,790 | | | | 165,638 | |
| | | | | | | | |
| | | | | | $ | 2,205,031 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Internet – 2.6% | | | | | | | | |
| eBay, Inc. (a) | | | 3,870 | | | $ | 197,447 | |
| Google, Inc., “A” (a) | | | 1,140 | | | | 808,682 | |
| Millennial Media, Inc. (a) | | | 8,600 | | | | 107,758 | |
| Rackspace Hosting, Inc. (a) | | | 3,480 | | | | 258,460 | |
| Shutterfly, Inc. (a) | | | 3,940 | | | | 117,688 | |
| | | | | | | | |
| | | | | | $ | 1,490,035 | |
| | | | | | | | |
| Leisure & Toys – 0.3% | | | | | | | | |
| Activision Blizzard, Inc. | | | 8,240 | | | $ | 87,509 | |
| Brunswick Corp. | | | 2,520 | | | | 73,307 | |
| | | | | | | | |
| | | | | | $ | 160,816 | |
| | | | | | | | |
| Machinery & Tools – 2.8% | | | | | | | | |
| Eaton Corp. PLC | | | 7,770 | | | $ | 421,134 | |
| Joy Global, Inc. | | | 6,180 | | | | 394,160 | |
| Kennametal, Inc. | | | 5,790 | | | | 231,600 | |
| Roper Industries, Inc. | | | 5,150 | | | | 574,122 | |
| | | | | | | | |
| | | | | | $ | 1,621,016 | |
| | | | | | | | |
| Major Banks – 4.5% | | | | | | | | |
| Goldman Sachs Group, Inc. | | | 2,390 | | | $ | 304,868 | |
| JPMorgan Chase & Co. (s) | | | 20,030 | | | | 880,719 | |
| PNC Financial Services Group, Inc. | | | 7,490 | | | | 436,742 | |
| State Street Corp. | | | 7,290 | | | | 342,703 | |
| Wells Fargo & Co. | | | 17,110 | | | | 584,820 | |
| | | | | | | | |
| | | | | | $ | 2,549,852 | |
| | | | | | | | |
| Medical & Health Technology & Services – 1.2% | | | | | |
| AmerisourceBergen Corp. | | | 4,340 | | | $ | 187,401 | |
| Cerner Corp. (a) | | | 890 | | | | 69,100 | |
| Express Scripts Holding Co. (a) | | | 5,040 | | | | 272,160 | |
| Henry Schein, Inc. (a) | | | 1,140 | | | | 91,724 | |
| Quest Diagnostics, Inc. | | | 890 | | | | 51,860 | |
| | | | | | | | |
| | | | | | $ | 672,245 | |
| | | | | | | | |
| Medical Equipment – 2.3% | | | | | | | | |
| Cooper Cos., Inc. | | | 3,310 | | | $ | 306,109 | |
| Covidien PLC | | | 7,590 | | | | 438,247 | |
| Sirona Dental Systems, Inc. (a) | | | 1,440 | | | | 92,822 | |
| St. Jude Medical, Inc. | | | 7,860 | | | | 284,060 | |
| Thermo Fisher Scientific, Inc. | | | 3,210 | | | | 204,734 | |
| | | | | | | | |
| | | | | | $ | 1,325,972 | |
| | | | | | | | |
| Metals & Mining – 0.6% | | | | | | | | |
| Cliffs Natural Resources, Inc. | | | 2,640 | | | $ | 101,798 | |
| Lundin Mining Corp. (a) | | | 21,640 | | | | 111,387 | |
| Teck Resources Ltd., “B” | | | 4,289 | | | | 155,873 | |
| | | | | | | | |
| | | | | | $ | 369,058 | |
| | | | | | | | |
| Natural Gas – Distribution – 0.4% | | | | | | | | |
| Spectra Energy Corp. | | | 9,110 | | | $ | 249,432 | |
| | | | | | | | |
| Natural Gas – Pipeline – 0.3% | | | | | | | | |
| Kinder Morgan, Inc. | | | 4,456 | | | $ | 157,430 | |
| | | | | | | | |
| Network & Telecom – 0.5% | | | | | | | | |
| Fortinet, Inc. (a) | | | 10,730 | | | $ | 226,081 | |
| Juniper Networks, Inc. (a) | | | 3,840 | | | | 75,533 | |
| | | | | | | | |
| | | | | | $ | 301,614 | |
| | | | | | | | |
8
MFS Core Equity Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Oil Services – 1.6% | | | | | | | | |
| Cameron International Corp. (a) | | | 4,620 | | | $ | 260,845 | |
| Dresser-Rand Group, Inc. (a) | | | 3,950 | | | | 221,753 | |
| FMC Technologies, Inc. (a) | | | 2,820 | | | | 120,781 | |
| Oil States International, Inc. (a) | | | 820 | | | | 58,663 | |
| Schlumberger Ltd. | | | 2,770 | | | | 191,933 | |
| Transocean, Inc. | | | 1,660 | | | | 74,119 | |
| | | | | | | | |
| | | | | | $ | 928,094 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 4.6% | |
| American Express Co. | | | 2,020 | | | $ | 116,110 | |
| BancorpSouth, Inc. | | | 4,410 | | | | 64,121 | |
| CapitalSource, Inc. | | | 21,350 | | | | 161,833 | |
| CIT Group, Inc. (a) | | | 9,220 | | | | 356,261 | |
| Citigroup, Inc. | | | 10,660 | | | | 421,710 | |
| EuroDekania Ltd. (a)(z) | | | 50,820 | | | | 65,906 | |
| Fifth Third Bancorp | | | 24,110 | | | | 366,231 | |
| PrivateBancorp, Inc. | | | 12,480 | | | | 191,194 | |
| Visa, Inc., “A” | | | 4,600 | | | | 697,268 | |
| Western Union Co. | | | 11,890 | | | | 161,823 | |
| | | | | | | | |
| | | | | | $ | 2,602,457 | |
| | | | | | | | |
| Pharmaceuticals – 4.5% | | | | | | | | |
| Abbott Laboratories | | | 6,900 | | | $ | 451,950 | |
| Eli Lilly & Co. | | | 2,800 | | | | 138,096 | |
| Johnson & Johnson | | | 6,930 | | | | 485,793 | |
| Perrigo Co. | | | 960 | | | | 99,869 | |
| Pfizer, Inc. | | | 49,219 | | | | 1,234,413 | |
| Teva Pharmaceutical Industries Ltd., ADR | | | 4,030 | | | | 150,480 | |
| | | | | | | | |
| | | | | | $ | 2,560,601 | |
| | | | | | | | |
| Printing & Publishing – 0.5% | | | | | | | | |
| Moody’s Corp. | | | 5,440 | | | $ | 273,741 | |
| | | | | | | | |
| Railroad & Shipping – 0.9% | | | | | | | | |
| Union Pacific Corp. | | | 4,220 | | | $ | 530,538 | |
| | | | | | | | |
| Real Estate – 3.6% | | | | | | | | |
| Atrium European Real Estate Ltd. | | | 13,250 | | | $ | 77,828 | |
| BioMed Realty Trust, Inc., REIT | | | 21,790 | | | | 421,201 | |
| Equity Lifestyle Properties, Inc., REIT | | | 2,050 | | | | 137,945 | |
| Mid-America Apartment Communities, Inc., REIT | | | 9,660 | | | | 625,485 | |
| Public Storage, Inc., REIT | | | 2,310 | | | | 334,858 | |
| Tanger Factory Outlet Centers, Inc., REIT | | | 13,900 | | | | 475,380 | |
| | | | | | | | |
| | | | | | $ | 2,072,697 | |
| | | | | | | | |
| Restaurants – 1.6% | | | | | | | | |
| McDonald’s Corp. | | | 7,080 | | | $ | 624,527 | |
| Starbucks Corp. | | | 5,460 | | | | 292,765 | |
| | | | | | | | |
| | | | | | $ | 917,292 | |
| | | | | | | | |
| Specialty Chemicals – 1.1% | | | | | | | | |
| Airgas, Inc. | | | 2,040 | | | $ | 186,232 | |
| Albemarle Corp. | | | 2,690 | | | | 167,103 | |
| Ecolab, Inc. | | | 3,900 | | | | 280,410 | |
| | | | | | | | |
| | | | | | $ | 633,745 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Specialty Stores – 2.6% | | | | | | | | |
| Amazon.com, Inc. (a) | | | 370 | | | $ | 92,922 | |
| AutoZone, Inc. (a) | | | 740 | | | | 262,278 | |
| Bed Bath & Beyond, Inc. (a) | | | 4,330 | | | | 242,090 | |
| Children’s Place Retail Store, Inc. (a) | | | 3,630 | | | | 160,773 | |
| Express, Inc. (a) | | | 13,790 | | | | 208,091 | |
| rue21, Inc. (a) | | | 6,760 | | | | 191,916 | |
| Tiffany & Co. | | | 3,500 | | | | 200,690 | |
| Urban Outfitters, Inc. (a) | | | 3,660 | | | | 144,058 | |
| | | | | | | | |
| | | | | | $ | 1,502,818 | |
| | | | | | | | |
| Telecommunications – Wireless – 0.7% | |
| American Tower Corp., REIT | | | 3,000 | | | $ | 231,810 | |
| SBA Communications Corp. (a) | | | 1,960 | | | | 139,199 | |
| | | | | | | | |
| | | | | | $ | 371,009 | |
| | | | | | | | |
| Telephone Services – 2.2% | | | | | | | | |
| AT&T, Inc. | | | 14,530 | | | $ | 489,806 | |
| Frontier Communications Corp. | | | 25,400 | | | | 108,712 | |
| Verizon Communications, Inc. | | | 15,610 | | | | 675,445 | |
| | | | | | | | |
| | | | | | $ | 1,273,963 | |
| | | | | | | | |
| Tobacco – 2.3% | | | | | | | | |
| Lorillard, Inc. | | | 3,600 | | | $ | 420,012 | |
| Philip Morris International, Inc. | | | 10,700 | | | | 894,948 | |
| | | | | | | | |
| | | | | | $ | 1,314,960 | |
| | | | | | | | |
| Trucking – 1.2% | | | | | | | | |
| Expeditors International of Washington, Inc. | | | 7,220 | | | $ | 285,551 | |
| Swift Transportation Co. (a) | | | 43,350 | | | | 395,352 | |
| | | | | | | | |
| | | | | | $ | 680,903 | |
| | | | | | | | |
| Utilities – Electric Power – 2.4% | | | | | | | | |
| AES Corp. | | | 13,040 | | | $ | 139,528 | |
| American Electric Power Co., Inc. | | | 4,840 | | | | 206,571 | |
| Calpine Corp. (a) | | | 11,170 | | | | 202,512 | |
| CMS Energy Corp. | | | 10,530 | | | | 256,721 | |
| Edison International | | | 3,860 | | | | 174,433 | |
| Great Plains Energy, Inc. | | | 10,110 | | | | 205,334 | |
| PG&E Corp. | | | 4,070 | | | | 163,533 | |
| | | | | | | | |
| | | | | | $ | 1,348,632 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $50,881,148) | | | | | | $ | 56,251,995 | |
| | | | | | | | |
|
| CONVERTIBLE PREFERRED STOCKS – 0.7% | |
| Utilities – Electric Power – 0.7% | | | | | | | | |
| PPL Corp., 9.5% | | | 3,660 | | | $ | 191,455 | |
| PPL Corp., 8.75% | | | 3,270 | | | | 175,697 | |
| | | | | | | | |
Total Convertible Preferred Stocks
(Identified Cost, $352,234) | | | | | | $ | 367,152 | |
| | | | | | | | |
9
MFS Core Equity Series
Portfolio of Investments – continued
| | | | | | | | | | | | | | | | |
| Issuer | | Strike
Price | | | First
Exercise | | | Shares/Par | | | Value ($) | |
| | | | | | | | | | | | | | | | |
| WARRANTS – 0.0% | | | | | | | | | |
| Natural Gas – Pipeline – 0.0% | | | | | | | | | |
Kinder Morgan, Inc.
(1 share for 1 warrant) (Identified Cost, $6,157)(a) | | $ | 40 | | | | 2/15/17 | | | | 3,232 | | | $ | 12,217 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | |
|
| CALL OPTIONS PURCHASED – 0.0% | |
| Internet – 0.0% | | | | | | | | |
| Pandora Media, Inc. – January 2013 @ $13 (Premiums Paid, $3,873) | | | 45 | | | $ | 45 | |
| | | | | | | | |
|
| MONEY MARKET FUNDS – 0.6% | |
| MFS Institutional Money Market Portfolio, 0.16%, at Cost and Net Asset Value (v) | | | 353,894 | | | $ | 353,894 | |
| | | | | | | | |
Total Investments
(Identified Cost, $51,597,306) | | | | | | $ | 56,985,303 | |
| | | | | | | | |
|
| CALL OPTIONS WRITTEN – (0.1)% | |
| Computer Software – 0.0% | | | | | | | | |
| Solarwinds Inc. – January 2014 @ $65 | | | (31 | ) | | $ | (10,230 | ) |
| | | | | | | | |
| Internet – 0.0% | | | | | | | | |
| Rackspace Hosting Inc. – January 2014 @ $90 | | | (34 | ) | | $ | (17,340 | ) |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| CALL OPTIONS WRITTEN – continued | | | | | |
| Network & Telecom – 0.0% | | | | | | | | |
| Fortinet Inc. – January 2014 @ $30 | | | (10 | ) | | $ | (1,250 | ) |
| | | | | | | | |
Total Call Options Written
(Premiums Received, $32,000) | | | | | | $ | (28,820 | ) |
| | | | | | | | |
|
| SECURITIES SOLD SHORT – (0.4)% | |
| Electronics – (0.2)% | | | | | | | | |
| Xilinx, Inc. | | | (3,500 | ) | | $ | (125,650 | ) |
| | | | | | | | |
| Network & Telecom – (0.2)% | | | | | | | | |
| EZchip Semiconductor Ltd., Inc. (a) | | | (3,200 | ) | | $ | (105,824 | ) |
| | | | | | | | |
Total Securities Sold Short
(Proceeds Received, $222,407) | | | | | | $ | (231,474 | ) |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.4% | | | | | | | 217,388 | |
| | | | | | | | |
| Net Assets – 100.0% | | | | | | $ | 56,942,397 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (s) | | Security or a portion of the security was pledged to cover collateral requirements for securities sold short and/or certain derivative transactions. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
| (z) | | Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The fund holds the following restricted securities: |
| | | | | | | | | | |
| Restricted Securities | | Acquisition
Date | | Cost | | | Value | |
| EuroDekania Ltd. | | 6/25/2007 | | | $737,167 | | | | $65,906 | |
| % of Net assets | | | | 0.1% | |
At December 31, 2012, the fund had cash collateral of $225,823 and other liquid securities with an aggregate value of $577,802 to cover any commitments for securities sold short and certain derivative contracts. Cash collateral is comprised of “Deposits with brokers” in the Statement of Assets and Liabilities.
The following abbreviations are used in this report and are defined:
| ADR | | American Depositary Receipt |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
See Notes to Financial Statements
10
MFS Core Equity Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | | | | |
At 12/31/12 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $51,243,412) | | | $56,631,409 | | | | | |
Underlying affiliated funds, at cost and value | | | 353,894 | | | | | |
Total investments, at value (identified cost, $51,597,306) | | | $56,985,303 | | | | | |
Deposits with brokers | | | 225,823 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 102,116 | | | | | |
Fund shares sold | | | 7,307 | | | | | |
Interest and dividends | | | 46,307 | | | | | |
Other assets | | | 754 | | | | | |
Total assets | | | | | | | $57,367,610 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Securities sold short, at value (proceeds received, $222,407) | | | $231,474 | | | | | |
Investments purchased | | | 50,107 | | | | | |
Fund shares reacquired | | | 63,475 | | | | | |
Written options outstanding, at value (premiums received, $32,000) | | | 28,820 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 3,070 | | | | | |
Shareholder servicing costs | | | 147 | | | | | |
Distribution and/or service fees | | | 93 | | | | | |
Payable for independent Trustees’ compensation | | | 49 | | | | | |
Accrued expenses and other liabilities | | | 47,978 | | | | | |
Total liabilities | | | | | | | $425,213 | |
Net assets | | | | | | | $56,942,397 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $67,562,939 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 5,382,085 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (16,619,069 | ) | | | | |
Undistributed net investment income | | | 616,442 | | | | | |
Net assets | | | | | | | $56,942,397 | |
Shares of beneficial interest outstanding | | | | | | | 3,221,547 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $53,504,237 | | | | 3,026,499 | | | | $17.68 | |
Service Class | | | 3,438,160 | | | | 195,048 | | | | 17.63 | |
See Notes to Financial Statements
11
MFS Core Equity Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | | | | | | |
| Year ended 12/31/12 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $1,161,259 | | | | | |
Interest | | | 1,452 | | | | | |
Dividends from underlying affiliated funds | | | 690 | | | | | |
Foreign taxes withheld | | | (2,507 | ) | | | | |
Total investment income | | | | | | | $1,160,894 | |
Expenses | | | | | | | | |
Management fee | | | $444,567 | | | | | |
Distribution and/or service fees | | | 8,763 | | | | | |
Shareholder servicing costs | | | 5,960 | | | | | |
Administrative services fee | | | 18,837 | | | | | |
Independent Trustees’ compensation | | | 3,126 | | | | | |
Custodian fee | | | 16,106 | | | | | |
Shareholder communications | | | 34,049 | | | | | |
Audit and tax fees | | | 53,605 | | | | | |
Legal fees | | | 900 | | | | | |
Dividend and interest expense on securities sold short | | | 1,213 | | | | | |
Miscellaneous | | | 12,176 | | | | | |
Total expenses | | | | | | | $599,302 | |
Fees paid indirectly | | | (4 | ) | | | | |
Reduction of expenses by investment adviser | | | (55,288 | ) | | | | |
Net expenses | | | | | | | $544,010 | |
Net investment income | | | | | | | $616,884 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $4,741,535 | | | | | |
Written options | | | 8,527 | | | | | |
Securities sold short | | | 3,888 | | | | | |
Foreign currency | | | (236 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $4,753,714 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $3,557,537 | | | | | |
Written options | | | 2,029 | | | | | |
Securities sold short | | | (9,067 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | (45 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $3,550,454 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $8,304,168 | |
Change in net assets from operations | | | | | | | $8,921,052 | |
See Notes to Financial Statements
12
MFS Core Equity Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | | | |
For years ended 12/31 | | | 2012 | | | | 2011 | |
Change in net assets | | | | | | | | |
From operations | | | | �� | | | | |
Net investment income | | | $616,884 | | | | $447,180 | |
Net realized gain (loss) on investments and foreign currency | | | 4,753,714 | | | | 3,839,546 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 3,550,454 | | | | (4,723,782 | ) |
Change in net assets from operations | | | $8,921,052 | | | | $(437,056 | ) |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(445,589 | ) | | | $(586,002 | ) |
Change in net assets from fund share transactions | | | $(9,541,139 | ) | | | $(8,193,687 | ) |
Total change in net assets | | | $(1,065,676 | ) | | | $(9,216,745 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 58,008,073 | | | | 67,224,818 | |
At end of period (including undistributed net investment income of $616,442 and
$445,383, respectively) | | | $56,942,397 | | | | $58,008,073 | |
See Notes to Financial Statements
13
MFS Core Equity Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $15.33 | | | | $15.65 | | | | $13.49 | | | | $10.38 | | | | $17.18 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.18 | | | | $0.11 | | | | $0.13 | | | | $0.14 | | | | $0.16 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 2.30 | | | | (0.28 | ) | | | 2.18 | | | | 3.16 | | | | (6.85 | ) |
Total from investment operations | | | $2.48 | | | | $(0.17 | ) | | | $2.31 | | | | $3.30 | | | | $(6.69 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.13 | ) | | | $(0.15 | ) | | | $(0.15 | ) | | | $(0.19 | ) | | | $(0.11 | ) |
Net asset value, end of period (x) | | | $17.68 | | | | $15.33 | | | | $15.65 | | | | $13.49 | | | | $10.38 | |
Total return (%) (k)(r)(s)(x) | | | 16.23 | | | | (1.02 | ) | | | 17.21 | | | | 32.43 | | | | (39.15 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.00 | | | | 1.00 | | | | 1.01 | | | | 1.01 | | | | 0.95 | |
Expenses after expense reductions (f) | | | 0.90 | | | | 0.91 | | | | 0.91 | | | | 0.90 | | | | 0.90 | |
Net investment income | | | 1.05 | | | | 0.72 | | | | 0.93 | | | | 1.20 | | | | 1.13 | |
Portfolio turnover | | | 64 | | | | 68 | | | | 69 | | | | 90 | | | | 109 | |
Net assets at end of period (000 omitted) | | | $53,504 | | | | $54,471 | | | | $62,602 | | | | $61,856 | | | | $54,049 | |
| Supplemental Ratios (%): | | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets after expense reductions excluding short sale dividend and interest expense (f) | | | 0.90 | | | | 0.90 | | | | 0.90 | | | | 0.90 | | | | N/A | |
See Notes to Financial Statements
14
MFS Core Equity Series
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $15.28 | | | | $15.59 | | | | $13.45 | | | | $10.32 | | | | $17.07 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.14 | | | | $0.07 | | | | $0.09 | | | | $0.11 | | | | $0.12 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 2.29 | | | | (0.27 | ) | | | 2.17 | | | | 3.17 | | | | (6.81 | ) |
Total from investment operations | | | $2.43 | | | | $(0.20 | ) | | | $2.26 | | | | $3.28 | | | | $(6.69 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.08 | ) | | | $(0.11 | ) | | | $(0.12 | ) | | | $(0.15 | ) | | | $(0.06 | ) |
Net asset value, end of period (x) | | | $17.63 | | | | $15.28 | | | | $15.59 | | | | $13.45 | | | | $10.32 | |
Total return (%) (k)(r)(s)(x) | | | 15.95 | | | | (1.28 | ) | | | 16.86 | | | | 32.24 | | | | (39.32 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.25 | | | | 1.25 | | | | 1.26 | | | | 1.26 | | | | 1.20 | |
Expenses after expense reductions (f) | | | 1.15 | | | | 1.16 | | | | 1.16 | | | | 1.15 | | | | 1.15 | |
Net investment income | | | 0.81 | | | | 0.47 | | | | 0.67 | | | | 0.95 | | | | 0.87 | |
Portfolio turnover | | | 64 | | | | 68 | | | | 69 | | | | 90 | | | | 109 | |
Net assets at end of period (000 omitted) | | | $3,438 | | | | $3,537 | | | | $4,623 | | | | $4,783 | | | | $4,571 | |
| Supplemental Ratios (%): | | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets after expense reductions excluding
short sale dividend and interest expense (f) | | | 1.15 | | | | 1.15 | | | | 1.15 | | | | 1.15 | | | | N/A | |
| (d) | | Per share data is based on average shares outstanding. |
| (f) | | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (r) | | Certain expenses have been reduced without which performance would have been lower. |
| (s) | | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (x) | | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
15
MFS Core Equity Series
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Core Equity Series (the fund) is a series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In this reporting period the fund adopted Financial Accounting Standards Board (FASB) Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 seeks to improve the comparability of fair value measurements as presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) by providing common requirements for fair value measurement and disclosure.
In December 2011, the FASB issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods, ASU 2011-11 is intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. Although still evaluating the potential impacts of ASU 2011-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Equity securities held short, for which there were no sales reported for that day, are generally valued at the last quoted daily ask quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Exchange-traded options are generally valued at the last sale or official closing price as provided by a third-party pricing service on the exchange on which such options are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as provided by a third-party pricing service on the exchange on which such options are primarily traded. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. Foreign currency options are generally valued at valuations provided by a third-party pricing service. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price
16
MFS Core Equity Series
Notes to Financial Statements – continued
movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. Other financial instruments are derivative instruments not reflected in total investments, such as written options. The following is a summary of the levels used as of December 31, 2012 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $55,350,577 | | | | $45 | | | | $— | | | | $55,350,622 | |
Israel | | | 587,815 | | | | — | | | | — | | | | 587,815 | |
Canada | | | 267,261 | | | | — | | | | — | | | | 267,261 | |
Netherlands | | | 188,464 | | | | — | | | | — | | | | 188,464 | |
Brazil | | | 93,513 | | | | — | | | | — | | | | 93,513 | |
Austria | | | 77,828 | | | | — | | | | — | | | | 77,828 | |
United Kingdom | | | — | | | | — | | | | 65,906 | | | | 65,906 | |
| Mutual Funds | | | 353,894 | | | | — | | | | — | | | | 353,894 | |
| Total Investments | | | $56,919,352 | | | | $45 | | | | $65,906 | | | | $56,985,303 | |
| Short Sales | | | $(231,474 | ) | | | $— | | | | $— | | | | $(231,474 | ) |
| | | | |
| Other Financial Instruments | | | | | | | | | | | | |
| Written Options | | | $(28,820 | ) | | | $— | | | | $— | | | | $(28,820 | ) |
For further information regarding security characteristics, see the Portfolio of Investments.
The following is a reconciliation of level 3 assets for which significant unobservable inputs were used to determine fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period. The table presents the activity of level 3 securities held at the beginning and the end of the period.
| | | | |
| | | Equity Securities | |
| Balance as of 12/31/11 | | | $127,787 | |
Change in unrealized appreciation (depreciation) | | | (61,881 | ) |
| Balance as of 12/31/12 | | | $65,906 | |
The net change in unrealized appreciation (depreciation) from investments still held as level 3 at December 31, 2012 is $(61,881).
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Derivatives – The fund uses derivatives for different purposes, primarily to increase or decrease exposure to a particular market or segment of the market, or security, to increase or decrease interest rate or currency exposure, or as alternatives to direct investments. Derivatives are used for hedging or non-hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. When the fund uses derivatives as an investment to increase market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative’s original cost.
17
MFS Core Equity Series
Notes to Financial Statements – continued
The derivative instruments used by the fund were written options and purchased options. The fund’s period end derivatives, as presented in the Portfolio of Investments, generally are indicative of the volume of its derivative activity during the period.
The following table presents, by major type of derivative contract, the fair value, on a gross basis, of the asset and liability components of derivatives held by the fund at December 31, 2012 as reported in the Statement of Assets and Liabilities:
| | | | | | | | | | |
| | | | | Fair Value (a) | |
| Risk | | Derivative Contracts | | Asset Derivatives | | | Liability Derivatives | |
| Equity | | Purchased Equity Options | | | $45 | | | | $— | |
| Equity | | Written Equity Options | | | — | | | | (28,820 | ) |
| Total | | | | | $45 | | | | $(28,820 | ) |
| (a) | The value of purchased options outstanding is included in total investments, at value, within the fund’s Statement of Assets and Liabilities. |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2012 as reported in the Statement of Operations:
| | | | | | | | |
| Risk | | Investments
(Purchased Options) | | | Written Options | |
| Equity | | | $15,759 | | | | $8,527 | |
The following table presents, by major type of derivative contract, the change in unrealized appreciation (depreciation) on derivatives held by the fund for the year ended December 31, 2012 as reported in the Statement of Operations:
| | | | | | | | |
| Risk | | Investments
(Purchased Options) | | | Written Options | |
| Equity | | | $(3,828 | ) | | | $2,029 | |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an International Swaps and Derivatives Association (ISDA) Master Agreement on a bilateral basis with each of the counterparties with whom it undertakes a significant volume of transactions. The ISDA Master Agreement gives each party to the agreement the right to terminate all transactions traded under such agreement if there is a certain deterioration in the credit quality of the other party. The ISDA Master Agreement gives the fund the right, upon an event of default by the applicable counterparty or a termination of the agreement, to close out all transactions traded under such agreement and to net amounts owed under each transaction to one net amount payable by one party to the other. This right to close out and net payments across all transactions traded under the ISDA Master Agreement could result in a reduction of the fund’s credit risk to such counterparty equal to any amounts payable by the fund under the applicable transactions, if any. However, absent an event of default by the counterparty or a termination of the agreement, the ISDA Master Agreement does not result in an offset of reported amounts of assets and liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearing house for exchange traded derivatives (i.e., futures contracts and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forward foreign currency exchange contracts, swap agreements and over-the-counter options). For derivatives traded under an ISDA Master Agreement, the collateral requirements are netted across all transactions traded under such agreement and one amount is posted from one party to the other to collateralize such obligations. Cash collateral that has been pledged to cover obligations of the fund under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as “Deposits with brokers.” Securities collateral pledged for the same purpose, if any, is noted in the Portfolio of Investments.
Written Options – In exchange for a premium, the fund wrote call options on securities that it anticipated the price would decline and also wrote put options on securities that it anticipated the price would increase. At the time the option was written, the fund believed the premium received exceeded the potential loss that could result from adverse price changes in the options’ underlying securities. In a written option, the fund as the option writer grants the buyer the right to purchase from, or sell to, the fund a specified number of shares or units of a particular security, currency or index at a specified price within a specified period of time.
The premium received is initially recorded as a liability in the Statement of Assets and Liabilities. The option is subsequently marked-to-market daily with the difference between the premium received and the market value of the written option being recorded as unrealized appreciation or depreciation. When a written option expires, the fund realizes a gain equal to the amount of the premium received. The difference between the premium received and the amount paid on effecting a closing transaction is considered a realized gain or loss. When a written call option is exercised, the premium received is offset against the proceeds to determine the realized gain or loss. When a written put option is exercised, the premium reduces the cost basis of the security purchased by the fund.
18
MFS Core Equity Series
Notes to Financial Statements – continued
At the initiation of the written option contract, for exchange traded options, the fund is required to deposit securities or cash as collateral with the custodian for the benefit of the broker. For over-the-counter options, the fund may post collateral subject to the terms of an ISDA Master Agreement as generally described above if the market value of the options contract moves against it. The fund, as writer of an option, may have no control over whether the underlying securities may be sold (call) or purchased (put) and, as a result, bears the market risk of an unfavorable change in the price of the securities underlying the written option. Losses from writing options can exceed the premium received and can exceed the potential loss from an ordinary buy and sell transaction. Although the fund’s market risk may be significant, the maximum counterparty credit risk to the fund is equal to the market value of any collateral posted to the broker. For over-the-counter options, this risk is mitigated in cases where there is an ISDA Master Agreement between the fund and the counterparty providing for netting as described above.
Written Options
| | | | | | | | |
| | | Number of
contracts | | | Premiums
received | |
| Outstanding, beginning of period | | | 16 | | | | $1,711 | |
| Options written | | | 193 | | | | 44,215 | |
| Options closed | | | (87 | ) | | | (10,260 | ) |
| Options expired | | | (47 | ) | | | (3,666 | ) |
| Outstanding, end of period | | | 75 | | | | $32,000 | |
Purchased Options – The fund purchased call and put options for a premium. Purchased call and put options entitle the holder to buy and sell a specified number of shares or units of a particular security, currency or index at a specified price at a specified date or within a specified period of time. Purchasing call options may hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or increase the fund’s exposure to an underlying instrument. Purchasing put options may hedge against an anticipated decline in the value of portfolio securities or currency or decrease the fund’s exposure to an underlying instrument.
The premium paid is initially recorded as an investment in the Statement of Assets and Liabilities. That investment is subsequently marked-to-market daily with the difference between the premium paid and the market value of the purchased option being recorded as unrealized appreciation or depreciation. Premiums paid for purchased call and put options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased call option, the premium paid is added to the cost of the security or financial instrument purchased. Upon the exercise or closing of a purchased put option, the premium paid is offset against the proceeds on the sale of the underlying security or financial instrument in order to determine the realized gain or loss on investments.
Whether or not the option is exercised, the fund’s maximum risk of loss from purchasing an option is the amount of premium paid. All option contracts involve credit risk if the counterparty to the option contract fails to perform. For over-the-counter options, this risk is mitigated in cases where there is an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and for posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.
Short Sales – The fund entered into short sales whereby it sells a security it does not own in anticipation of a decline in the value of that security. The fund will realize a gain if the security price decreases and a loss if the security price increases between the date of the short sale and the date on which the fund replaces the borrowed security. Losses from short sales can exceed the proceeds of the security sold; and they can also exceed the potential loss from an ordinary buy and sell transaction. The amount of any premium, dividends, or interest the fund may be required to pay in connection with a short sale will be recognized as a fund expense. During the year ended December 31, 2012, this expense amounted to $1,213. The fund segregates cash or marketable securities in an amount that, when combined with the amount of proceeds from the short sale deposited with the broker, at least equals the current market value of the security sold short.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2012, there were no securities on loan or collateral outstanding.
19
MFS Core Equity Series
Notes to Financial Statements – continued
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount, for the year ended December 31, 2012, is shown as a reduction of total expenses in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Foreign taxes have been accrued by the fund in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
During the year ended December 31, 2012, there were no significant adjustments due to differences between book and tax accounting.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/12 | | | 12/31/11 | |
| Ordinary income (including any short-term capital gains) | | | $445,589 | | | | $586,002 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/12 | | | | |
| Cost of investments | | | $51,607,762 | |
| Gross appreciation | | | 7,827,149 | |
| Gross depreciation | | | (2,449,608 | ) |
| Net unrealized appreciation (depreciation) | | | $5,377,541 | |
| Undistributed ordinary income | | | 616,442 | |
| Capital loss carryforwards | | | (16,594,917 | ) |
| Other temporary differences | | | (19,608 | ) |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized after December 31, 2010 may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
As of December 31, 2012, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | | |
| Pre-enactment losses: | | | | |
| 12/31/16 | | | $(7,590,612 | ) |
| 12/31/17 | | | (9,004,305 | ) |
| Total | | | $(16,594,917 | ) |
20
MFS Core Equity Series
Notes to Financial Statements – continued
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/12 | | | Year ended
12/31/11 | |
| Initial Class | | | $428,757 | | | | $560,229 | |
| Service Class | | | 16,832 | | | | 25,773 | |
| Total | | | $445,589 | | | | $586,002 | |
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
| | | | |
| First $1 billion of average daily net assets | | | 0.75% | |
| Average daily net assets in excess of $1 billion | | | 0.65% | |
The management fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.75% of the fund’s average daily net assets.
The investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, extraordinary expenses, brokerage and transaction costs and investment-related expenses, such that total annual operating expenses do not exceed 0.90% of average daily net assets for the Initial Class shares and 1.15% of average daily net assets for the Service Class shares. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2014. For the year ended December 31, 2012, this reduction amounted to $55,074 and is reflected as a reduction of total expenses in the Statement of Operations.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2012, the fee was $5,424, which equated to 0.0091% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2012, these costs amounted to $536.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.0318% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended
21
MFS Core Equity Series
Notes to Financial Statements – continued
December 31, 2012, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $501 and are included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $214, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
Purchases and sales of investments, other than purchased option transactions, short sales, and short-term obligations, aggregated $37,380,747 and $46,431,870, respectively.
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 320,287 | | | | $5,394,125 | | | | 432,255 | | | | $6,792,348 | |
Service Class | | | 11,414 | | | | 193,883 | | | | 22,622 | | | | 357,190 | |
| | | 331,701 | | | | $5,588,008 | | | | 454,877 | | | | $7,149,538 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 25,236 | | | | $428,757 | | | | 38,215 | | | | $560,229 | |
Service Class | | | 992 | | | | 16,832 | | | | 1,762 | | | | 25,773 | |
| | | 26,228 | | | | $445,589 | | | | 39,977 | | | | $586,002 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (872,197 | ) | | | $(14,755,256 | ) | | | (917,874 | ) | | | $(14,513,082 | ) |
Service Class | | | (48,838 | ) | | | (819,480 | ) | | | (89,506 | ) | | | (1,416,145 | ) |
| | | (921,035 | ) | | | $(15,574,736 | ) | | | (1,007,380 | ) | | | $(15,929,227 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (526,674 | ) | | | $(8,932,374 | ) | | | (447,404 | ) | | | $(7,160,505 | ) |
Service Class | | | (36,432 | ) | | | (608,765 | ) | | | (65,122 | ) | | | (1,033,182 | ) |
| | | (563,106 | ) | | | $(9,541,139 | ) | | | (512,526 | ) | | | $(8,193,687 | ) |
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2012, the fund’s commitment fee and interest expense were $385 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
| | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | 284,156 | | | 14,541,988 | | | | (14,472,250 | ) | | | 353,894 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | $— | | | $— | | | | $690 | | | | $353,894 | |
22
MFS Core Equity Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of
MFS Core Equity Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Core Equity Series (the “Fund”) (one of the series comprising MFS Variable Insurance Trust) as of December 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Core Equity Series as of December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2013
23
MFS Core Equity Series
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 1, 2013, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES | | | | | | | | |
Robert J. Manning (k) (age 49) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Chief Executive Officer and Director; President (until December 2009); Chief Investment Officer (until July 2010) | | N/A |
| | | | |
| INDEPENDENT TRUSTEES | | | | | | | | |
David H. Gunning (age 70) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman; Portman Limited (mining), Director (until 2008) |
| | | | |
Robert E. Butler (age 71) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 57) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 71) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 68) | | Trustee | | December 2004 | | Private investor; Rouse Properties Inc. (real estate), Director | | N/A |
| | | | |
John P. Kavanaugh (age 58) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
J. Dale Sherratt (age 74) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner | | N/A |
| | | | |
Laurie J. Thomsen
(age 55) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 71) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
John M. Corcoran (k) (age 47) | | President | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) | | N/A |
| | | | |
| Christopher R. Bohane (k) (age 39) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kino Clark (k) (age 44) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 53) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
| | | | |
Ethan D. Corey (k) (age 49) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
24
MFS Core Equity Series
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
David L. DiLorenzo (k) (age 44) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Robyn L. Griffin (age 37) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 39) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 62) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 42) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 42) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 60) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Frank L. Tarantino (age 68) | | Independent
Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 52) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. For the period October 2008, until January 2012, Mr. Corcoran served as Treasurer of the Funds. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2013, the Trustees served as board members of 143 funds within the MFS Family of Funds.
25
MFS Core Equity Series
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Manager Joseph MacDougall | | |
26
MFS Core Equity Series
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2012 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2011 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
In considering the Fund’s investment performance, the Trustees took into account that, effective May 1, 2007, the Fund changed its name (formerly, the Fund was named MFS Capital Opportunities Series) and made related changes to its investment policies and strategies. Notwithstanding these changes, the Trustees considered the Fund’s prior investment performance prior to May 1, 2007 to be relevant. Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2011, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 2nd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 2nd quintile for each of the one- and five-year periods ended December 31, 2011 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course
27
MFS Core Equity Series
Board Review of Investment Advisory Agreement – continued
of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to institutional accounts, if any. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund is likely to benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2012.
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of the MFS Web site (mfs.com).
28
MFS Core Equity Series
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling
1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 100% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
29
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
30
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
31
ANNUAL REPORT
December 31, 2012
MFS® GROWTH SERIES
MFS® Variable Insurance Trust
VEG-ANN
MFS® GROWTH SERIES
CONTENTS
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ NO BANK OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Growth Series
LETTER FROM THE CHAIRMAN AND CEO
Dear Contract Owners:
The global market outlook for 2013 is one of cautious optimism. While we are seeing some positive economic trends in the United States, Europe and China, the overall environment remains challenging. In the United States, the recent fiscal cliff agreement was received positively by investors, even though it mostly addressed pressing taxation issues and did not resolve additional concerns, including the need for spending cuts and a large-scale reduction of the federal debt. These issues will be front and center again in the spring. Despite the ongoing uncertainty, economic tailwinds are gathering strength as the U.S. housing and job markets are improving and consumer confidence is rising.
Overseas, the debt crisis continues to weigh heavily on eurozone markets, with even Germany — long an economic stalwart — experiencing some contraction. These ongoing challenges could be a drag on global market performance this year. In Asia, manufacturing activity has accelerated in emerging markets such as China and India, and we are seeing signs of stabilized loan growth in China, a leading indicator of that country’s economic health. In contrast, Japan’s economy is contracting sharply under deflationary pressures. Nevertheless, Japanese markets have responded favorably to early actions by the new government, which appears determined to act aggressively, along with the Bank of Japan, to stimulate growth.
As always, managing risk in the face of uncertainty remains a top priority for investors. At MFS®, our uniquely collaborative investment process revolves around global research and our disciplined risk management approach. Our global team of investment professionals shares ideas and evaluates opportunities across continents, investment disciplines and asset classes — all with a goal of building better insights, and ultimately better results, for our clients.
We remain mindful of the many economic challenges investors face today, and believe it is more important than ever to maintain a long-term view, employ time-tested principles, such as asset allocation and diversification, and work closely with investment advisors to identify and pursue the most suitable opportunities.
Respectfully,
Robert J. Manning
Chairman and Chief Executive Officer
MFS Investment Management®
February 15, 2013
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
MFS Growth Series
PORTFOLIO COMPOSITION
Portfolio structure
| | | | |
| Top ten holdings | | | | |
| Apple, Inc. | | | 5.7% | |
| Google, Inc., “A” | | | 3.9% | |
| Danaher Corp. | | | 2.9% | |
| American Tower Corp., REIT | | | 2.7% | |
| Qualcomm, Inc. | | | 2.4% | |
| Visa, Inc., “A” | | | 2.3% | |
| Precision Castparts Corp. | | | 2.3% | |
| EMC Corp. | | | 2.2% | |
| MasterCard, Inc., “A” | | | 2.0% | |
| Thermo Fisher Scientific, Inc. | | | 1.9% | |
| | | | |
| Equity sectors | | | | |
| Technology | | | 22.9% | |
| Health Care | | | 13.0% | |
| Leisure | | | 11.5% | |
| Retailing | | | 9.6% | |
| Industrial Goods & Services | | | 8.9% | |
| Financial Services | | | 6.6% | |
| Energy | | | 6.2% | |
| Consumer Staples | | | 5.2% | |
| Special Products & Services | | | 4.8% | |
| Utilities & Communications | | | 3.3% | |
| Basic Materials | | | 2.9% | |
| Autos & Housing | | | 2.1% | |
| Transportation | | | 1.9% | |
Percentages are based on net assets as of 12/31/12.
The portfolio is actively managed and current holdings may be different.
2
MFS Growth Series
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2012, Initial Class shares of the MFS Growth Series (“fund”) provided a total return of 17.39%, while Service Class shares of the fund provided a total return of 17.07%. These compare with a return of 15.26% over the same period for the fund’s benchmark, the Russell 1000 Growth Index.
Market Environment
The beginning of the period was characterized by a risk-on sentiment as a result of additional liquidity measures by the Federal Reserve Bank (“Fed”) and the European Central Bank (“ECB”) as well as a commensurate improvement in macroeconomic conditions. During this time, global equity valuations rose, credit spreads contracted, and high-quality sovereign yields increased modestly.
During the middle of the period, however, conditions worsened, driven by broadly weaker global macroeconomic indicators, as well as renewed concerns over the eurozone’s capacity and determination to address its ongoing crisis. Despite this deterioration, broad market sentiment remained relatively resilient as equity markets generally maintained gains and credit spreads did not indicate deterioration.
However, this renewed weakness in the fundamentals precipitated a further round of monetary easing by both the Fed (through a third round of quantitative easing) and the ECB (through a new bond purchase facility) in the second half of the period, which soon instilled additional confidence in risk markets. Nonetheless, towards the end of the period, weaker equity earnings reports and declining forward guidance caused market sentiment to soften. In addition, as we moved toward year end, the fiscal cliff negotiations between the Republicans in the U.S. Congress and President Obama were a particular source of market attention, where uncertainty surrounding the fiscal negotiations continued right up to the end-of-year deadline.
Contributors to Performance
Strong stock selection in the leisure sector was a primary driver of relative outperformance during the period, led by holdings of strong-performing media and entertainment company News Corp. The timing of the fund’s ownership in shares of fast food giant McDonald’s (h) also boosted relative results.
The timing of the fund’s overweight allocation to the energy sector contributed to relative performance as the sector underperformed the benchmark for the period. Avoiding shares of integrated oil and gas company Exxon Mobil was a positive factor for relative returns. Shares of Exxon Mobil traded lower over the period as the company experienced lower production and currency headwinds in a challenging global macroeconomic environment which caused energy prices to be lower.
Stock selection in the financial services sector helped relative results. Holding shares of global payments firm Visa bolstered relative performance. Visa’s shares rose over the period as consumer spending improved relative to prior years allowing the company to consistently beat earnings expectations throughout the year.
The combination of an underweight position and stock selection in the technology sector positively influenced relative performance. Holding shares of software giant Apple benefited relative returns as the stock outperformed the benchmark over the period. Shares of Apple traded higher throughout most of the period due to continued strong demand for its iPhone and iPad products as well as favorable rulings for the firm’s patent infringement lawsuit against Samsung. The fund’s avoidance of semiconductor company Intel, and an underweight position in diversified technology products and services company International Business Machines (IBM) (h), also supported relative results as both stocks underperformed the benchmark over the period.
Stock selection in the utilities & communications sector was another factor that contributed to relative performance, led by the fund’s holdings of strong-performing broadcast and communication tower management firm American Tower.
The combination of an overweight position and stock selection in the health care sector also strengthened relative returns. Holdings of life sciences supply company Thermo Fisher Scientific (b) were among the fund’s top relative contributors for the year. Shares of Thermo Fisher Scientific traded higher throughout the period as the company benefited from solid organic revenue growth, an initiation of a quarterly dividend starting at the beginning of the year, and a series of share repurchases.
Detractors from Performance
Stock selection in both the autos & housing and industrial goods & services sectors detracted from relative performance. Within autos & housing, holdings of multi-industrial company Johnson Controls hampered relative returns as the stock delivered weak performance over the period. The stock struggled during the early part of the year as declining operating margins and an unusually warm winter in the beginning of the year, which lowered demand for car batteries, negatively impacted its share price. Within the industrial goods & services sector, holding shares of mining equipment manufacturer Joy Global weighed on relative results as weak demand for commodities throughout the year appeared to have caused the company’s share price to trade lower.
3
MFS Growth Series
Management Review – continued
Elsewhere, the fund’s holdings of Israeli-headquartered security software provider Check Point Software Technologies (b), internet search giant Google, independent energy company SM Energy (h), and network security provider F5 Networks (h) hindered relative performance as all four stocks underperformed the benchmark during the period. Not holding shares of home improvement chain Home Depot, and the fund’s underweight position in internet retailer Amazon.com (b), also weakened relative returns. The timing of the fund’s ownership in shares of healthcare services company Express Scripts Holdings also detracted from relative results.
The fund’s cash and/or cash equivalents position held back relative performance. The fund strives to be fully invested and generally holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Respectfully,
Eric Fischman
Portfolio Manager
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio manager only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
4
MFS Growth Series
PERFORMANCE SUMMARY THROUGH 12/31/12
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/12
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 7/24/95 | | 17.39% | | 3.06% | | 9.34% | | |
| | | Service Class | | 5/01/00 | | 17.07% | | 2.81% | | 9.07% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Russell 1000 Growth Index (f) | | 15.26% | | 3.12% | | 7.52% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Russell 1000 Growth Index – constructed to provide a comprehensive barometer for growth securities in the large-cap segment of the U.S. equity universe. Companies in this index generally have higher price-to-book ratios and higher forecasted growth values.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Growth Series
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2012 through December 31, 2012
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2012 through December 31, 2012.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | | Beginning
Account Value
7/01/12 | | | Ending Account Value
12/31/12 | | | Expenses Paid
During Period (p)
7/01/12-12/31/12 | |
| Initial Class | | Actual | | | 0.82% | | | | $1,000.00 | | | | $1,075.75 | | | | $4.28 | |
| | Hypothetical (h) | | | 0.82% | | | | $1,000.00 | | | | $1,021.01 | | | | $4.17 | |
| Service Class | | Actual | | | 1.07% | | | | $1,000.00 | | | | $1,074.55 | | | | $5.58 | |
| | Hypothetical (h) | | | 1.07% | | | | $1,000.00 | | | | $1,019.76 | | | | $5.43 | |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS Growth Series
PORTFOLIO OF INVESTMENTS – 12/31/12
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 98.9% | |
| Aerospace – 3.3% | | | | | | | | |
| Honeywell International, Inc. | | | 168,560 | | | $ | 10,698,500 | |
| Precision Castparts Corp. | | | 139,304 | | | | 26,386,964 | |
| | | | | | | �� | |
| | | | | | $ | 37,085,464 | |
| | | | | | | | |
| Alcoholic Beverages – 1.3% | | | | | | | | |
| Diageo PLC | | | 375,627 | | | $ | 10,935,450 | |
| Pernod Ricard S.A. | | | 34,650 | | | | 4,074,382 | |
| | | | | | | | |
| | | | | | $ | 15,009,832 | |
| | | | | | | | |
| Apparel Manufacturers – 2.0% | | | | | | | | |
| LVMH Moet Hennessy Louis Vuitton S.A. | | | 40,498 | | | $ | 7,546,688 | |
| NIKE, Inc., “B” | | | 140,842 | | | | 7,267,447 | |
| VF Corp. | | | 49,184 | | | | 7,425,308 | |
| | | | | | | | |
| | | | | | $ | 22,239,443 | |
| | | | | | | | |
| Automotive – 1.2% | | | | | | | | |
| BorgWarner Transmission Systems, Inc. (a) | | | 56,695 | | | $ | 4,060,496 | |
| Johnson Controls, Inc. | | | 224,720 | | | | 6,898,904 | |
| LKQ Corp. (a) | | | 146,010 | | | | 3,080,811 | |
| | | | | | | | |
| | | | | | $ | 14,040,211 | |
| | | | | | | | |
| Biotechnology – 4.1% | | | | | | | | |
| Alexion Pharmaceuticals, Inc. (a) | | | 113,630 | | | $ | 10,659,630 | |
| Biogen Idec, Inc. (a) | | | 87,059 | | | | 12,768,944 | |
| Celgene Corp. (a) | | | 147,691 | | | | 11,626,236 | |
| Gilead Sciences, Inc. (a) | | | 166,980 | | | | 12,264,681 | |
| | | | | | | | |
| | | | | | $ | 47,319,491 | |
| | | | | | | | |
| Broadcasting – 4.8% | | | | | | | | |
| Discovery Communications, Inc., “A” (a) | | | 195,330 | | | $ | 12,399,548 | |
| News Corp., “A” | | | 785,350 | | | | 20,057,839 | |
| Viacom, Inc., “B” | | | 213,470 | | | | 11,258,408 | |
| Walt Disney Co. | | | 218,820 | | | | 10,895,048 | |
| | | | | | | | |
| | | | | | $ | 54,610,843 | |
| | | | | | | | |
| Brokerage & Asset Managers – 1.8% | | | | | |
| Affiliated Managers Group, Inc. (a) | | | 87,730 | | | $ | 11,418,060 | |
| BlackRock, Inc. | | | 44,110 | | | | 9,117,978 | |
| | | | | | | | |
| | | | | | $ | 20,536,038 | |
| | | | | | | | |
| Business Services – 3.2% | | | | | | | | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 243,866 | | | $ | 18,058,277 | |
| FleetCor Technologies, Inc. (a) | | | 116,510 | | | | 6,250,762 | |
| Verisk Analytics, Inc., “A” (a) | | | 242,600 | | | | 12,372,600 | |
| | | | | | | | |
| | | | | | $ | 36,681,639 | |
| | | | | | | | |
| Cable TV – 2.3% | | | | | | | | |
| Comcast Corp., “Special A” | | | 490,100 | | | $ | 17,619,095 | |
| Time Warner Cable, Inc. | | | 88,130 | | | | 8,565,355 | |
| | | | | | | | |
| | | | | | $ | 26,184,450 | |
| | | | | | | | |
| Chemicals – 1.1% | | | | | | | | |
| Monsanto Co. | | | 138,370 | | | $ | 13,096,721 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Computer Software – 4.4% | | | | | | | | |
| Check Point Software Technologies Ltd. (a) | | | 277,430 | | | $ | 13,216,765 | |
| Citrix Systems, Inc. (a) | | | 132,202 | | | | 8,692,282 | |
| Oracle Corp. | | | 354,020 | | | | 11,795,946 | |
| Parametric Technology Corp. (a) | | | 167,680 | | | | 3,774,477 | |
| Salesforce.com, Inc. (a) | | | 56,108 | | | | 9,431,755 | |
| TIBCO Software, Inc. (a) | | | 124,820 | | | | 2,747,288 | |
| | | | | | | | |
| | | | | | $ | 49,658,513 | |
| | | | | | | | |
| Computer Software – Systems – 7.9% | |
| Apple, Inc. | | | 122,675 | | | $ | 65,389,455 | |
| EMC Corp. (a) | | | 977,260 | | | | 24,724,678 | |
| | | | | | | | |
| | | | | | $ | 90,114,133 | |
| | | | | | | | |
| Construction – 0.9% | | | | | | | | |
| Stanley Black & Decker, Inc. | | | 144,710 | | | $ | 10,704,199 | |
| | | | | | | | |
| Consumer Products – 1.0% | | | | | | | | |
| Estee Lauder Cos., Inc., “A” | | | 184,909 | | | $ | 11,068,653 | |
| | | | | | | | |
| Consumer Services – 1.6% | | | | | | | | |
| Priceline.com, Inc. (a) | | | 28,894 | | | $ | 17,948,953 | |
| | | | | | | | |
| Electrical Equipment – 3.3% | | | | | | | | |
| AMETEK, Inc. | | | 137,810 | | | $ | 5,177,522 | |
| Danaher Corp. | | | 584,270 | | | | 32,660,693 | |
| | | | | | | | |
| | | | | | $ | 37,838,215 | |
| | | | | | | | |
| Electronics – 2.3% | | | | | | | | |
| Altera Corp. | | | 306,060 | | | $ | 10,540,706 | |
| Broadcom Corp., “A” | | | 203,160 | | | | 6,746,944 | |
| Linear Technology Corp. | | | 245,130 | | | | 8,407,959 | |
| | | | | | | | |
| | | | | | $ | 25,695,609 | |
| | | | | | | | |
| Energy – Independent – 3.7% | | | | | | | | |
| Anadarko Petroleum Corp. | | | 89,660 | | | $ | 6,662,635 | |
| Cabot Oil & Gas Corp. | | | 177,340 | | | | 8,820,892 | |
| EOG Resources, Inc. | | | 89,420 | | | | 10,801,042 | |
| Noble Energy, Inc. | | | 84,890 | | | | 8,636,709 | |
| Pioneer Natural Resources Co. | | | 66,590 | | | | 7,097,828 | |
| | | | | | | | |
| | | | | | $ | 42,019,106 | |
| | | | | | | | |
| Engineering – Construction – 0.4% | |
| Fluor Corp. | | | 79,930 | | | $ | 4,695,088 | |
| | | | | | | | |
| Food & Beverages – 2.0% | | | | | | | | |
| Groupe Danone | | | 71,590 | | | $ | 4,729,925 | |
| Mead Johnson Nutrition Co., “A” | | | 157,736 | | | | 10,393,225 | |
| Mondelez International, Inc. | | | 312,150 | | | | 7,950,461 | |
| | | | | | | | |
| | | | | | $ | 23,073,611 | |
| | | | | | | | |
| Gaming & Lodging – 1.8% | | | | | | | | |
| Las Vegas Sands Corp. | | | 258,110 | | | $ | 11,914,358 | |
| Wynn Resorts Ltd. | | | 75,547 | | | | 8,498,282 | |
| | | | | | | | |
| | | | | | $ | 20,412,640 | |
| | | | | | | | |
7
MFS Growth Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| General Merchandise – 2.9% | | | | | | | | |
| Costco Wholesale Corp. | | | 152,621 | | | $ | 15,074,376 | |
| Dollar General Corp. (a) | | | 148,060 | | | | 6,527,965 | |
| Target Corp. | | | 199,914 | | | | 11,828,911 | |
| | | | | | | | |
| | | | | | $ | 33,431,252 | |
| | | | | | | | |
| Insurance – 0.5% | | | | | | | | |
| ACE Ltd. | | | 77,840 | | | $ | 6,211,632 | |
| | | | | | | | |
| Internet – 5.9% | | | | | | | | |
| eBay, Inc. (a) | | | 292,970 | | | $ | 14,947,329 | |
| Google, Inc., “A” (a) | | | 63,224 | | | | 44,849,209 | |
| LinkedIn Corp., “A” (a) | | | 33,780 | | | | 3,878,620 | |
| Rackspace Hosting, Inc. (a) | | | 51,480 | | | | 3,823,420 | |
| | | | | | | | |
| | | | | | $ | 67,498,578 | |
| | | | | | | | |
| Leisure & Toys – 0.6% | | | | | | | | |
| Polaris Industries, Inc. | | | 77,199 | | | $ | 6,496,296 | |
| | | | | | | | |
| Machinery & Tools – 1.9% | | | | | | | | |
| Cummins, Inc. | | | 47,540 | | | $ | 5,150,959 | |
| Joy Global, Inc. | | | 128,681 | | | | 8,207,274 | |
| Polypore International, Inc. (a) | | | 61,140 | | | | 2,843,010 | |
| Roper Industries, Inc. | | | 51,590 | | | | 5,751,253 | |
| | | | | | | | |
| | | | | | $ | 21,952,496 | |
| | | | | | | | |
| Medical & Health Technology & Services – 2.7% | |
| Catamaran Corp. (a) | | | 197,080 | | | $ | 9,284,439 | |
| Cerner Corp. (a) | | | 80,572 | | | | 6,255,610 | |
| Express Scripts Holding Co. (a) | | | 289,040 | | | | 15,608,160 | |
| | | | | | | | |
| | | | | | $ | 31,148,209 | |
| | | | | | | | |
| Medical Equipment – 3.8% | | | | | | | | |
| Cooper Cos., Inc. | | | 46,080 | | | $ | 4,261,478 | |
| Covidien PLC | | | 303,038 | | | | 17,497,414 | |
| Thermo Fisher Scientific, Inc. | | | 332,049 | | | | 21,178,085 | |
| | | | | | | | |
| | | | | | $ | 42,936,977 | |
| | | | | | | | |
| Natural Gas – Pipeline – 0.6% | | | | | | | | |
| Kinder Morgan, Inc. | | | 182,420 | | | $ | 6,444,899 | |
| | | | | | | | |
| Network & Telecom – 2.4% | | | | | | | | |
| Qualcomm, Inc. | | | 443,629 | | | $ | 27,513,871 | |
| | | | | | | | |
| Oil Services – 2.5% | | | | | | | | |
| Cameron International Corp. (a) | | | 150,850 | | | $ | 8,516,991 | |
| Dresser-Rand Group, Inc. (a) | | | 148,302 | | | | 8,325,674 | |
| FMC Technologies, Inc. (a) | | | 128,180 | | | | 5,489,949 | |
| Noble Corp. | | | 81,970 | | | | 2,854,195 | |
| Schlumberger Ltd. | | | 48,202 | | | | 3,339,917 | |
| | | | | | | | |
| | | | | | $ | 28,526,726 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 4.3% | | | | | |
| MasterCard, Inc., “A” | | | 45,402 | | | $ | 22,305,095 | |
| Visa, Inc., “A” | | | 175,927 | | | | 26,667,015 | |
| | | | | | | | |
| | | | | | $ | 48,972,110 | |
| | | | | | | | |
| Pharmaceuticals – 2.4% | | | | | | | | |
| Abbott Laboratories | | | 204,740 | | | $ | 13,410,470 | |
| Allergan, Inc. | | | 107,124 | | | | 9,826,485 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Pharmaceuticals – continued | | | | | |
| Perrigo Co. | | | 44,860 | | | $ | 4,666,786 | |
| | | | | | | | |
| | | | | | $ | 27,903,741 | |
| | | | | | | | |
| Railroad & Shipping – 1.4% | | | | | | | | |
| Kansas City Southern Co. | | | 102,860 | | | $ | 8,586,753 | |
| Union Pacific Corp. | | | 58,924 | | | | 7,407,925 | |
| | | | | | | | |
| | | | | | $ | 15,994,678 | |
| | | | | | | | |
| Restaurants – 2.0% | | | | | | | | |
| Starbucks Corp. | | | 261,920 | | | $ | 14,044,150 | |
| YUM! Brands, Inc. | | | 127,451 | | | | 8,462,746 | |
| | | | | | | | |
| | | | | | $ | 22,506,896 | |
| | | | | | | | |
| Specialty Chemicals – 1.8% | | | | | | | | |
| Airgas, Inc. | | | 118,980 | | | $ | 10,861,684 | |
| Praxair, Inc. | | | 88,677 | | | | 9,705,698 | |
| | | | | | | | |
| | | | | | $ | 20,567,382 | |
| | | | | | | | |
| Specialty Stores – 4.7% | | | | | | | | |
| Amazon.com, Inc. (a) | | | 31,860 | | | $ | 8,001,320 | |
| AutoZone, Inc. (a) | | | 14,538 | | | | 5,152,703 | |
| PetSmart, Inc. | | | 116,120 | | | | 7,935,641 | |
| Ross Stores, Inc. | | | 212,512 | | | | 11,507,525 | |
| Tiffany & Co. | | | 135,060 | | | | 7,744,340 | |
| Tractor Supply Co. | | | 59,020 | | | | 5,215,007 | |
| Urban Outfitters, Inc. (a) | | | 215,379 | | | | 8,477,317 | |
| | | | | | | | |
| | | | | | $ | 54,033,853 | |
| | | | | | | | |
| Telecommunications – Wireless – 2.7% | | | | | |
| American Tower Corp., REIT | | | 391,886 | | | $ | 30,281,031 | |
| | | | | | | | |
| Tobacco – 0.9% | | | | | | | | |
| Philip Morris International, Inc. | | | 126,680 | | | $ | 10,595,515 | |
| | | | | | | | |
| Trucking – 0.5% | | | | | | | | |
| Expeditors International of Washington, Inc. | | | 155,681 | | | $ | 6,157,184 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $975,540,709) | | | | | | $ | 1,129,206,178 | |
| | | | | | | | |
|
| MONEY MARKET FUNDS – 1.1% | |
MFS Institutional Money Market Portfolio, 0.16%, at Cost and Net Asset Value (v) | | | 11,917,356 | | | $ | 11,917,356 | |
| | | | | | | | |
Total Investments
(Identified Cost, $987,458,065) | | | | | | $ | 1,141,123,534 | |
| | | | | | | | |
| |
| WHEN-ISSUED EQUITY SALE – 0.0% | | | | | |
| Pharmaceuticals – 0.0% | | | | | | | | |
Abbott Laboratories
(Proceeds $26,510) | | | (880 | ) | | $ | (27,632 | ) |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.0% | | | | | | | 573,090 | |
| | | | | | | | |
| Net Assets – 100.0% | | | | | | $ | 1,141,668,992 | |
| | | | | | | | |
8
MFS Growth Series
Portfolio of Investments – continued
| (a) | | Non-income producing security. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
The following abbreviations are used in this report and are defined:
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
See Notes to Financial Statements
9
MFS Growth Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | | | | |
At 12/31/12 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $975,540,709) | | | $1,129,206,178 | | | | | |
Underlying affiliated funds, at cost and value | | | 11,917,356 | | | | | |
Total investments, at value (identified cost, $987,458,065) | | | $1,141,123,534 | | | | | |
Cash | | | 22,816 | | | | | |
Receivables for | | | | | | | | |
When-issued equity sale | | | 26,510 | | | | | |
Investments sold | | | 11,313,684 | | | | | |
Fund shares sold | | | 436,014 | | | | | |
Dividends | | | 416,348 | | | | | |
Other assets | | | 10,089 | | | | | |
Total assets | | | | | | | $1,153,348,995 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
When-issued equity sale, at value | | | $27,632 | | | | | |
Investments purchased | | | 9,352,791 | | | | | |
Fund shares reacquired | | | 2,000,921 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 101,827 | | | | | |
Shareholder servicing costs | | | 1,255 | | | | | |
Distribution and/or service fees | | | 3,615 | | | | | |
Payable for independent Trustees’ compensation | | | 10 | | | | | |
Accrued expenses and other liabilities | | | 191,952 | | | | | |
Total liabilities | | | | | | | $11,680,003 | |
Net assets | | | | | | | $1,141,668,992 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $985,918,001 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 153,664,339 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (818,636 | ) | | | | |
Undistributed net investment income | | | 2,905,288 | | | | | |
Net assets | | | | | | | $1,141,668,992 | |
Shares of beneficial interest outstanding | | | | | | | 39,699,413 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $1,007,421,548 | | | | 34,946,911 | | | | $28.83 | |
Service Class | | | 134,247,444 | | | | 4,752,502 | | | | 28.25 | |
See Notes to Financial Statements
10
MFS Growth Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | | | | | | |
Year ended 12/31/12 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $8,653,834 | | | | | |
Interest | | | 46,226 | | | | | |
Dividends from underlying affiliated funds | | | 18,645 | | | | | |
Foreign taxes withheld | | | (40,852 | ) | | | | |
Total investment income | | | | | | | $8,677,853 | |
Expenses | | | | | | | | |
Management fee | | | $5,062,798 | | | | | |
Distribution and/or service fees | | | 217,227 | | | | | |
Shareholder servicing costs | | | 62,175 | | | | | |
Administrative services fee | | | 105,443 | | | | | |
Independent Trustees’ compensation | | | 18,548 | | | | | |
Custodian fee | | | 68,524 | | | | | |
Shareholder communications | | | 110,097 | | | | | |
Audit and tax fees | | | 56,271 | | | | | |
Legal fees | | | 48,884 | | | | | |
Miscellaneous | | | 35,431 | | | | | |
Total expenses | | | | | | | $5,785,398 | |
Fees paid indirectly | | | (7 | ) | | | | |
Reduction of expenses by investment adviser | | | (2,070 | ) | | | | |
Net expenses | | | | | | | $5,783,321 | |
Net investment income | | | | | | | $2,894,532 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $49,506,913 | | | | | |
Foreign currency | | | (8,244 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $49,498,669 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $48,166,573 | | | | | |
Translation of assets and liabilities in foreign currencies | | | (10 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $48,166,563 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $97,665,232 | |
Change in net assets from operations | | | | | | | $100,559,764 | |
See Notes to Financial Statements
11
MFS Growth Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | | | |
For years ended 12/31 | | | 2012 | | | | 2011 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income (loss) | | | $2,894,532 | | | | $(133,687 | ) |
Net realized gain (loss) on investments and foreign currency | | | 49,498,669 | | | | 36,539,304 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 48,166,563 | | | | (38,178,192 | ) |
Change in net assets from operations | | | $100,559,764 | | | | $(1,772,575 | ) |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $— | | | | $(934,874 | ) |
Change in net assets from fund share transactions | | | $522,916,983 | | | | $(25,758,827 | ) |
Total change in net assets | | | $623,476,747 | | | | $(28,466,276 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 518,192,245 | | | | 546,658,521 | |
At end of period (including undistributed net investment income of $2,905,288 and
$0, respectively) | | | $1,141,668,992 | | | | $518,192,245 | |
See Notes to Financial Statements
12
MFS Growth Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $24.56 | | | | $24.69 | | | | $21.43 | | | | $15.62 | | | | $25.01 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.13 | | | | $(0.00 | )(w) | | | $0.05 | | | | $0.03 | | | | $0.05 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 4.14 | | | | (0.08 | ) | | | 3.24 | | | | 5.83 | | | | (9.39 | ) |
Total from investment operations | | | $4.27 | | | | $(0.08 | ) | | | $3.29 | | | | $5.86 | | | | $(9.34 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $— | | | | $(0.05 | ) | | | $(0.03 | ) | | | $(0.05 | ) | | | $(0.05 | ) |
Net asset value, end of period (x) | | | $28.83 | | | | $24.56 | | | | $24.69 | | | | $21.43 | | | | $15.62 | |
Total return (%) (k)(r)(s)(x) | | | 17.39 | | | | (0.32 | ) | | | 15.34 | | | | 37.67 | | | | (37.42 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | |
Expenses before expense reductions (f) | | | 0.82 | | | | 0.84 | | | | 0.85 | | | | 0.86 | | | | 0.84 | |
Expenses after expense reductions (f) | | | 0.82 | | | | 0.84 | | | | 0.85 | | | | 0.86 | | | | 0.84 | |
Net investment income | | | 0.45 | | | | (0.00 | )(w) | | | 0.24 | | | | 0.14 | | | | 0.25 | |
Portfolio turnover | | | 52 | | | | 75 | | | | 100 | | | | 100 | | | | 129 | |
Net assets at end of period (000 omitted) | | | $1,007,422 | | | | $461,382 | | | | $503,497 | | | | $498,288 | | | | $389,813 | |
See Notes to Financial Statements
13
MFS Growth Series
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $24.13 | | | | $24.27 | | | | $21.10 | | | | $15.37 | | | | $24.61 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss) (d) | | | $0.07 | | | | $(0.06 | ) | | | $0.00 | (w) | | | $(0.02 | ) | | | $0.00 | (w) |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 4.05 | | | | (0.08 | ) | | | 3.17 | | | | 5.76 | | | | (9.24 | ) |
Total from investment operations | | | $4.12 | | | | $(0.14 | ) | | | $3.17 | | | | $5.74 | | | | $(9.24 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $— | | | | $(0.00 | )(w) | | | $— | | | | $(0.01 | ) | | | $— | |
Net asset value, end of period (x) | | | $28.25 | | | | $24.13 | | | | $24.27 | | | | $21.10 | | | | $15.37 | |
Total return (%) (k)(r)(s)(x) | | | 17.07 | | | | (0.56 | ) | | | 15.02 | | | | 37.33 | | | | (37.55 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.07 | | | | 1.09 | | | | 1.10 | | | | 1.10 | | | | 1.09 | |
Expenses after expense reductions (f) | | | 1.07 | | | | 1.09 | | | | 1.10 | | | | 1.10 | | | | 1.08 | |
Net investment income (loss) | | | 0.26 | | | | (0.25 | ) | | | 0.02 | | | | (0.11 | ) | | | 0.01 | |
Portfolio turnover | | | 52 | | | | 75 | | | | 100 | | | | 100 | | | | 129 | |
Net assets at end of period (000 omitted) | | | $134,247 | | | | $56,810 | | | | $43,161 | | | | $31,861 | | | | $18,684 | |
| (d) | | Per share data is based on average shares outstanding. |
| (f) | | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (r) | | Certain expenses have been reduced without which performance would have been lower. |
| (s) | | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (w) | | Per share amount was less than $0.01 |
| (x) | | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
14
MFS Growth Series
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Growth Series (the fund) is a series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In this reporting period the fund adopted Financial Accounting Standards Board (FASB) Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 seeks to improve the comparability of fair value measurements as presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) by providing common requirements for fair value measurement and disclosure.
In December 2011, the FASB issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods, ASU 2011-11 is intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. Although still evaluating the potential impacts of ASU 2011-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
15
MFS Growth Series
Notes to Financial Statements – continued
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of December 31, 2012 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $1,079,418,529 | | | | $— | | | | $— | | | | $1,079,418,529 | |
France | | | — | | | | 16,350,995 | | | | — | | | | 16,350,995 | |
Israel | | | 13,216,765 | | | | — | | | | — | | | | 13,216,765 | |
United Kingdom | | | — | | | | 10,935,450 | | | | — | | | | 10,935,450 | |
Canada | | | 9,284,439 | | | | — | | | | — | | | | 9,284,439 | |
| Mutual Funds | | | 11,917,356 | | | | — | | | | — | | | | 11,917,356 | |
| Total Investments | | | $1,113,837,089 | | | | $27,286,445 | | | | $— | | | | $1,141,123,534 | |
| When-Issued Equity Sale | | | $(27,632 | ) | | | $— | | | | $— | | | | $(27,632 | ) |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $15,665,375 would have been considered level 1 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2012, there were no securities on loan or collateral outstanding. At December 31, 2012, there were no securities on loan or collateral outstanding.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Some securities may be purchased on a “when-issued” or “forward delivery” basis, which means that the securities will be delivered to the fund at a future date, usually beyond customary settlement time. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
16
MFS Growth Series
Notes to Financial Statements – continued
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount, for the year ended December 31, 2012, is shown as a reduction of total expenses in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Foreign taxes have been accrued by the fund in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/12 | | | 12/31/11 | |
| Ordinary income (including any short-term capital gains) | | | $— | | | | $934,874 | (a) |
| | (a) | Included in the fund’s distributions from ordinary income is $1,176 in excess of investment company taxable income, which in accordance with applicable U.S. tax law, is taxable to shareholders as ordinary income distribution. | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/12 | | | | |
| Cost of investments | | | $987,854,440 | |
| Gross appreciation | | | 161,815,643 | |
| Gross depreciation | | | (8,546,549 | ) |
| Net unrealized appreciation (depreciation) | | | $153,269,094 | |
| Undistributed ordinary income | | | 2,905,288 | |
| Undistributed long-term capital gain | | | 9,914,525 | |
| Capital loss carryforwards | | | (10,171,567 | ) |
| Other temporary differences | | | (166,349 | ) |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized after December 31, 2010 may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
As of December 31, 2012, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | | |
| Pre-enactment losses: | | | | |
| 12/31/16 | | | $(4,835,046 | ) |
| 12/31/17 | | | (5,336,521 | ) |
| Total | | | $(10,171,567 | ) |
The availability of $4,835,046 of the capital loss carryforwards, which were acquired on August 17, 2012 in connection with the MFS Growth Portfolio merger, may be limited in a given year.
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to
17
MFS Growth Series
Notes to Financial Statements – continued
shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/12 | | | Year ended
12/31/11 | |
| Initial Class | | | $— | | | | $925,433 | |
| Service Class | | | — | | | | 9,441 | |
| Total | | | $— | | | | $934,874 | |
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund.
The management fee is computed daily and paid monthly at the following annual rates:
| | | | |
| First $1 billion of average daily net assets | | | 0.75% | |
| Average daily net assets in excess of $1 billion | | | 0.65% | |
The management fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.75% of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2012, the fee was $59,850, which equated to 0.0089% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2012, these costs amounted to $2,325.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.0156% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended December 31, 2012, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $5,201 and are included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $2,070, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
18
MFS Growth Series
Notes to Financial Statements – continued
Purchases and sales of investments, other than short-term obligations, aggregated $369,883,423 and $331,047,733, respectively. Purchases exclude the value of securities acquired in connection with the MFS Growth Portfolio and SC WMC Large Cap Growth Fund mergers. (See Note 8.)
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 4,032,529 | | | | $110,039,913 | | | | 2,705,438 | | | | $67,872,176 | |
Service Class | | | 2,536,052 | | | | 68,492,337 | | | | 1,506,623 | | | | 36,837,421 | |
| | | 6,568,581 | | | | $178,532,250 | | | | 4,212,061 | | | | $104,709,597 | |
| Shares issued in connection with acquisition of MFS Growth Portfolio | | | | | | | | | | | | | | | | |
Initial Class | | | 5,123,763 | | | | $144,080,230 | | | | | | | | | |
Service Class | | | 491,709 | | | | 13,561,334 | | | | | | | | | |
| | | 5,615,472 | | | | $157,641,564 | | | | | | | | | |
| Shares issued in connection with acquisition of SC WMC Large Cap Growth Fund | | | | | | | | | | | | | | | | |
Initial Class | | | 11,289,645 | | | | $321,190,385 | | | | | | | | | |
Service Class | | | 556,484 | | | | 15,514,779 | | | | | | | | | |
| | | 11,846,129 | | | | $336,705,164 | | | | | | | | | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | — | | | | $— | | | | 38,916 | | | | $925,433 | |
Service Class | | | — | | | | — | | | | 404 | | | | 9,441 | |
| | | — | | | | $— | | | | 39,320 | | | | $934,874 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (4,281,886 | ) | | | $(118,022,809 | ) | | | (4,355,037 | ) | | | $(108,841,435 | ) |
Service Class | | | (1,186,136 | ) | | | (31,939,186 | ) | | | (931,109 | ) | | | (22,561,863 | ) |
| | | (5,468,022 | ) | | | $(149,961,995 | ) | | | (5,286,146 | ) | | | $(131,403,298 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | 16,164,051 | | | | $457,287,719 | | | | (1,610,683 | ) | | | $(40,043,826 | ) |
Service Class | | | 2,398,109 | | | | 65,629,264 | | | | 575,918 | | | | 14,284,999 | |
| | | 18,562,160 | | | | $522,916,983 | | | | (1,034,765 | ) | | | $(25,758,827 | ) |
The fund is one of several mutual funds in which the MFS funds-of-funds may invest. The MFS funds-of-funds do not invest in the underlying MFS funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio, the MFS Growth Allocation Portfolio, and the MFS Conservative Allocation Portfolio were the owners of record of approximately 16%, 5%, and 5%, respectively, of the value of outstanding voting shares of the fund.
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2012, the fund’s commitment fee and interest expense were $4,021 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
19
MFS Growth Series
Notes to Financial Statements – continued
| (7) | | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par Amount | |
| MFS Institutional Money Market Portfolio | | | 13,485,319 | | | | 177,041,230 | | | | (178,609,193 | ) | | | 11,917,356 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $18,645 | | | | $11,917,356 | |
At close of business on August 17, 2012, the fund with net assets of approximately $629,077,130, acquired all of the assets and liabilities of MFS Growth Portfolio, a series of MFS Variable Insurance Trust. The purpose of the transaction was to provide shareholders of the MFS Growth Portfolio the opportunity to participate in a larger combined portfolio with an identical investment objective and similar investment policies and strategies. The acquisition was accomplished by a tax-free exchange of approximately 5,615,472 shares of the fund (valued at approximately $157,641,564) for all of the assets and liabilities of MFS Growth Portfolio. MFS Growth Portfolio then distributed the shares of the fund that MFS Growth Portfolio received from the fund to its shareholders. MFS Growth Portfolio’s investments on that date were valued at approximately $158,214,214 with a cost basis of approximately $127,245,941. For financial reporting purposes, assets received and shares issued by the fund were recorded at fair value; however, the cost basis of the investments received from MFS Growth Portfolio were carried forward to align ongoing reporting of the fund’s realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes. Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of MFS Growth Portfolio that have been included in the fund’s Statement of Operations since August 17, 2012.
At close of business on December 7, 2012 the fund with net assets of approximately $781,080,976, acquired all of the assets and liabilities of SC WMC Large Cap Growth Fund, a series of Sun Capital Advisers Trust. The purpose of the transaction was to provide shareholders of the SC WMC Large Cap Growth Fund the opportunity to participate in a larger combined portfolio with a similar investment objective and similar investment policies and strategies. The acquisition was accomplished by a tax-free exchange of approximately 11,846,129 shares of the fund (valued at approximately $336,705,164) for all of the assets and liabilities of SC WMC Large Cap Growth Fund. SC WMC Large Cap Growth Fund then distributed the shares of the fund that SC WMC Large Cap Growth Fund received from the fund to its shareholders. SC WMC Large Cap Growth Fund’s investments on that date were valued at approximately $328,346,705 with a cost basis of approximately $315,494,167. For financial reporting purposes, assets received and shares issued by the fund were recorded at fair value; however, the cost basis of the investments received from SC WMC Large Cap Growth Fund were carried forward to align ongoing reporting of the fund’s realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes. Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of SC WMC Large Cap Growth Fund that have been included in the fund’s Statement of Operations since December 7, 2012.
Assuming the acquisitions had been completed on January 1, 2012, the fund’s pro forma results of operations for the year ended December 31, 2012 are as follows:
| | | | |
| Net investment income | | | $4,457,579 | |
| Net realized and unrealized gain (loss) on investments and foreign currency | | | $142,948,488 | |
| Change in net assets from operations | | | $147,406,067 | |
20
MFS Growth Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of
MFS Growth Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Growth Series (the “Fund”) (one of the series comprising MFS Variable Insurance Trust) as of December 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Growth Series as of December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2013
21
MFS Growth Series
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 1, 2013, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES | | | | | | | | |
Robert J. Manning (k) (age 49) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Chief Executive Officer and Director; President (until December 2009); Chief Investment Officer (until July 2010) | | N/A |
| | | | |
| INDEPENDENT TRUSTEES | | | | | | | | |
David H. Gunning (age 70) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman; Portman Limited (mining), Director (until 2008) |
| | | | |
Robert E. Butler (age 71) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 57) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 71) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 68) | | Trustee | | December 2004 | | Private investor; Rouse Properties Inc. (real estate), Director | | N/A |
| | | | |
John P. Kavanaugh (age 58) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
J. Dale Sherratt (age 74) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner | | N/A |
| | | | |
Laurie J. Thomsen
(age 55) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 71) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
John M. Corcoran (k) (age 47) | | President | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) | | N/A |
| | | | |
| Christopher R. Bohane (k) (age 39) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kino Clark (k) (age 44) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 53) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
| | | | |
Ethan D. Corey (k) (age 49) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
22
MFS Growth Series
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
David L. DiLorenzo (k) (age 44) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Robyn L. Griffin (age 37) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 39) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 62) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 42) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 42) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 60) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Frank L. Tarantino (age 68) | | Independent
Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 52) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. For the period October 2008, until January 2012, Mr. Corcoran served as Treasurer of the Funds. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2013, the Trustees served as board members of 143 funds within the MFS Family of Funds.
23
MFS Growth Series
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Manager Eric Fischman | | |
24
MFS Growth Series
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2012 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2011 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2011, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 2nd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 2nd quintile for the one-year period and the 1st quintile for the five-year period ended December 31, 2011 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year, regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
25
MFS Growth Series
Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate was approximately at the Lipper expense group median, and the Fund’s total expense ratio was higher than the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to institutional accounts, if any. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund is likely to benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2012.
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of the MFS Web site (mfs.com).
26
MFS Growth Series
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling
1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of mfs.com.
27
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
28
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
29
ANNUAL REPORT
December 31, 2012
MFS® VALUE SERIES
MFS® Variable Insurance Trust
VLU-ANN
MFS® VALUE SERIES
CONTENTS
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ NO BANK OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Value Series
LETTER FROM THE CHAIRMAN AND CEO
Dear Contract Owners:
The global market outlook for 2013 is one of cautious optimism. While we are seeing some positive economic trends in the United States, Europe and China, the overall environment remains challenging. In the United States, the recent fiscal cliff agreement was received positively by investors, even though it mostly addressed pressing taxation issues and did not resolve additional concerns, including the need for spending cuts and a large-scale reduction of the federal debt. These issues will be front and center again in the spring. Despite the ongoing uncertainty, economic tailwinds are gathering strength as the U.S. housing and job markets are improving and consumer confidence is rising.
Overseas, the debt crisis continues to weigh heavily on eurozone markets, with even Germany — long an economic stalwart — experiencing some contraction. These ongoing challenges could be a drag on global market performance this year. In Asia, manufacturing activity has accelerated in emerging markets such as China and India, and we are seeing signs of stabilized loan growth in China, a leading indicator of that country’s economic health. In contrast, Japan’s economy is contracting sharply under deflationary pressures. Nevertheless, Japanese markets have responded favorably to early actions by the new government, which appears determined to act aggressively, along with the Bank of Japan, to stimulate growth.
As always, managing risk in the face of uncertainty remains a top priority for investors. At MFS®, our uniquely collaborative investment process revolves around global research and our disciplined risk management approach. Our global team of investment professionals shares ideas and evaluates opportunities across continents, investment disciplines and asset classes — all with a goal of building better insights, and ultimately better results, for our clients.
We remain mindful of the many economic challenges investors face today, and believe it is more important than ever to maintain a long-term view, employ time-tested principles, such as asset allocation and diversification, and work closely with investment advisors to identify and pursue the most suitable opportunities.
Respectfully,
Robert J. Manning
Chairman and Chief Executive Officer
MFS Investment Management®
February 15, 2013
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
MFS Value Series
PORTFOLIO COMPOSITION
Portfolio structure
| | | | |
| Top ten holdings | | | | |
| Philip Morris International, Inc. | | | 3.5% | |
| JPMorgan Chase & Co. | | | 3.5% | |
| Pfizer, Inc. | | | 3.4% | |
| Lockheed Martin Corp. | | | 3.3% | |
| Johnson & Johnson | | | 3.2% | |
| Goldman Sachs Group, Inc. | | | 2.5% | |
| Accenture PLC, “A” | | | 2.1% | |
| Chevron Corp. | | | 2.1% | |
| AT&T, Inc. | | | 2.1% | |
| United Technologies Corp. | | | 2.0% | |
| | | | |
| Equity sectors | | | | |
| Financial Services | | | 21.6% | |
| Health Care | | | 13.3% | |
| Consumer Staples | | | 12.8% | |
| Industrial Goods & Services | | | 12.0% | |
| Leisure | | | 7.3% | |
| Energy | | | 6.9% | |
| Utilities & Communications | | | 4.6% | |
| Technology | | | 4.3% | |
| Basic Materials | | | 4.0% | |
| Retailing | | | 3.9% | |
| Special Products & Services | | | 3.1% | |
| Autos & Housing | | | 2.9% | |
| Transportation | | | 2.0% | |
Percentages are based on net assets as of 12/31/12.
The portfolio is actively managed and current holdings may be different.
2
MFS Value Series
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2012, Initial Class shares of the MFS Value Series (“fund”) provided a total return of 16.26%, while Service Class shares of the fund provided a total return of 15.88%. These compare with a return of 17.51% over the same period for the fund’s benchmark, the Russell 1000 Value Index.
Market Environment
The beginning of the period was characterized by a risk-on sentiment as a result of additional liquidity measures by the Federal Reserve Bank (“Fed”) and the European Central Bank (“ECB”) as well as a commensurate improvement in macroeconomic conditions. During this time, global equity valuations rose, credit spreads contracted, and high-quality sovereign yields increased modestly.
During the middle of the period, however, conditions worsened, driven by broadly weaker global macroeconomic indicators, as well as renewed concerns over the eurozone’s capacity and determination to address its ongoing crisis. Despite this deterioration, broad market sentiment remained relatively resilient as equity markets generally maintained gains and credit spreads did not indicate deterioration.
However, this renewed weakness in the fundamentals precipitated a further round of monetary easing by both the Fed (through a third round of quantitative easing) and the ECB (through a new bond purchase facility) in the second half of the period, which soon instilled additional confidence in risk markets. Nonetheless, towards the end of the period, weaker equity earnings reports and declining forward guidance caused market sentiment to soften. In addition, as we moved toward year end, the fiscal cliff negotiations between the Republicans in the U.S. Congress and President Obama were a particular source of market attention, where uncertainty surrounding the fiscal negotiations continued right up to the end-of-year deadline.
Detractors from Performance
The combination of weak stock selection and an underweight position in the financial services sector detracted from performance relative to the Russell 1000 Value Index. The fund’s underweight position in financial services firm Bank of America (h) and holdings of consumer and business payment processor Western Union (b) held back relative performance. Shares of Bank of America traded higher as the company reported earnings results that beat analyst expectations which demonstrated the effectiveness of the bank’s cost-cutting efforts. In addition, banks, as a group, were among the best-performing stocks during the reporting period. Not holding shares of strong-performing financial services firm Citigroup also weakened relative results.
Stock selection in the retailing sector dampened relative returns. There were no individual securities within this sector that were among the fund’s top relative detractors for the reporting period.
Stocks in other sectors that detracted from relative performance included voice and data communications services company Vodafone Group (b) (United Kingdom), oil and gas exploration and production company Occidental Petroleum, tobacco company Philip Morris, global food company General Mills, and diversified technology products and services company IBM (b). Weak economic conditions in Europe weighed on the shares of many telecommunications companies in 2012 and Vodafone was no exception. The fund’s positioning in semiconductor company Intel also weakened relative performance.
The fund’s cash and/or cash equivalents position was also a detractor from relative performance. The fund strives to be fully invested and generally holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Contributors to Performance
Security selection in the technology sector aided relative performance. The fund’s underweight position in shares of poor-performing computer products and services provider Hewlett-Packard helped relative returns. The stock declined as management provided guidance for fiscal 2013 which was below analysts’ expectations. Management expressed caution regarding current trends and forecasted the fiscal year to be a “fix and rebuild year” with broad-based profit declines. Additionally, concerns over potential accounting issues associated with the company’s acquisition of Autonomy appeared to have weighed on results. Holdings of enterprise software products maker Oracle (b) also supported relative returns as the stock outperformed the benchmark during the reporting period.
An underweight allocation to the utilities & communications sector boosted relative performance. Within this sector, the fund’s avoidance of poor-performing electric company Exelon strengthened relative results. Management announced that in an effort to
3
MFS Value Series
Management Review – continued
retain its investment grade rating, in the face of rising debt levels, it would be reducing its capital expenditure plans and also indicated that if power prices did not increase the company would have to reevaluate its dividend. The risk of a potential dividend cut weighed heavily on its share price.
Stock selection in the basic materials section also supported relative performance. Holdings of stand-out-performing chemical company PPG Industries (b), and the fund’s avoidance of weak-performing mining company Newmont Mining, aided results during the reporting period.
Elsewhere, holdings of investment banking firm Goldman Sachs Group, alcoholic drink producer Diageo (b), household products maker Procter & Gamble, paint and coatings manufacturer Sherwin Williams (b)(h), and management consulting firm Accenture (b), were among the fund’s top relative contributors.
Respectfully,
| | |
| Nevin Chitkara | | Steven Gorham |
| Portfolio Manager | | Portfolio Manager |
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
4
MFS Value Series
PERFORMANCE SUMMARY THROUGH 12/31/12
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/12
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 1/02/02 | | 16.26% | | 1.35% | | 7.91% | | |
| | | Service Class | | 1/02/02 | | 15.88% | | 1.10% | | 7.64% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Russell 1000 Value Index (f) | | 17.51% | | 0.59% | | 7.38% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Russell 1000 Value Index – constructed to provide a comprehensive barometer for the value securities in the large-cap segment of the U.S. equity universe. Companies in this index generally have lower price-to-book ratios and lower forecasted growth values.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Value Series
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2012 through December 31, 2012
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2012 through December 31, 2012.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | | Beginning
Account Value
7/01/12 | | | Ending Account Value
12/31/12 | | | Expenses Paid
During Period (p)
7/01/12-12/31/12 | |
| Initial Class | | Actual | | | 0.77% | | | | $1,000.00 | | | | $1,076.83 | | | | $4.02 | |
| | Hypothetical (h) | | | 0.77% | | | | $1,000.00 | | | | $1,021.27 | | | | $3.91 | |
| Service Class | | Actual | | | 1.02% | | | | $1,000.00 | | | | $1,074.83 | | | | $5.32 | |
| | Hypothetical (h) | | | 1.02% | | | | $1,000.00 | | | | $1,020.01 | | | | $5.18 | |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS Value Series
PORTFOLIO OF INVESTMENTS – 12/31/12
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 98.5% | | | | | |
| Aerospace – 8.1% | | | | | | | | |
| Honeywell International, Inc. | | | 559,210 | | | $ | 35,493,054 | |
| Lockheed Martin Corp. | | | 728,910 | | | | 67,271,104 | |
| Northrop Grumman Corp. | | | 309,110 | | | | 20,889,654 | |
| United Technologies Corp. | | | 482,180 | | | | 39,543,582 | |
| | | | | | | | |
| | | | | | $ | 163,197,394 | |
| | | | | | | | |
| Alcoholic Beverages – 1.9% | | | | | | | | |
| Diageo PLC | | | 1,297,492 | | | $ | 37,773,267 | |
| | | | | | | | |
| Automotive – 1.9% | | | | | | | | |
| Delphi Automotive PLC (a) | | | 318,410 | | | $ | 12,179,183 | |
| General Motors Co. (a) | | | 154,610 | | | | 4,457,406 | |
| Johnson Controls, Inc. | | | 693,210 | | | | 21,281,547 | |
| | | | | | | | |
| | | | | | $ | 37,918,136 | |
| | | | | | | | |
| Broadcasting – 4.0% | | | | | | | | |
| Omnicom Group, Inc. | | | 450,510 | | | $ | 22,507,480 | |
| Viacom, Inc., “B” | | | 439,360 | | | | 23,171,846 | |
| Walt Disney Co. | | | 704,660 | | | | 35,085,021 | |
| | | | | | | | |
| | | | | | $ | 80,764,347 | |
| | | | | | | | |
| Brokerage & Asset Managers – 2.0% | | | | | |
| BlackRock, Inc. | | | 133,507 | | | $ | 27,597,232 | |
| Franklin Resources, Inc. | | | 104,980 | | | | 13,195,986 | |
| | | | | | | | |
| | | | | | $ | 40,793,218 | |
| | | | | | | | |
| Business Services – 3.1% | | | | | | | | |
| Accenture PLC, “A” | | | 649,920 | | | $ | 43,219,680 | |
| Dun & Bradstreet Corp. | | | 119,790 | | | | 9,421,484 | |
| Fiserv, Inc. (a) | | | 130,270 | | | | 10,295,238 | |
| | | | | | | | |
| | | | | | $ | 62,936,402 | |
| | | | | | | | |
| Cable TV – 1.0% | | | | | | | | |
| Comcast Corp., “Special A” | | | 554,440 | | | $ | 19,932,118 | |
| | | | | | | | |
| Chemicals – 3.1% | | | | | | | | |
| 3M Co. | | | 368,180 | | | $ | 34,185,513 | |
| PPG Industries, Inc. | | | 208,316 | | | | 28,195,571 | |
| | | | | | | | |
| | | | | | $ | 62,381,084 | |
| | | | | | | | |
| Computer Software – 1.5% | | | | | | | | |
| Oracle Corp. | | | 908,980 | | | $ | 30,287,214 | |
| | | | | | | | |
| Computer Software – Systems – 2.0% | | | | | |
| Hewlett-Packard Co. | | | 202,490 | | | $ | 2,885,483 | |
| International Business Machines Corp. | | | 192,610 | | | | 36,894,446 | |
| | | | | | | | |
| | | | | | $ | 39,779,929 | |
| | | | | | | | |
| Construction – 1.0% | | | | | | | | |
| Stanley Black & Decker, Inc. | | | 280,303 | | | $ | 20,734,013 | |
| | | | | | | | |
| Consumer Products – 0.5% | | | | | | | | |
| Procter & Gamble Co. | | | 143,104 | | | $ | 9,715,331 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Electrical Equipment – 2.7% | | | | | | | | |
| Danaher Corp. | | | 449,410 | | | $ | 25,122,019 | |
| Pentair Ltd. | | | 163,912 | | | | 8,056,275 | |
| Tyco International Ltd. | | | 731,420 | | | | 21,394,035 | |
| | | | | | | | |
| | | | | | $ | 54,572,329 | |
| | | | | | | | |
| Electronics – 0.7% | | | | | | | | |
| Intel Corp. | | | 664,060 | | | $ | 13,699,558 | |
| | | | | | | | |
| Energy – Independent – 2.8% | | | | | | | | |
| Apache Corp. | | | 149,660 | | | $ | 11,748,310 | |
| EOG Resources, Inc. | | | 115,350 | | | | 13,933,127 | |
| Occidental Petroleum Corp. | | | 394,030 | | | | 30,186,638 | |
| | | | | | | | |
| | | | | | $ | 55,868,075 | |
| | | | | | | | |
| Energy – Integrated – 3.9% | | | | | | | | |
| Chevron Corp. | | | 386,240 | | | $ | 41,767,994 | |
| Exxon Mobil Corp. | | | 431,628 | | | | 37,357,403 | |
| | | | | | | | |
| | | | | | $ | 79,125,397 | |
| | | | | | | | |
| Engineering – Construction – 0.2% | | | | | |
| Fluor Corp. | | | 53,240 | | | $ | 3,127,318 | |
| | | | | | | | |
| Food & Beverages – 5.4% | | | | | | | | |
| Coca-Cola Enterprises, Inc. | | | 164,110 | | | $ | 5,207,210 | |
| Dr Pepper Snapple Group, Inc. | | | 196,900 | | | | 8,699,042 | |
| General Mills, Inc. | | | 751,130 | | | | 30,353,163 | |
| Groupe Danone | | | 307,630 | | | | 20,325,000 | |
| J.M. Smucker Co. | | | 63,930 | | | | 5,513,323 | |
| Kellogg Co. | | | 131,300 | | | | 7,333,105 | |
| Nestle S.A. | | | 347,677 | | | | 22,655,168 | |
| PepsiCo, Inc. | | | 128,078 | | | | 8,764,378 | |
| | | | | | | | |
| | | | | | $ | 108,850,389 | |
| | | | | | | | |
| Food & Drug Stores – 1.4% | | | | | | | | |
| CVS Caremark Corp. | | | 600,161 | | | $ | 29,017,784 | |
| | | | | | | | |
| General Merchandise – 1.6% | | | | | | | | |
| Kohl’s Corp. | | | 125,590 | | | $ | 5,397,858 | |
| Target Corp. | | | 463,020 | | | | 27,396,893 | |
| | | | | | | | |
| | | | | | $ | 32,794,751 | |
| | | | | | | | |
| Insurance – 7.2% | | | | | | | | |
| ACE Ltd. | | | 291,770 | | | $ | 23,283,246 | |
| Aon PLC | | | 381,720 | | | | 21,223,632 | |
| Chubb Corp. | | | 205,720 | | | | 15,494,830 | |
| MetLife, Inc. | | | 1,016,653 | | | | 33,488,550 | |
| Prudential Financial, Inc. | | | 442,565 | | | | 23,601,991 | |
| Travelers Cos., Inc. | | | 376,690 | | | | 27,053,876 | |
| | | | | | | | |
| | | | | | $ | 144,146,125 | |
| | | | | | | | |
| Leisure & Toys – 0.8% | | | | | | | | |
| Hasbro, Inc. | | | 460,820 | | | $ | 16,543,438 | |
| | | | | | | | |
| Machinery & Tools – 0.9% | | | | | | | | |
| Eaton Corp. PLC | | | 327,560 | | | $ | 17,753,752 | |
| | | | | | | | |
7
MFS Value Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Major Banks – 11.2% | | | | | | | | |
| Bank of New York Mellon Corp. | | | 1,246,640 | | | $ | 32,038,648 | |
| Goldman Sachs Group, Inc. | | | 401,682 | | | | 51,238,556 | |
| JPMorgan Chase & Co. | | | 1,583,960 | | | | 69,646,721 | |
| PNC Financial Services Group, Inc. | | | 238,230 | | | | 13,891,191 | |
| State Street Corp. | | | 410,480 | | | | 19,296,665 | |
| Wells Fargo & Co. | | | 1,141,080 | | | | 39,002,114 | |
| | | | | | | | |
| | | | | | $ | 225,113,895 | |
| | | | | | | | |
| Medical & Health Technology & Services – 0.5% | |
| Quest Diagnostics, Inc. | | | 177,230 | | | $ | 10,327,192 | |
| | | | | | | | |
| Medical Equipment – 3.3% | | | | | | | | |
| Becton, Dickinson & Co. | | | 131,600 | | | $ | 10,289,804 | |
| Medtronic, Inc. | | | 533,380 | | | | 21,879,248 | |
| St. Jude Medical, Inc. | | | 422,850 | | | | 15,281,799 | |
| Thermo Fisher Scientific, Inc. | | | 301,660 | | | | 19,239,875 | |
| | | | | | | | |
| | | | | | $ | 66,690,726 | |
| | | | | | | | |
| Network & Telecom – 0.1% | | | | | | | | |
| Cisco Systems, Inc. | | | 60,900 | | | $ | 1,196,685 | |
| | | | | | | | |
| Oil Services – 0.2% | | | | | | | | |
| Transocean, Inc. | | | 103,760 | | | $ | 4,632,884 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 1.2% | |
| MasterCard, Inc., “A” | | | 18,978 | | | $ | 9,323,512 | |
| Western Union Co. | | | 1,023,460 | | | | 13,929,291 | |
| | | | | | | | |
| | | | | | $ | 23,252,803 | |
| | | | | | | | |
| Pharmaceuticals – 9.5% | | | | | | | | |
| Abbott Laboratories | | | 445,420 | | | $ | 29,175,010 | |
| Johnson & Johnson | | | 905,960 | | | | 63,507,796 | |
| Merck & Co., Inc. | | | 444,990 | | | | 18,217,891 | |
| Pfizer, Inc. | | | 2,716,716 | | | | 68,135,237 | |
| Roche Holding AG | | | 57,532 | | | | 11,720,701 | |
| | | | | | | | |
| | | | | | $ | 190,756,635 | |
| | | | | | | | |
| Printing & Publishing – 1.1% | | | | | | | | |
| McGraw-Hill Cos., Inc. | | | 182,260 | | | $ | 9,964,154 | |
| Moody’s Corp. | | | 247,930 | | | | 12,475,838 | |
| | | | | | | | |
| | | | | | $ | 22,439,992 | |
| | | | | | | | |
| Railroad & Shipping – 0.5% | | | | | | | | |
| Canadian National Railway Co. | | | 106,350 | | | $ | 9,678,914 | |
| | | | | | | | |
| Restaurants – 0.4% | | | | | | | | |
| McDonald’s Corp. | | | 91,520 | | | $ | 8,072,979 | |
| | | | | | | | |
| Specialty Chemicals – 0.9% | | | | | | | | |
| Air Products & Chemicals, Inc. | | | 211,876 | | | $ | 17,801,822 | |
| | | | | | | | |
| Specialty Stores – 0.9% | | | | | | | | |
| Advance Auto Parts, Inc. | | | 160,340 | | | $ | 11,600,599 | |
| Staples, Inc. | | | 597,320 | | | | 6,809,448 | |
| | | | | | | | |
| | | | | | $ | 18,410,047 | |
| | | | | | | | |
| Telecommunications – Wireless – 1.6% | |
| Vodafone Group PLC | | | 13,037,225 | | | $ | 32,786,876 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Telephone Services – 2.1% | | | | | | | | |
| AT&T, Inc. | | | 1,237,060 | | | $ | 41,701,293 | |
| | | | | | | | |
| Tobacco – 5.0% | | | | | | | | |
| Altria Group, Inc. | | | 330,651 | | | $ | 10,389,054 | |
| Lorillard, Inc. | | | 178,680 | | | | 20,846,596 | |
| Philip Morris International, Inc. | | | 841,861 | | | | 70,413,254 | |
| | | | | | | | |
| | | | | | $ | 101,648,904 | |
| | | | | | | | |
| Trucking – 1.5% | | | | | | | | |
| United Parcel Service, Inc., “B” | | | 400,660 | | | $ | 29,540,662 | |
| | | | | | | | |
| Utilities – Electric Power – 0.8% | | | | | | | | |
| PG&E Corp. | | | 224,800 | | | $ | 9,032,464 | |
| PPL Corp. | | | 131,470 | | | | 3,763,986 | |
| Public Service Enterprise Group, Inc. | | | 130,080 | | | | 3,980,448 | |
| | | | | | | | |
| | | | | | $ | 16,776,898 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $1,724,792,454) | | | $ | 1,982,540,576 | |
| | | | | | | | |
|
| CONVERTIBLE PREFERRED STOCKS – 0.2% | |
| Aerospace – 0.1% | | | | | | | | |
| United Technologies Corp., 7.5% | | | 35,180 | | | $ | 1,959,878 | |
| | | | | | | | |
| Utilities – Electric Power – 0.1% | | | | | | | | |
| PPL Corp., 9.5% | | | 34,450 | | | $ | 1,802,079 | |
| | | | | | | | |
Total Convertible Preferred Stocks
(Identified Cost, $3,536,939) | | | $ | 3,761,957 | |
| | | | | | | | |
| MONEY MARKET FUNDS – 1.3% | |
| MFS Institutional Money Market Portfolio, 0.16%, at Cost and Net Asset Value (v) | | | 25,547,731 | | | $ | 25,547,731 | |
| | | | | | | | |
Total Investments
(Identified Cost, $1,753,877,124) | | | $ | 2,011,850,264 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.0)% | | | | (533,325 | ) |
| | | | | | | | |
| Net Assets – 100.0% | | | | | | $ | 2,011,316,939 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
The following abbreviations are used in this report and are defined:
| PLC | | Public Limited Company |
See Notes to Financial Statements
8
MFS Value Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | | | | |
At 12/31/12 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $1,728,329,393) | | | $1,986,302,533 | | | | | |
Underlying affiliated funds, at cost and value | | | 25,547,731 | | | | | |
Total investments, at value (identified cost, $1,753,877,124) | | | $2,011,850,264 | | | | | |
Cash | | | 205,296 | | | | | |
Receivables for | | | | | | | | |
Fund shares sold | | | 568,077 | | | | | |
Interest and dividends | | | 2,603,544 | | | | | |
Other assets | | | 15,139 | | | | | |
Total assets | | | | | | | $2,015,242,320 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | $299,359 | | | | | |
Fund shares reacquired | | | 3,295,951 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 156,224 | | | | | |
Shareholder servicing costs | | | 1,616 | | | | | |
Distribution and/or service fees | | | 27,862 | | | | | |
Payable for independent Trustees’ compensation | | | 166 | | | | | |
Accrued expenses and other liabilities | | | 144,203 | | | | | |
Total liabilities | | | | | | | $3,925,381 | |
Net assets | | | | | | | $2,011,316,939 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $1,732,031,393 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 257,981,829 | | | | | |
Accumulated distributions in excess of net realized gain on investments and foreign currency | | | (3,224,094 | ) | | | | |
Undistributed net investment income | | | 24,527,811 | | | | | |
Net assets | | | | | | | $2,011,316,939 | |
Shares of beneficial interest outstanding | | | | | | | 140,601,328 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $988,594,477 | | | | 68,671,247 | | | | $14.40 | |
Service Class | | | 1,022,722,462 | | | | 71,930,081 | | | | 14.22 | |
See Notes to Financial Statements
9
MFS Value Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | | | | | | |
Year ended 12/31/12 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $37,456,867 | | | | | |
Interest | | | 27,197 | | | | | |
Dividends from underlying affiliated funds | | | 25,806 | | | | | |
Foreign taxes withheld | | | (193,267 | ) | | | | |
Total investment income | | | | | | | $37,316,603 | |
Expenses | | | | | | | | |
Management fee | | | $9,696,436 | | | | | |
Distribution and/or service fees | | | 2,319,878 | | | | | |
Shareholder servicing costs | | | 121,194 | | | | | |
Administrative services fee | | | 199,907 | | | | | |
Independent Trustees’ compensation | | | 29,720 | | | | | |
Custodian fee | | | 129,922 | | | | | |
Shareholder communications | | | 116,893 | | | | | |
Audit and tax fees | | | 52,341 | | | | | |
Legal fees | | | 40,220 | | | | | |
Miscellaneous | | | 55,579 | | | | | |
Total expenses | | | | | | | $12,762,090 | |
Fees paid indirectly | | | (17 | ) | | | | |
Reduction of expenses by investment adviser | | | (4,483 | ) | | | | |
Net expenses | | | | | | | $12,757,590 | |
Net investment income | | | | | | | $24,559,013 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $5,719,169 | | | | | |
Foreign currency | | | (26,063 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $5,693,106 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $166,097,343 | | | | | |
Translation of assets and liabilities in foreign currencies | | | 24,925 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $166,122,268 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $171,815,374 | |
Change in net assets from operations | | | | | | | $196,374,387 | |
See Notes to Financial Statements
10
MFS Value Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | | | |
For years ended 12/31 | | | 2012 | | | | 2011 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $24,559,013 | | | | $19,122,135 | |
Net realized gain (loss) on investments and foreign currency | | | 5,693,106 | | | | 7,048,777 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 166,122,268 | | | | (27,106,084 | ) |
Change in net assets from operations | | | $196,374,387 | | | | $(935,172 | ) |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(19,135,390 | ) | | | $(15,423,161 | ) |
From net realized gain on investments | | | (9,779,483 | ) | | | (4,647,117 | ) |
Total distributions declared to shareholders | | | $(28,914,873 | ) | | | $(20,070,278 | ) |
Change in net assets from fund share transactions | | | $659,624,750 | | | | $66,137,253 | |
Total change in net assets | | | $827,084,264 | | | | $45,131,803 | |
Net assets | | | | | | | | |
At beginning of period | | | 1,184,232,675 | | | | 1,139,100,872 | |
At end of period (including undistributed net investment income of $24,527,811 and
$19,130,251, respectively) | | | $2,011,316,939 | | | | $1,184,232,675 | |
See Notes to Financial Statements
11
MFS Value Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $12.68 | | | | $12.98 | | | | $11.80 | | | | $9.76 | | | | $15.25 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.28 | | | | $0.24 | | | | $0.19 | | | | $0.20 | | | | $0.22 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 1.77 | | | | (0.30 | ) | | | 1.16 | | | | 1.98 | | | | (4.98 | ) |
Total from investment operations | | | $2.05 | | | | $(0.06 | ) | | | $1.35 | | | | $2.18 | | | | $(4.76 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.23 | ) | | | $(0.19 | ) | | | $(0.17 | ) | | | $(0.14 | ) | | | $(0.17 | ) |
From net realized gain on investments | | | (0.10 | ) | | | (0.05 | ) | | | — | | | | — | | | | (0.56 | ) |
Total distributions declared to shareholders | | | $(0.33 | ) | | | $(0.24 | ) | | | $(0.17 | ) | | | $(0.14 | ) | | | $(0.73 | ) |
Net asset value, end of period (x) | | | $14.40 | | | | $12.68 | | | | $12.98 | | | | $11.80 | | | | $9.76 | |
Total return (%) (k)(r)(s)(x) | | | 16.26 | | | | (0.30 | ) | | | 11.53 | | | | 22.71 | | | | (32.58 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.78 | | | | 0.79 | | | | 0.83 | | | | 0.84 | | | | 0.84 | |
Expenses after expense reductions (f) | | | 0.78 | | | | 0.79 | | | | 0.83 | | | | 0.84 | | | | 0.84 | |
Net investment income | | | 2.02 | | | | 1.81 | | | | 1.60 | | | | 1.99 | | | | 1.77 | |
Portfolio turnover | | | 16 | | | | 18 | | | | 28 | | | | 26 | | | | 36 | |
Net assets at end of period (000 omitted) | | | $988,594 | | | | $352,752 | | | | $389,052 | | | | $367,676 | | | | $295,721 | |
See Notes to Financial Statements
12
MFS Value Series
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $12.54 | | | | $12.83 | | | | $11.68 | | | | $9.67 | | | | $15.12 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.24 | | | | $0.20 | | | | $0.16 | | | | $0.18 | | | | $0.19 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 1.74 | | | | (0.27 | ) | | | 1.15 | | | | 1.95 | | | | (4.94 | ) |
Total from investment operations | | | $1.98 | | | | $(0.07 | ) | | | $1.31 | | | | $2.13 | | | | $(4.75 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.20 | ) | | | $(0.17 | ) | | | $(0.16 | ) | | | $(0.12 | ) | | | $(0.14 | ) |
From net realized gain on investments | | | (0.10 | ) | | | (0.05 | ) | | | — | | | | — | | | | (0.56 | ) |
Total distributions declared to shareholders | | | $(0.30 | ) | | | $(0.22 | ) | | | $(0.16 | ) | | | $(0.12 | ) | | | $(0.70 | ) |
Net asset value, end of period (x) | | | $14.22 | | | | $12.54 | | | | $12.83 | | | | $11.68 | | | | $9.67 | |
Total return (%) (k)(r)(s)(x) | | | 15.88 | | | | (0.47 | ) | | | 11.22 | | | | 22.45 | | | | (32.74 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.03 | | | | 1.04 | | | | 1.08 | | | | 1.09 | | | | 1.09 | |
Expenses after expense reductions (f) | | | 1.03 | | | | 1.04 | | | | 1.08 | | | | 1.09 | | | | 1.09 | |
Net investment income | | | 1.76 | | | | 1.58 | | | | 1.35 | | | | 1.75 | | | | 1.57 | |
Portfolio turnover | | | 16 | | | | 18 | | | | 28 | | | | 26 | | | | 36 | |
Net assets at end of period (000 omitted) | | | $1,022,722 | | | | $831,481 | | | | $750,049 | | | | $617,739 | | | | $218,528 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (r) | Certain expenses have been reduced without which performance would have been lower. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (x) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
13
MFS Value Series
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Value Series (the fund) is a series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In this reporting period the fund adopted Financial Accounting Standards Board (FASB) Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 seeks to improve the comparability of fair value measurements as presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) by providing common requirements for fair value measurement and disclosure.
In December 2011, the FASB issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods, ASU 2011-11 is intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. Although still evaluating the potential impacts of ASU 2011-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
14
MFS Value Series
Notes to Financial Statements – continued
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of December 31, 2012 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $1,851,362,608 | | | | $— | | | | $— | | | | $1,851,362,608 | |
United Kingdom | | | — | | | | 70,560,143 | | | | — | | | | 70,560,143 | |
Switzerland | | | 22,655,168 | | | | 11,720,701 | | | | — | | | | 34,375,869 | |
France | | | — | | | | 20,325,000 | | | | — | | | | 20,325,000 | |
Canada | | | 9,678,913 | | | | — | | | | — | | | | 9,678,913 | |
| Mutual Funds | | | 25,547,731 | | | | — | | | | — | | | | 25,547,731 | |
| Total Investments | | | $1,909,244,420 | | | | $102,605,844 | | | | $— | | | | $2,011,850,264 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $70,560,143 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $22,655,168 would have been considered level 2 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income, in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2012, there were no securities on loan or collateral outstanding.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
15
MFS Value Series
Notes to Financial Statements – continued
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount, for the year ended December 31, 2012, is shown as a reduction of total expenses in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Foreign taxes have been accrued by the fund in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/12 | | | 12/31/11 | |
| Ordinary income (including any short-term capital gains) | | | $28,557,964 | | | | $15,423,161 | |
| Long-term capital gains | | | 356,909 | | | | 4,647,117 | |
| Total distributions | | | $28,914,873 | | | | $20,070,278 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/12 | | | | |
| Cost of investments | | | $1,764,045,555 | |
| Gross appreciation | | | 275,410,948 | |
| Gross depreciation | | | (27,606,239 | ) |
| Net unrealized appreciation (depreciation) | | | $247,804,709 | |
| Undistributed ordinary income | | | 30,722,131 | |
| Undistributed long-term capital gain | | | 750,017 | |
| Other temporary differences | | | 8,689 | |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | | | | | | | | | |
| | | From net investment
income | | | From net realized gain on
investments | |
| | | Year ended
12/31/12 | | | Year ended
12/31/11 | | | Year ended
12/31/12 | | | Year ended
12/31/11 | |
| Initial Class | | | $5,784,014 | | | | $5,362,125 | | | | $2,681,309 | | | | $1,450,316 | |
| Service Class | | | 13,351,376 | | | | 10,061,036 | | | | 7,098,174 | | | | 3,196,801 | |
| Total | | | $19,135,390 | | | | $15,423,161 | | | | $9,779,483 | | | | $4,647,117 | |
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund.
16
MFS Value Series
Notes to Financial Statements – continued
The management fee is computed daily and paid monthly at the following annual rates:
| | | | |
| First $1 billion of average daily net assets | | | 0.75% | |
| Average daily net assets in excess of $1 billion | | | 0.65% | |
The investment adviser has agreed in writing to reduce its management fee to 0.60% of average daily net assets in excess of $2.5 billion. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2014. For the year ended December 31, 2012, the fund’s average daily net assets did not exceed $2.5 billion and therefore, the management fee was not reduced.
The management fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.72% of the fund’s average daily net assets.
The investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, extraordinary expenses, brokerage and transaction costs and investment-related expenses, such that operating expenses do not exceed 0.90% of average daily net assets for the Initial Class shares and 1.15% of average daily net assets for the Service Class shares. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2014. For the year ended December 31, 2012, the fund’s actual operating expenses did not exceed the limit and therefore, the investment adviser did not pay any portion of the fund’s expenses related to this agreement.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2012, the fee was $120,282, which equated to 0.0090% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2012, these costs amounted to $912.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.0149% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended December 31, 2012, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $10,674 and are included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $4,483, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
Purchases and sales of investments, other than short-term obligations, aggregated $400,382,288 and $208,924,450, respectively.
17
MFS Value Series
Notes to Financial Statements – continued
Purchases exclude the value of securities acquired in connection with the SC Lord Abbett Growth & Income Fund merger. (See Note 8.)
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 15,304,279 | | | | $213,696,404 | | | | 2,298,352 | | | | $29,236,939 | |
Service Class | | | 14,322,476 | | | | 195,888,177 | | | | 14,860,781 | | | | 187,192,540 | |
| | | 29,626,755 | | | | $409,584,581 | | | | 17,159,133 | | | | $216,429,479 | |
| Shares issued in connection with acquisition of the SC Lord Abbett Growth & Income Fund | | | | | | | | | | | | | | | | |
Initial Class | | | 31,880,924 | | | | $456,216,033 | | | | | | | | | |
Service Class | | | 1,046,135 | | | | 14,781,882 | | | | | | | | | |
| | | 32,927,059 | | | | $470,997,915 | | | | | | | | | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 608,141 | | | | $8,465,323 | | | | 565,817 | | | | $6,812,441 | |
Service Class | | | 1,486,159 | | | | 20,449,550 | | | | 1,113,169 | | | | 13,257,837 | |
| | | 2,094,300 | | | | $28,914,873 | | | | 1,678,986 | | | | $20,070,278 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (6,931,699 | ) | | | $(96,080,507 | ) | | | (5,029,795 | ) | | | $(65,732,351 | ) |
Service Class | | | (11,240,576 | ) | | | (153,792,112 | ) | | | (8,102,420 | ) | | | (104,630,153 | ) |
| | | (18,172,275 | ) | | | $(249,872,619 | ) | | | (13,132,215 | ) | | | $(170,362,504 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | 40,861,645 | | | | $582,297,253 | | | | (2,165,626 | ) | | | $(29,682,971 | ) |
Service Class | | | 5,614,194 | | | | 77,327,497 | | | | 7,871,530 | | | | 95,820,224 | |
| | | 46,475,839 | | | | $659,624,750 | | | | 5,705,904 | | | | $66,137,253 | |
The fund is one of several mutual funds in which the MFS funds-of-funds may invest. The MFS funds-of-funds do not invest in the underlying MFS funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio, the MFS Growth Allocation Portfolio, and the MFS Conservative Allocation Portfolio were the owners of record of approximately 9%, 3%, and 3%, respectively, of the value of outstanding voting shares of the fund.
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2012, the fund’s commitment fee and interest expense were $8,372 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
18
MFS Value Series
Notes to Financial Statements – continued
| (7) | | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
| | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 20,734,900 | | | 343,336,849 | | | (338,524,018 | ) | | | 25,547,731 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | $— | | | $25,806 | | | | $25,547,731 | |
At close of business on December 7, 2012, the fund with net assets of approximately $1,531,914,221, acquired all of the assets and liabilities of SC Lord Abbett Growth & Income Fund, a series of Sun Capital Advisers Trust. The purpose of the transaction was to provide shareholders of SC Lord Abbett Growth & Income Fund the opportunity to participate in a larger combined portfolio with similar investment policies and strategies. The acquisition was accomplished by a tax-free exchange of approximately 32,927,059 shares of the fund (valued at approximately $470,997,915) for all of the assets and liabilities of SC Lord Abbett Growth & Income Fund. SC Lord Abbett Growth & Income Fund then distributed the shares of the fund that SC Lord Abbett Growth & Income Fund received from the fund to its shareholders. SC Lord Abbett Growth & Income Fund’s investments on that date were valued at approximately $463,315,950 with a cost basis of approximately $450,582,951. For financial reporting purposes, assets received and shares issued by the fund were recorded at fair value; however, the cost basis of the investments received from SC Lord Abbett Growth & Income Fund were carried forward to align ongoing reporting of the fund’s realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes. Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of SC Lord Abbett Growth & Income Fund that have been included in the fund’s Statement of Operations since December 7, 2012.
Assuming the acquisition had been completed on January 1, 2012, the fund’s pro forma results of operations for the year ended December 31, 2012 are as follows:
| | | | |
| Net investment income | | | $29,205,333 | |
| Net realized and unrealized gain (loss) on investments and foreign currency | | | $215,895,184 | |
| Change in net assets from operations | | | $245,100,517 | |
19
MFS Value Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of
MFS Value Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Value Series (the “Fund”) (one of the series comprising MFS Variable Insurance Trust) as of December 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Value Series as of December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2013
20
MFS Value Series
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 1, 2013, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES | | | | | | | | |
Robert J. Manning (k) (age 49) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Chief Executive Officer and Director; President (until December 2009); Chief Investment Officer (until July 2010) | | N/A |
| | | | |
| INDEPENDENT TRUSTEES | | | | | | | | |
David H. Gunning (age 70) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman; Portman Limited (mining), Director (until 2008) |
| | | | |
Robert E. Butler (age 71) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 57) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 71) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 68) | | Trustee | | December 2004 | | Private investor; Rouse Properties Inc. (real estate), Director | | N/A |
| | | | |
John P. Kavanaugh (age 58) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
J. Dale Sherratt (age 74) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner | | N/A |
| | | | |
Laurie J. Thomsen
(age 55) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 71) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
John M. Corcoran (k) (age 47) | | President | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) | | N/A |
| | | | |
| Christopher R. Bohane (k) (age 39) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kino Clark (k) (age 44) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 53) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
| | | | |
Ethan D. Corey (k) (age 49) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
21
MFS Value Series
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
David L. DiLorenzo (k) (age 44) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Robyn L. Griffin (age 37) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 39) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 62) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 42) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 42) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 60) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Frank L. Tarantino (age 68) | | Independent
Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 52) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. For the period October 2008, until January 2012, Mr. Corcoran served as Treasurer of the Funds. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2013, the Trustees served as board members of 143 funds within the MFS Family of Funds.
22
MFS Value Series
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers Nevin Chitkara Steven Gorham | | |
23
MFS Value Series
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2012 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2011 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2011, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 4th quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 2nd quintile for the one-year period and the 1st quintile for the five-year period ended December 31, 2011 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
The Trustees expressed concern to MFS about the substandard investment performance of the Fund. In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year, as to MFS’ efforts to improve the Fund’s performance. In addition, the Trustees requested that they receive a separate update on the Fund’s performance at each of their regular meetings. After reviewing these and related factors, the Trustees concluded, within the context
24
MFS Value Series
Board Review of Investment Advisory Agreement – continued
of their overall conclusions regarding the investment advisory agreement, that MFS’ responses and efforts and plans to improve investment performance were sufficient to support approval of the continuance of the investment advisory agreement for an additional one-year period, but that they would continue to closely monitor the performance of the Fund.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each higher than the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to institutional accounts, if any. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund is likely to benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion, and that MFS has agreed in writing to reduce its advisory fee on average daily net assets over $2.5 billion, which may not be changed without the Trustees’ approval. The Trustees concluded that the existing breakpoints were sufficient to allow the Fund to benefit from economies of scale as its assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2012.
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of the MFS Web site (mfs.com).
25
MFS Value Series
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling
1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $393,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 92.49% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
26
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
27
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. • MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. • MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. • MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
28
ANNUAL REPORT
December 31, 2012
MFS® MID CAP GROWTH SERIES
MFS® Variable Insurance Trust
VMG-ANN
MFS® MID CAP GROWTH SERIES
CONTENTS
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ NO BANK OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Mid Cap Growth Series
LETTER FROM THE CHAIRMAN AND CEO
Dear Contract Owners:
The global market outlook for 2013 is one of cautious optimism. While we are seeing some positive economic trends in the United States, Europe and China, the overall environment remains challenging. In the United States, the recent fiscal cliff agreement was received positively by investors, even though it mostly addressed pressing taxation issues and did not resolve additional concerns, including the need for spending cuts and a large-scale reduction of the federal debt. These issues will be front and center again in the spring. Despite the ongoing uncertainty, economic tailwinds are gathering strength as the U.S. housing and job markets are improving and consumer confidence is rising.
Overseas, the debt crisis continues to weigh heavily on eurozone markets, with even Germany — long an economic stalwart — experiencing some contraction. These ongoing challenges could be a drag on global market performance this year. In Asia, manufacturing activity has accelerated in emerging markets such as China and India, and we are seeing signs of stabilized loan growth in China, a leading indicator of that country’s economic health. In contrast, Japan’s economy is contracting sharply under deflationary pressures. Nevertheless, Japanese markets have responded favorably to early actions by the new government, which appears determined to act aggressively, along with the Bank of Japan, to stimulate growth.
As always, managing risk in the face of uncertainty remains a top priority for investors. At MFS®, our uniquely collaborative investment process revolves around global research and our disciplined risk management approach. Our global team of investment professionals shares ideas and evaluates opportunities across continents, investment disciplines and asset classes — all with a goal of building better insights, and ultimately better results, for our clients.
We remain mindful of the many economic challenges investors face today, and believe it is more important than ever to maintain a long-term view, employ time-tested principles, such as asset allocation and diversification, and work closely with investment advisors to identify and pursue the most suitable opportunities.
Respectfully,
Robert J. Manning
Chairman and Chief Executive Officer
MFS Investment Management®
February 15, 2013
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
MFS Mid Cap Growth Series
PORTFOLIO COMPOSITION
Portfolio structure
| | | | |
| Top ten holdings | | | | |
| American Tower Corp., REIT | | | 2.1% | |
| MasterCard, Inc., “A” | | | 1.9% | |
| Verisk Analytics, Inc., “A” | | | 1.7% | |
| AMETEK, Inc. | | | 1.6% | |
| Affiliated Managers Group, Inc. | | | 1.5% | |
| Priceline.com, Inc. | | | 1.5% | |
| Covidien PLC | | | 1.5% | |
| Cabot Oil & Gas Corp. | | | 1.4% | |
| Henry Schein, Inc. | | | 1.4% | |
| Cognizant Technology Solutions Corp., “A” | | | 1.4% | |
| | | | |
| Equity sectors | | | | |
| Health Care | | | 15.4% | |
| Industrial Goods & Services | | | 14.0% | |
| Technology | | | 12.1% | |
| Retailing | | | 10.0% | |
| Special Products & Services | | | 9.2% | |
| Leisure | | | 7.9% | |
| Energy | | | 6.8% | |
| Basic Materials | | | 5.9% | |
| Autos & Housing | | | 5.7% | |
| Financial Services | | | 4.4% | |
| Utilities & Communications | | | 3.4% | |
| Consumer Staples | | | 3.0% | |
| Transportation | | | 1.5% | |
Percentages are based on net assets as of 12/31/12.
The portfolio is actively managed and current holdings may be different.
2
MFS Mid Cap Growth Series
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2012, Initial Class shares of the MFS Mid Cap Growth Series (“fund”) provided a total return of 16.52%, while Service Class shares of the fund provided a total return of 16.42%. These compare with a return of 15.81% over the same period for the fund’s benchmark, the Russell Midcap Growth Index.
Market Environment
The beginning of the period was characterized by a risk-on sentiment as a result of additional liquidity measures by the Federal Reserve Bank (“Fed”) and the European Central Bank (“ECB”) as well as a commensurate improvement in macroeconomic conditions. During this time, global equity valuations rose, credit spreads contracted, and high-quality sovereign yields increased modestly.
During the middle of the period, however, conditions worsened, driven by broadly weaker global macroeconomic indicators, as well as renewed concerns over the eurozone’s capacity and determination to address its ongoing crisis. Despite this deterioration, broad market sentiment remained relatively resilient as equity markets generally maintained gains and credit spreads did not indicate deterioration.
However, this renewed weakness in the fundamentals precipitated a further round of monetary easing by both the Fed (through a third round of quantitative easing) and the ECB (through a new bond purchase facility) in the second half of the period, which soon instilled additional confidence in risk markets. Nonetheless, towards the end of the period, weaker equity earnings reports and declining forward guidance caused market sentiment to soften. In addition, as we moved toward year end, the fiscal cliff negotiations between the Republicans in the U.S. Congress and President Obama were a particular source of market attention, where uncertainty surrounding the fiscal negotiations continued right up to the end-of-year deadline.
Contributors to Performance
Strong stock selection in the special products & services sector was a primary factor that benefited relative returns, led by the fund’s holdings of specialized payment products and services provider FleetCor Technologies. Shares of FleetCor Technologies traded higher during the reporting period due, in part, to favorable acquisition activity and fuel spreads which positively affected earnings.
The combination of an underweight position and stock selection in the consumer staples sector, and strong stock selection in the retailing sector, also bolstered relative performance. However, there were no individual stocks within either sector that were among the fund’s top relative contributors for the period.
Stock selection in the financial services sector benefited relative results. Holding shares of strong-performing credit transaction processing company MasterCard (b) bolstered relative performance. MasterCard benefited from an improvement in consumer spending relative to prior years which positively affected credit card transactions. The fund’s avoidance of weak-performing payment service provider Western Union also supported relative performance.
Elsewhere, holdings of biotechnology firm Alexion Pharmaceuticals, professional networking site LinkedIn, cloud computing service provider Rackspace Hosting, apparel retailer Urban Outfitters, electric instrument manufacturer AMETEK, and data and information management software provider CommVault Systems (b) benefited relative results as all six stocks outperformed the benchmark during the period. Shares of Alexion Pharmaceuticals traded higher throughout much of the year as sales of its Soliris drug were better-than-expected. The timing of ownership in shares of IT infrastructure management software company SolarWinds also contributed to relative performance.
Detractors from Performance
Stock selection in the basic materials sector detracted from relative results. Not holding shares of strong-performing protective and decorative coatings manufacturer PPG Industries held back relative performance.
The combination of an overweight position and stock selection in the technology sector also held back relative returns. Holding shares of Israeli-headquartered security software provider Check Point Software Technologies (b) negatively impacted relative results. Shares of the company traded lower as stronger competitive forces in its industry and a challenging global economic landscape weighed on the firm’s profitability.
In other sectors, holdings of energy companies SM Energy and Paramount Resources (b)(h) hindered relative performance. Shares of both companies struggled as energy prices remained low throughout the year. Not holding shares of wireless infrastructure company Crown Castle, network and data storage company Equinix, and international cable operator Liberty Global held back relative returns as all three stocks outperformed the benchmark during the period. Additionally, the timing of ownership in shares of strong-performing biopharmaceutical company Regeneron Pharmaceuticals and Intuitive Surgical, the maker of the da Vinci Surgical Systems, negatively affected relative results.
3
MFS Mid Cap Growth Series
Management Review – continued
The fund’s cash and/or cash equivalents position was also a detractor from relative performance. The fund strives to be fully invested and generally holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Respectfully,
| | |
| Eric Fischman | | Paul Gordon |
| Portfolio Manager | | Portfolio Manager |
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
4
MFS Mid Cap Growth Series
PERFORMANCE SUMMARY THROUGH 12/31/12
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/12
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 4/28/00 | | 16.52% | | (0.50)% | | 5.92% | | |
| | | Service Class | | 5/01/00 | | 16.42% | | (0.71)% | | 5.68% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Russell Midcap Growth Index (f) | | 15.81% | | 3.23% | | 10.32% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Russell Midcap Growth Index – constructed to provide a comprehensive barometer for growth securities in the mid-cap segment of the U.S. equity universe. Companies in this index generally have higher price-to-book ratios and higher forecasted growth values.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Mid Cap Growth Series
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2012 through December 31, 2012
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2012 through December 31, 2012.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | | Beginning
Account Value
7/01/12 | | | Ending Account Value
12/31/12 | | | Expenses Paid
During Period (p)
7/01/12-12/31/12 | |
| Initial Class | | Actual | | | 0.89% | | | | $1,000.00 | | | | $1,078.95 | | | | $4.65 | |
| | Hypothetical (h) | | | 0.89% | | | | $1,000.00 | | | | $1,020.66 | | | | $4.52 | |
| Service Class | | Actual | | | 1.15% | | | | $1,000.00 | | | | $1,079.53 | | | | $6.01 | |
| | Hypothetical (h) | | | 1.15% | | | | $1,000.00 | | | | $1,019.36 | | | | $5.84 | |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS Mid Cap Growth Series
PORTFOLIO OF INVESTMENTS – 12/31/12
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 99.3% | | | | | | | | |
| Aerospace – 2.6% | | | | | | | | |
| Precision Castparts Corp. | | | 28,920 | | | $ | 5,478,019 | |
| TransDigm Group, Inc. | | | 41,470 | | | | 5,654,849 | |
| | | | | | | | |
| | | | | | $ | 11,132,868 | |
| | | | | | | | |
| Alcoholic Beverages – 1.0% | | | | | | | | |
| Beam, Inc. | | | 68,600 | | | $ | 4,190,774 | |
| | | | | | | | |
| Apparel Manufacturers – 1.9% | | | | | | | | |
| Guess?, Inc. | | | 48,260 | | | $ | 1,184,300 | |
| Li & Fung Ltd. | | | 1,262,000 | | | | 2,267,186 | |
| Michael Kors Holdings Ltd. (a) | | | 28,010 | | | | 1,429,350 | |
| VF Corp. | | | 22,060 | | | | 3,330,398 | |
| | | | | | | | |
| | | | | | $ | 8,211,234 | |
| | | | | | | | |
| Automotive – 3.3% | | | | | | | | |
| BorgWarner Transmission Systems, Inc. (a) | | | 74,580 | | | $ | 5,341,420 | |
| Delphi Automotive PLC (a) | | | 138,460 | | | | 5,296,095 | |
| LKQ Corp. (a) | | | 181,890 | | | | 3,837,879 | |
| | | | | | | | |
| | | | | | $ | 14,475,394 | |
| | | | | | | | |
| Biotechnology – 2.1% | | | | | | | | |
| Alexion Pharmaceuticals, Inc. (a) | | | 48,980 | | | $ | 4,594,814 | |
| Medivation, Inc. (a) | | | 13,240 | | | | 677,358 | |
| Regeneron Pharmaceuticals, Inc. (a) | | | 10,430 | | | | 1,784,260 | |
| ViroPharma, Inc. (a) | | | 96,680 | | | | 2,200,437 | |
| | | | | | | | |
| | | | | | $ | 9,256,869 | |
| | | | | | | | |
| Broadcasting – 2.5% | | | | | | | | |
| CBS Corp., “B” | | | 70,230 | | | $ | 2,672,252 | |
| Discovery Communications, Inc., “A” (a) | | | 92,872 | | | | 5,895,515 | |
| Scripps Networks Interactive, Inc., “A” | | | 37,240 | | | | 2,156,941 | |
| | | | | | | | |
| | | | | | $ | 10,724,708 | |
| | | | | | | | |
| Brokerage & Asset Managers – 2.5% | | | | | |
| Affiliated Managers Group, Inc. (a) | | | 51,760 | | | $ | 6,736,564 | |
| Evercore Partners, Inc. | | | 40,800 | | | | 1,231,752 | |
| IntercontinentalExchange, Inc. (a) | | | 22,150 | | | | 2,742,392 | |
| | | | | | | | |
| | | | | | $ | 10,710,708 | |
| | | | | | | | |
| Business Services – 7.6% | | | | | | | | |
| Cognizant Technology Solutions | | | | | | | | |
| Corp., “A” (a) | | | 82,305 | | | $ | 6,094,685 | |
| Concur Technologies, Inc. (a) | | | 30,400 | | | | 2,052,608 | |
| FleetCor Technologies, Inc. (a) | | | 112,350 | | | | 6,027,578 | |
| Gartner, Inc. (a) | | | 82,580 | | | | 3,800,332 | |
| IHS, Inc., “A” (a) | | | 11,200 | | | | 1,075,200 | |
| Jones Lang LaSalle, Inc. | | | 57,480 | | | | 4,824,871 | |
| Realogy Holdings Corp. (a) | | | 40,980 | | | | 1,719,521 | |
| Verisk Analytics, Inc., “A” (a) | | | 145,520 | | | | 7,421,520 | |
| | | | | | | | |
| | | | | | $ | 33,016,315 | |
| | | | | | | | |
| Cable TV – 1.0% | | | | | | | | |
| Charter Communications, Inc., “A” (a) | | | 56,870 | | | $ | 4,335,769 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Chemicals – 0.7% | | | | | | | | |
| Celanese Corp. | | | 72,670 | | | $ | 3,235,995 | |
| | | | | | | | |
| Computer Software – 6.0% | | | | | | | | |
| Autodesk, Inc. (a) | | | 49,480 | | | $ | 1,749,118 | |
| Check Point Software Technologies Ltd. (a) | | | 79,680 | | | | 3,795,955 | |
| Citrix Systems, Inc. (a) | | | 49,070 | | | | 3,226,353 | |
| CommVault Systems, Inc. (a) | | | 54,100 | | | | 3,771,311 | |
| Parametric Technology Corp. (a) | | | 165,380 | | | | 3,722,704 | |
| Qlik Technologies, Inc. (a) | | | 156,590 | | | | 3,401,135 | |
| SolarWinds, Inc. (a) | | | 68,030 | | | | 3,568,174 | |
| TIBCO Software, Inc. (a) | | | 136,360 | | | | 3,001,284 | |
| | | | | | | | |
| | | | | | $ | 26,236,034 | |
| | | | | | | | |
| Computer Software – Systems – 0.2% | | | | | |
| Verifone Systems, Inc. (a) | | | 35,480 | | | $ | 1,053,046 | |
| | | | | | | | |
| Construction – 2.4% | | | | | | | | |
| NVR, Inc. (a) | | | 3,870 | | | $ | 3,560,400 | |
| Sherwin-Williams Co. | | | 9,100 | | | | 1,399,762 | |
| Stanley Black & Decker, Inc. | | | 74,605 | | | | 5,518,532 | |
| | | | | | | | |
| | | | | | $ | 10,478,694 | |
| | | | | | | | |
| Consumer Services – 1.6% | | | | | | | | |
| Anhanguera Educacional | | | | | | | | |
| Participacoes S.A. | | | 19,900 | | | $ | 339,971 | |
| Priceline.com, Inc. (a) | | | 10,720 | | | | 6,659,264 | |
| | | | | | | | |
| | | | | | $ | 6,999,235 | |
| | | | | | | | |
| Containers – 2.4% | | | | | | | | |
| Ball Corp. | | | 122,160 | | | $ | 5,466,660 | |
| Silgan Holdings, Inc. | | | 115,640 | | | | 4,809,468 | |
| | | | | | | | |
| | | | | | $ | 10,276,128 | |
| | | | | | | | |
| Electrical Equipment – 6.3% | | | | | | | | |
| AMETEK, Inc. | | | 187,009 | | | $ | 7,025,928 | |
| Mettler-Toledo International, Inc. (a) | | | 30,980 | | | | 5,988,434 | |
| MSC Industrial Direct Co., Inc., “A” | | | 50,000 | | | | 3,769,000 | |
| Sensata Technologies Holding B.V. (a) | | | 91,610 | | | | 2,975,493 | |
| TriMas Corp. (a) | | | 51,030 | | | | 1,426,799 | |
| W.W. Grainger, Inc. | | | 20,330 | | | | 4,114,182 | |
| WESCO International, Inc. (a) | | | 33,450 | | | | 2,255,534 | |
| | | | | | | | |
| | | | | | $ | 27,555,370 | |
| | | | | | | | |
| Electronics – 2.9% | | | | | | | | |
| Altera Corp. | | | 116,580 | | | $ | 4,015,015 | |
| Hittite Microwave Corp. (a) | | | 28,010 | | | | 1,739,421 | |
| Linear Technology Corp. | | | 85,280 | | | | 2,925,104 | |
| Microchip Technology, Inc. | | | 126,050 | | | | 4,107,970 | |
| | | | | | | | |
| | | | | | $ | 12,787,510 | |
| | | | | | | | |
| Energy – Independent – 4.1% | | | | | | | | |
| Cabot Oil & Gas Corp. | | | 124,900 | | | $ | 6,212,526 | |
| Concho Resources, Inc. (a) | | | 35,690 | | | | 2,875,186 | |
| EQT Corp. | | | 40,880 | | | | 2,411,102 | |
| Pioneer Natural Resources Co. | | | 18,480 | | | | 1,969,783 | |
7
MFS Mid Cap Growth Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Energy – Independent – continued | | | | | | | | |
| Range Resources Corp. | | | 25,150 | | | $ | 1,580,175 | |
| SM Energy Co. | | | 51,500 | | | | 2,688,815 | |
| | | | | | | | |
| | | | | | $ | 17,737,587 | |
| | | | | | | | |
| Engineering – Construction – 0.3% | | | | | | | | |
| Fluor Corp. | | | 24,997 | | | $ | 1,468,324 | |
| | | | | | | | |
| Entertainment – 1.0% | | | | | | | | |
| AMC Networks, Inc., “A” (a) | | | 42,120 | | | $ | 2,084,940 | |
| Six Flags Entertainment Corp. | | | 35,110 | | | | 2,148,732 | |
| | | | | | | | |
| | | | | | $ | 4,233,672 | |
| | | | | | | | |
| Food & Beverages – 2.0% | | | | | | | | |
| Chr. Hansen Holding A/S | | | 92,023 | | | $ | 3,000,226 | |
| Mead Johnson Nutrition Co., “A” | | | 60,580 | | | | 3,991,616 | |
| Want Want China Holdings Ltd. | | | 1,128,000 | | | | 1,571,502 | |
| | | | | | | | |
| | | | | | $ | 8,563,344 | |
| | | | | | | | |
| Gaming & Lodging – 0.7% | | | | | | | | |
| Sands China Ltd. | | | 326,000 | | | $ | 1,460,271 | |
| Wynn Resorts Ltd. | | | 16,040 | | | | 1,804,340 | |
| | | | | | | | |
| | | | | | $ | 3,264,611 | |
| | | | | | | | |
| General Merchandise – 1.1% | | | | | | | | |
| Dollar General Corp. (a) | | | 45,370 | | | $ | 2,000,363 | |
| Five Below, Inc. (a) | | | 93,050 | | | | 2,981,322 | |
| | | | | | | | |
| | | | | | $ | 4,981,685 | |
| | | | | | | | |
| Internet – 1.8% | | | | | | | | |
| LinkedIn Corp., “A” (a) | | | 25,500 | | | $ | 2,927,910 | |
| Rackspace Hosting, Inc. (a) | | | 66,400 | | | | 4,931,528 | |
| | | | | | | | |
| | | | | | $ | 7,859,438 | |
| | | | | | | | |
| Leisure & Toys – 1.0% | | | | | | | | |
| Brunswick Corp. | | | 67,310 | | | $ | 1,958,048 | |
| Polaris Industries, Inc. | | | 28,310 | | | | 2,382,287 | |
| | | | | | | | |
| | | | | | $ | 4,340,335 | |
| | | | | | | | |
| Machinery & Tools – 4.5% | | | | | | | | |
| Cummins, Inc. | | | 29,070 | | | $ | 3,149,735 | |
| Flowserve Corp. | | | 12,420 | | | | 1,823,256 | |
| Joy Global, Inc. | | | 66,630 | | | | 4,249,661 | |
| Polypore International, Inc. (a) | | | 48,500 | | | | 2,255,250 | |
| Roper Industries, Inc. | | | 41,030 | | | | 4,574,024 | |
| WABCO Holdings, Inc. (a) | | | 52,180 | | | | 3,401,614 | |
| | | | | | | | |
| | | | | | $ | 19,453,540 | |
| | | | | | | | |
| Medical & Health Technology & Services – 4.7% | |
| Advisory Board Co. (a) | | | 77,040 | | | $ | 3,604,702 | |
| Catamaran Corp. (a) | | | 118,810 | | | | 5,597,139 | |
| Cerner Corp. (a) | | | 49,980 | | | | 3,880,447 | |
| Henry Schein, Inc. (a) | | | 76,300 | | | | 6,139,098 | |
| IDEXX Laboratories, Inc. (a) | | | 14,020 | | | | 1,301,056 | |
| | | | | | | | |
| | | | | | $ | 20,522,442 | |
| | | | | | | | |
| Medical Equipment – 6.6% | | | | | | | | |
| Cepheid, Inc. (a) | | | 18,910 | | | $ | 639,347 | |
| Cooper Cos., Inc. | | | 56,863 | | | | 5,258,690 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Medical Equipment – continued | | | | | | | | |
| Covidien PLC | | | 110,350 | | | $ | 6,371,609 | |
| DexCom, Inc. (a) | | | 79,960 | | | | 1,088,256 | |
| Edwards Lifesciences Corp. (a) | | | 45,880 | | | | 4,137,000 | |
| Endologix, Inc. (a) | | | 132,920 | | | | 1,892,781 | |
| Intuitive Surgical, Inc. (a) | | | 7,249 | | | | 3,554,692 | |
| Sirona Dental Systems, Inc. (a) | | | 26,260 | | | | 1,692,720 | |
| Thermo Fisher Scientific, Inc. | | | 64,800 | | | | 4,132,944 | |
| | | | | | | | |
| | | | | | $ | 28,768,039 | |
| | | | | | | | |
| Metals & Mining – 0.4% | | | | | | | | |
| Cliffs Natural Resources, Inc. | | | 42,150 | | | $ | 1,625,304 | |
| | | | | | | | |
| Network & Telecom – 1.2% | | | | | | | | |
| Fortinet, Inc. (a) | | | 252,360 | | | $ | 5,317,225 | |
| | | | | | | | |
| Oil Services – 2.7% | | | | | | | | |
| Cameron International Corp. (a) | | | 26,900 | | | $ | 1,518,774 | |
| Core Laboratories N.V. | | | 18,910 | | | | 2,067,052 | |
| Dresser-Rand Group, Inc. (a) | | | 83,460 | | | | 4,685,444 | |
| FMC Technologies, Inc. (a) | | | 77,220 | | | | 3,307,333 | |
| | | | | | | | |
| | | | | | $ | 11,578,603 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 1.9% | | | | | |
| MasterCard, Inc., “A” | | | 17,280 | | | $ | 8,489,318 | |
| | | | | | | | |
| Pharmaceuticals – 2.0% | | | | | | | | |
| Auxilium Pharmaceuticals, Inc. (a) | | | 52,250 | | | $ | 968,193 | |
| Perrigo Co. | | | 53,870 | | | | 5,604,096 | |
| Valeant Pharmaceuticals International, Inc. (a) | | | 36,800 | | | | 2,199,536 | |
| | | | | | | | |
| | | | | | $ | 8,771,825 | |
| | | | | | | | |
| Pollution Control – 0.3% | | | | | | | | |
| Stericycle, Inc. (a) | | | 16,310 | | | $ | 1,521,234 | |
| | | | | | | | |
| Railroad & Shipping – 0.9% | | | | | | | | |
| Kansas City Southern Co. | | | 48,670 | | | $ | 4,062,972 | |
| | | | | | | | |
| Restaurants – 1.7% | | | | | | | | |
| Arcos Dorados Holdings, Inc. | | | 151,670 | | | $ | 1,813,973 | |
| Bloomin Brands, Inc. (a) | | | 46,030 | | | | 719,909 | |
| Chipotle Mexican Grill, Inc., “A” (a) | | | 3,630 | | | | 1,079,780 | |
| Starbucks Corp. | | | 71,970 | | | | 3,859,031 | |
| | | | | | | | |
| | | | | | $ | 7,472,693 | |
| | | | | | | | |
| Specialty Chemicals – 2.4% | | | | | | | | |
| Airgas, Inc. | | | 52,840 | | | $ | 4,823,764 | |
| Albemarle Corp. | | | 43,280 | | | | 2,688,554 | |
| Rockwood Holdings, Inc. | | | 58,270 | | | | 2,882,034 | |
| | | | | | | | |
| | | | | | $ | 10,394,352 | |
| | | | | | | | |
| Specialty Stores – 7.0% | | | | | | | | |
| AutoZone, Inc. (a) | | | 13,990 | | | $ | 4,958,476 | |
| Bed Bath & Beyond, Inc. (a) | | | 31,120 | | | | 1,739,919 | |
| Children’s Place Retail Store, Inc. (a) | | | 51,600 | | | | 2,285,364 | |
| Express, Inc. (a) | | | 33,970 | | | | 512,607 | |
| PetSmart, Inc. | | | 38,230 | | | | 2,612,638 | |
| Ross Stores, Inc. | | | 87,570 | | | | 4,741,916 | |
| rue21, Inc. (a) | | | 53,730 | | | | 1,525,395 | |
8
MFS Mid Cap Growth Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Specialty Stores – continued | | | | | | | | |
| Tiffany & Co. | | | 73,720 | | | $ | 4,227,105 | |
| Tractor Supply Co. | | | 36,600 | | | | 3,233,976 | |
| Urban Outfitters, Inc. (a) | | | 119,200 | | | | 4,691,712 | |
| | | | | | | | |
| | | | | | $ | 30,529,108 | |
| | | | | | | | |
| Telecommunications – Wireless – 2.1% | |
| American Tower Corp., REIT | | | 118,670 | | | $ | 9,169,631 | |
| | | | | | | | |
| Trucking – 0.6% | | | | | | | | |
| Expeditors International of Washington, Inc. | | | 63,330 | | | $ | 2,504,702 | |
| | | | | | | | |
| Utilities – Electric Power – 1.3% | | | | | | | | |
| CMS Energy Corp. | | | 237,070 | | | $ | 5,779,767 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $402,250,837) | | | | | | $ | 433,086,402 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| MONEY MARKET FUNDS – 0.3% | |
| MFS Institutional Money Market Portfolio, 0.16%, at Cost and Net Asset Value (v) | | | 1,598,892 | | | $ | 1,598,892 | |
| | | | | | | | |
Total Investments
(Identified Cost, $403,849,729) | | | | | | $ | 434,685,294 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.4% | | | | 1,582,136 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | $ | 436,267,430 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
The following abbreviations are used in this report and are defined:
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
See Notes to Financial Statements
9
MFS Mid Cap Growth Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | | | | |
At 12/31/12 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $402,250,837) | | | $433,086,402 | | | | | |
Underlying affiliated funds, at cost and value | | | 1,598,892 | | | | | |
Total investments, at value (identified cost, $403,849,729) | | | $434,685,294 | | | | | |
Cash | | | 33,859 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 2,377,459 | | | | | |
Fund shares sold | | | 98,841 | | | | | |
Dividends | | | 74,854 | | | | | |
Other assets | | | 4,369 | | | | | |
Total assets | | | | | | | $437,274,676 | |
Liabilities | | | | | | | | |
Payable for fund shares reacquired | | | $867,755 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 36,080 | | | | | |
Shareholder servicing costs | | | 418 | | | | | |
Distribution and/or service fees | | | 2,070 | | | | | |
Payable for independent Trustees’ compensation | | | 15 | | | | | |
Accrued expenses and other liabilities | | | 100,908 | | | | | |
Total liabilities | | | | | | | $1,007,246 | |
Net assets | | | | | | | $436,267,430 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $419,819,293 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 30,835,629 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (14,387,492 | ) | | | | |
Net assets | | | | | | | $436,267,430 | |
Shares of beneficial interest outstanding | | | | | | | 66,817,875 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $359,488,302 | | | | 54,775,382 | | | | $6.56 | |
Service Class | | | 76,779,128 | | | | 12,042,493 | | | | 6.38 | |
See Notes to Financial Statements
10
MFS Mid Cap Growth Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | | | | | | |
Year ended 12/31/12 | | | | | | | | |
Net investment loss | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $1,155,109 | | | | | |
Interest | | | 2,115 | | | | | |
Dividends from underlying affiliated funds | | | 2,854 | | | | | |
Foreign taxes withheld | | | (3,043 | ) | | | | |
Total investment income | | | | | | | $1,157,035 | |
Expenses | | | | | | | | |
Management fee | | | $1,094,282 | | | | | |
Distribution and/or service fees | | | 94,820 | | | | | |
Shareholder servicing costs | | | 13,204 | | | | | |
Administrative services fee | | | 30,729 | | | | | |
Independent Trustees’ compensation | | | 5,321 | | | | | |
Custodian fee | | | 24,027 | | | | | |
Shareholder communications | | | 22,348 | | | | | |
Audit and tax fees | | | 55,382 | | | | | |
Legal fees | | | 41,907 | | | | | |
Miscellaneous | | | 15,071 | | | | | |
Total expenses | | | | | | | $1,397,091 | |
Fees paid indirectly | | | (7 | ) | | | | |
Reduction of expenses by investment adviser | | | (425 | ) | | | | |
Net expenses | | | | | | | $1,396,659 | |
Net investment loss | | | | | | | $(239,624 | ) |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $14,113,343 | | | | | |
Foreign currency | | | (2,705 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $14,110,638 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $10,922,473 | | | | | |
Translation of assets and liabilities in foreign currencies | | | 61 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $10,922,534 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $25,033,172 | |
Change in net assets from operations | | | | | | | $24,793,548 | |
See Notes to Financial Statements
11
MFS Mid Cap Growth Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | | | |
For years ended 12/31 | | | 2012 | | | | 2011 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment loss | | | $(239,624 | ) | | | $(712,690 | ) |
Net realized gain (loss) on investments and foreign currency | | | 14,110,638 | | | | 25,044,307 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 10,922,534 | | | | (31,574,277 | ) |
Change in net assets from operations | | | $24,793,548 | | | | $(7,242,660 | ) |
Change in net assets from fund share transactions | | | $296,944,917 | | | | $(51,517,703 | ) |
Total change in net assets | | | $321,738,465 | | | | $(58,760,363 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 114,528,965 | | | | 173,289,328 | |
At end of period | | | $436,267,430 | | | | $114,528,965 | |
See Notes to Financial Statements
12
MFS Mid Cap Growth Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $5.63 | | | | $5.99 | | | | $4.62 | | | | $3.27 | | | | $7.66 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss) (d) | | | $(0.01 | ) | | | $(0.03 | ) | | | $(0.00 | )(w) | | | $(0.00 | )(w) | | | $0.01 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.94 | | | | (0.33 | ) | | | 1.37 | | | | 1.36 | | | | (3.55 | ) |
Total from investment operations | | | $0.93 | | | | $(0.36 | ) | | | $1.37 | | | | $1.36 | | | | $(3.54 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $— | | | | $— | | | | $— | | | | $(0.01 | ) | | | $— | |
From net realized gain on investments | | | — | | | | — | | | | — | | | | — | | | | (0.85 | ) |
From tax return of capital | | | — | | | | — | | | | — | | | | (0.00 | )(w) | | | — | |
Total distributions declared to shareholders | | | $— | | | | $— | | | | $— | | | | $(0.01 | ) | | | $(0.85 | ) |
Net asset value, end of period (x) | | | $6.56 | | | | $5.63 | | | | $5.99 | | | | $4.62 | | | | $3.27 | |
Total return (%) (k)(r)(s)(x) | | | 16.52 | | | | (6.01 | ) | | | 29.65 | | | | 41.78 | | | | (51.56 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.89 | | | | 0.88 | | | | 0.88 | | | | 0.90 | | | | 0.87 | |
Expenses after expense reductions (f) | | | 0.89 | | | | 0.88 | | | | 0.88 | | | | 0.90 | | | | 0.87 | |
Net investment income (loss) | | | (0.10 | ) | | | (0.44 | ) | | | 0.09 | | | | (0.09 | ) | | | 0.21 | |
Portfolio turnover | | | 65 | | | | 71 | | | | 91 | | | | 114 | | | | 104 | |
Net assets at end of period (000 omitted) | | | $359,488 | | | | $84,387 | | | | $137,567 | | | | $107,989 | | | | $73,066 | |
See Notes to Financial Statements
13
MFS Mid Cap Growth Series
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $5.48 | | | | $5.84 | | | | $4.52 | | | | $3.20 | | | | $7.52 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss) (d) | | | $(0.02 | ) | | | $(0.04 | ) | | | $(0.01 | ) | | | $(0.01 | ) | | | $(0.00 | )(w) |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.92 | | | | (0.32 | ) | | | 1.33 | | | | 1.33 | | | | (3.47 | ) |
Total from investment operations | | | $0.90 | | | | $(0.36 | ) | | | $1.32 | | | | $1.32 | | | | $(3.47 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net realized gain on investments | | | $— | | | | $— | | | | $— | | | | $— | | | | $(0.85 | ) |
Net asset value, end of period (x) | | | $6.38 | | | | $5.48 | | | | $5.84 | | | | $4.52 | | | | $3.20 | |
Total return (%) (k)(r)(s)(x) | | | 16.42 | | | | (6.16 | ) | | | 29.20 | | | | 41.25 | | | | (51.59 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.14 | | | | 1.13 | | | | 1.13 | | | | 1.16 | | | | 1.12 | |
Expenses after expense reductions (f) | | | 1.14 | | | | 1.13 | | | | 1.13 | | | | 1.15 | | | | 1.12 | |
Net investment loss | | | (0.35 | ) | | | (0.70 | ) | | | (0.16 | ) | | | (0.33 | ) | | | (0.05 | ) |
Portfolio turnover | | | 65 | | | | 71 | | | | 91 | | | | 114 | | | | 104 | |
Net assets at end of period (000 omitted) | | | $76,779 | | | | $30,142 | | | | $35,722 | | | | $29,524 | | | | $22,511 | |
| (d) | | Per share data is based on average shares outstanding. |
| (f) | | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (r) | | Certain expenses have been reduced without which performance would have been lower. |
| (s) | | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (w) | | Per share amount was less than $0.01. |
| (x) | | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
14
MFS Mid Cap Growth Series
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Mid Cap Growth Series (the fund) is a series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In this reporting period the fund adopted Financial Accounting Standards Board (FASB) Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 seeks to improve the comparability of fair value measurements as presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) by providing common requirements for fair value measurement and disclosure.
In December 2011, the FASB issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods, ASU 2011-11 is intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. Although still evaluating the potential impacts of ASU 2011-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
15
MFS Mid Cap Growth Series
Notes to Financial Statements – continued
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of December 31, 2012 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $411,040,643 | | | | $— | | | | $— | | | | $411,040,643 | |
Canada | | | 7,796,675 | | | | — | | | | — | | | | 7,796,675 | |
Israel | | | 3,795,955 | | | | — | | | | — | | | | 3,795,955 | |
Hong Kong | | | — | | | | 3,727,457 | | | | — | | | | 3,727,457 | |
Denmark | | | — | | | | 3,000,226 | | | | — | | | | 3,000,226 | |
British Virgin Islands | | | 1,813,973 | | | | — | | | | — | | | | 1,813,973 | |
China | | | — | | | | 1,571,502 | | | | — | | | | 1,571,502 | |
Brazil | | | — | | | | 339,971 | | | | — | | | | 339,971 | |
| Mutual Funds | | | 1,598,892 | | | | — | | | | — | | | | 1,598,892 | |
| Total Investments | | | $426,046,138 | | | | $8,639,156 | | | | $— | | | | $434,685,294 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $4,178,659 would have been considered level 1 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2012, there were no securities on loan or collateral outstanding.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be
16
MFS Mid Cap Growth Series
Notes to Financial Statements – continued
recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount, for the year ended December 31, 2012, is shown as a reduction of total expenses in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Foreign taxes have been accrued by the fund in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
During the year ended December 31, 2012, there were no significant adjustments due to differences between book and tax accounting.
The fund declared no distributions for the years ended December 31, 2012 and December 31, 2011.
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/12 | | | | |
| Cost of investments | | | $404,057,522 | |
| Gross appreciation | | | 34,088,257 | |
| Gross depreciation | | | (3,460,485 | ) |
| Net unrealized appreciation (depreciation) | | | $30,627,772 | |
| Capital loss carryforwards | | | (14,179,699 | ) |
| Other temporary differences | | | 64 | |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized after December 31, 2010 may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
As of December 31, 2012, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | | |
| Pre-enactment losses: | | | | |
| 12/31/15 | | | (8,394,469 | ) |
| 12/31/16 | | | (4,433,720 | ) |
| 12/31/17 | | | (1,351,510 | ) |
| Total | | | (14,179,699 | ) |
The availability of $12,828,189 of the capital loss carryforwards, which were acquired on August 17, 2012 in connection with the MFS Mid Cap Growth Portfolio merger, may be limited in a given year.
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses.
17
MFS Mid Cap Growth Series
Notes to Financial Statements – continued
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
| | | | |
| First $1 billion of average daily net assets | | | 0.75% | |
| Average daily net assets in excess of $1 billion | | | 0.70% | |
The management fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.75% of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2012, the fee was $12,722, which equated to 0.0087% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2012, these costs amounted to $482.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.0211% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended December 31, 2012, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $1,047 and are included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $425, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
Purchases and sales of investments, other than short-term obligations, aggregated $79,640,025 and $104,596,701, respectively. Purchases exclude the value of securities acquired in connection with MFS Mid Cap Growth Portfolio and SC WMC Blue Chip Mid Cap Fund mergers (See Note 8).
18
MFS Mid Cap Growth Series
Notes to Financial Statements – continued
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 959,760 | | | | $5,983,020 | | | | 924,633 | | | | $5,574,028 | |
Service Class | | | 992,068 | | | | 6,016,557 | | | | 1,307,673 | | | | 7,551,227 | |
| | | 1,951,828 | | | | $11,999,577 | | | | 2,232,306 | | | | $13,125,255 | |
| Shares issued in connection with acquisition of MFS Mid Cap Growth Portfolio | | | | | | | | | | | | | | | | |
Initial Class | | | 3,130,532 | | | | $19,816,269 | | | | | | | | | |
Service Class | | | 1,761,981 | | | | 10,836,185 | | | | | | | | | |
| | | 4,892,513 | | | | $30,652,454 | | | | | | | | | |
| Shares issued in connection with acquisition of SC WMC Blue Chip Mid Cap Fund | | | | | | | | | | | | | | | | |
Initial Class | | | 40,449,941 | | | | $260,093,122 | | | | | | | | | |
Service Class | | | 5,344,503 | | | | 33,403,141 | | | | | | | | | |
| | | 45,794,444 | | | | $293,496,263 | | | | | | | | | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (4,759,917 | ) | | | $(29,732,542 | ) | | | (8,892,985 | ) | | | $(53,492,403 | ) |
Service Class | | | (1,559,316 | ) | | | (9,470,835 | ) | | | (1,916,202 | ) | | | (11,150,555 | ) |
| | | (6,319,233 | ) | | | $(39,203,377 | ) | | | (10,809,187 | ) | | | $(64,642,958 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | 39,780,316 | | | | $256,159,869 | | | | (7,968,352 | ) | | | $(47,918,375 | ) |
Service Class | | | 6,539,236 | | | | 40,785,048 | | | | (608,529 | ) | | | (3,599,328 | ) |
| | | 46,319,552 | | | | $296,944,917 | | | | (8,576,881 | ) | | | $(51,517,703 | ) |
The fund is one of several mutual funds in which the MFS funds-of-funds may invest. The MFS funds-of-funds do not invest in the underlying MFS funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio, the MFS Growth Allocation Portfolio, and the MFS Conservative Allocation Portfolio were the owners of record of approximately 32%, 12%, and 9%, respectively, of the value of outstanding voting shares of the fund.
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2012, the fund’s commitment fee and interest expense were $782 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 2,546,249 | | | | 39,595,739 | | | | (40,543,096 | ) | | | 1,598,892 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $2,854 | | | | $1,598,892 | |
19
MFS Mid Cap Growth Series
Notes to Financial Statements – continued
At close of business on August 17, 2012, the fund with net assets of approximately $114,276,515, acquired all of the assets and liabilities of MFS Mid Cap Growth Portfolio, a series of MFS Variable Insurance Trust II. The purpose of the transaction was to provide shareholders of the MFS Mid Cap Growth Portfolio the opportunity to participate in a larger combined portfolio with an identical investment objective and identical investment policies and strategies. The acquisition was accomplished by a tax-free exchange of approximately 4,892,513 shares of the fund (valued at approximately $30,652,454) for all of the assets and liabilities of MFS Mid Cap Growth Portfolio. MFS Mid Cap Growth Portfolio then distributed the shares of the fund that MFS Mid Cap Growth Portfolio received from the fund to its shareholders. MFS Mid Cap Growth Portfolio’s investments on that date were valued at approximately $30,646,648 with a cost basis of approximately $26,191,922. For financial reporting purposes, assets received and shares issued by the fund were recorded at fair value; however, the cost basis of the investments received from MFS Mid Cap Growth Portfolio were carried forward to align ongoing reporting of the fund’s realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes. Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of MFS Mid Cap Growth Portfolio that have been included in the fund’s Statement of Operations since August 17, 2012.
At close of business on December 7, 2012, the fund with net assets of approximately $138,538,778, acquired all of the assets and liabilities of SC WMC Blue Chip Mid Cap Fund, a series of Sun Capital Advisers Trust. The purpose of the transaction was to provide shareholders of the SC WMC Blue Chip Mid Cap Fund the opportunity to participate in a larger combined portfolio with a similar investment objective and similar investment policies and strategies. The acquisition was accomplished by a tax-free exchange of approximately 45,794,444 shares of the fund (valued at approximately $293,496,263) for all of the assets and liabilities of SC WMC Blue Chip Mid Cap Fund. SC WMC Blue Chip Mid Cap Fund then distributed the shares of the fund that SC WMC Blue Chip Mid Cap Fund received from the fund to its shareholders. SC WMC Blue Chip Mid Cap Fund’s investments on that date were valued at approximately $290,124,383 with a cost basis of approximately $283,276,379. For financial reporting purposes, assets received and shares issued by the fund were recorded at fair value; however, the cost basis of the investments received from SC WMC Blue Chip Mid Cap Fund were carried forward to align ongoing reporting of the fund’s realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes. Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of SC WMC Blue Chip Mid Cap Fund that have been included in the fund’s Statement of Operations since December 7, 2012.
Assuming the acquisitions had been completed on January 1, 2012, the fund’s pro forma results of operations for the year ended December 31, 2012 are as follows:
| | | | |
| Net investment income | | | $530,488 | |
| Net realized and unrealized gain (loss) on investments and foreign currency | | | 59,661,512 | |
| Change in net assets from operations | | | $60,192,000 | |
20
MFS Mid Cap Growth Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of
MFS Mid Cap Growth Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Mid Cap Growth Series (the “Fund”) (one of the series comprising MFS Variable Insurance Trust) as of December 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Mid Cap Growth Series as of December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2013
21
MFS Mid Cap Growth Series
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 1, 2013, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES | | | | | | | | |
Robert J. Manning (k) (age 49) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Chief Executive Officer and Director; President (until December 2009); Chief Investment Officer (until July 2010) | | N/A |
| | | | |
| INDEPENDENT TRUSTEES | | | | | | | | |
David H. Gunning (age 70) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman; Portman Limited (mining), Director (until 2008) |
| | | | |
Robert E. Butler (age 71) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 57) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 71) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 68) | | Trustee | | December 2004 | | Private investor; Rouse Properties Inc. (real estate), Director | | N/A |
| | | | |
John P. Kavanaugh (age 58) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
J. Dale Sherratt (age 74) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner | | N/A |
| | | | |
Laurie J. Thomsen
(age 55) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 71) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
John M. Corcoran (k) (age 47) | | President | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) | | N/A |
| | | | |
| Christopher R. Bohane (k) (age 39) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kino Clark (k) (age 44) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 53) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
| | | | |
Ethan D. Corey (k) (age 49) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
22
MFS Mid Cap Growth Series
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
David L. DiLorenzo (k) (age 44) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Robyn L. Griffin (age 37) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 39) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 62) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 42) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 42) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 60) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Frank L. Tarantino (age 68) | | Independent
Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 52) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. For the period October 2008, until January 2012, Mr. Corcoran served as Treasurer of the Funds. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2013, the Trustees served as board members of 143 funds within the MFS Family of Funds.
23
MFS Mid Cap Growth Series
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers Eric Fischman Paul Gordon | | |
24
MFS Mid Cap Growth Series
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2012 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2011 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2011, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 3rd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 3rd quintile for the one-year period and the 5th quintile for the five-year period ended December 31, 2011 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In addition to considering the performance information provided in connection with the contract review meetings, the independent Trustees noted that, in light of the Fund’s substandard relative performance at the time of their contract review meetings in 2011, they had met at each of their regular meetings since then with MFS’ senior investment management personnel to discuss the Fund’s performance and MFS’ efforts to improve the Fund’s performance. The independent Trustees further noted that the Fund’s three-year performance as compared to its Lipper performance universe improved for the period ended December 31, 2011, as
25
MFS Mid Cap Growth Series
Board Review of Investment Advisory Agreement – continued
compared to the prior year. Taking this information into account, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to institutional accounts, if any. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund is likely to benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2012.
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of the MFS Web site (mfs.com).
26
MFS Mid Cap Growth Series
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling
1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of mfs.com.
27
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
28
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
29
ANNUAL REPORT
December 31, 2012
MFS® NEW DISCOVERY SERIES
MFS® Variable Insurance Trust
VND-ANN
MFS® NEW DISCOVERY SERIES
CONTENTS
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ NO BANK OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS New Discovery Series
LETTER FROM THE CHAIRMAN AND CEO
Dear Contract Owners:
The global market outlook for 2013 is one of cautious optimism. While we are seeing some positive economic trends in the United States, Europe and China, the overall environment remains challenging. In the United States, the recent fiscal cliff agreement was received positively by investors, even though it mostly addressed pressing taxation issues and did not resolve additional concerns, including the need for spending cuts and a large-scale reduction of the federal debt. These issues will be front and center again in the spring. Despite the ongoing uncertainty, economic tailwinds are gathering strength as the U.S. housing and job markets are improving and consumer confidence is rising.
Overseas, the debt crisis continues to weigh heavily on eurozone markets, with even Germany — long an economic stalwart — experiencing some contraction. These ongoing challenges could be a drag on global market performance this year. In Asia, manufacturing activity has accelerated in emerging markets such as China and India, and we are seeing signs of stabilized loan growth in China, a leading indicator of that country’s economic health. In contrast, Japan’s economy is contracting sharply under deflationary pressures. Nevertheless, Japanese markets have responded favorably to early actions by the new government, which appears determined to act aggressively, along with the Bank of Japan, to stimulate growth.
As always, managing risk in the face of uncertainty remains a top priority for investors. At MFS®, our uniquely collaborative investment process revolves around global research and our disciplined risk management approach. Our global team of investment professionals shares ideas and evaluates opportunities across continents, investment disciplines and asset classes — all with a goal of building better insights, and ultimately better results, for our clients.
We remain mindful of the many economic challenges investors face today, and believe it is more important than ever to maintain a long-term view, employ time-tested principles, such as asset allocation and diversification, and work closely with investment advisors to identify and pursue the most suitable opportunities.
Respectfully,
Robert J. Manning
Chairman and Chief Executive Officer
MFS Investment Management®
February 15, 2013
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
MFS New Discovery Series
PORTFOLIO COMPOSITION
Portfolio structure
| | | | |
| Top ten holdings | | | | |
| Cabot Oil & Gas Corp. | | | 2.3% | |
| Conceptus, Inc. | | | 2.1% | |
| Atwood Oceanics, Inc. | | | 1.9% | |
| Green Mountain Coffee Roasters, Inc. | | | 1.8% | |
| Diana Shipping, Inc. | | | 1.8% | |
| Swift Transportation Co. | | | 1.7% | |
| Polypore International, Inc. | | | 1.7% | |
| HomeAway, Inc. | | | 1.7% | |
| FleetMatics Group PLC | | | 1.7% | |
| Range Resources Corp. | | | 1.7% | |
| | | | |
| Equity sectors | | | | |
| Technology | | | 20.0% | |
| Health Care | | | 18.3% | |
| Industrial Goods & Services | | | 14.7% | |
| Energy | | | 11.5% | |
| Special Products & Services | | | 7.7% | |
| Basic Materials | | | 6.7% | |
| Retailing | | | 6.6% | |
| Transportation | | | 5.6% | |
| Leisure | | | 4.0% | |
| Consumer Staples | | | 2.5% | |
| Autos & Housing | | | 1.2% | |
| Financial Services | | | 0.9% | |
Percentages are based on net assets as of 12/31/12.
The portfolio is actively managed and current holdings may be different.
2
MFS New Discovery Series
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2012, Initial Class shares of the MFS New Discovery Series (“fund”) provided a total return of 21.22%, while Service Class shares of the fund provided a total return of 20.90%. These compare with a return of 14.59% over the same period for the fund’s benchmark, the Russell 2000 Growth Index.
Market Environment
The beginning of the period was characterized by a risk-on sentiment as a result of additional liquidity measures by the Federal Reserve Bank (“Fed”) and the European Central Bank (“ECB”) as well as a commensurate improvement in macroeconomic conditions. During this time, global equity valuations rose, credit spreads contracted, and high-quality sovereign yields increased modestly.
During the middle of the period, however, conditions worsened, driven by broadly weaker global macroeconomic indicators, as well as renewed concerns over the eurozone’s capacity and determination to address its ongoing crisis. Despite this deterioration, broad market sentiment remained relatively resilient as equity markets generally maintained gains and credit spreads did not indicate deterioration.
However, this renewed weakness in the fundamentals precipitated a further round of monetary easing by both the Fed (through a third round of quantitative easing) and the ECB (through a new bond purchase facility) in the second half of the period, which soon instilled additional confidence in risk markets. Nonetheless, towards the end of the period, weaker equity earnings reports and declining forward guidance caused market sentiment to soften. In addition, as we moved toward year end, the fiscal cliff negotiations between the Republicans in the U.S. Congress and President Obama were a particular source of market attention, where uncertainty surrounding the fiscal negotiations continued right up to the end-of-year deadline.
Contributors to Performance
Strong stock selection in both the industrial goods & services and retailing sectors was a principal contributor to the fund’s relative performance. Within industrial goods & services, holdings of optical fiber-based lasers manufacturer IPG Photonics (b) boosted relative returns. Within retailing, the fund’s overweight position in strong-performing women’s apparel retailer Francesca’s Holdings (h) also strengthened relative performance.
Security selection in the energy sector benefited relative returns during the period, led by the fund’s holdings of strong-performing oil and gas exploration company Cabot Oil & Gas Corp (b).
The combination of strong stock selection and an underweight position in the health care sector also supported relative performance. Holdings of permanent birth control device maker Conceptus and retirement community operator Brookdale Senior Living (b), both of which outperformed the benchmark during the period, aided relative returns.
Stock selection in the autos & housing sector was another positive factor for relative returns. Here, holdings of construction equipment company Eagle Materials (h) and homebuilder Pulte Group (b)(h) contributed to relative results as both stocks outperformed the benchmark over the reporting period.
Elsewhere, the fund’s holdings of information technology infrastructure management provider SolarWinds, specialized payment products provider FleetCor Technologies (b), and data and information management software provider CommVault Systems supported relative results. Shares of FleetCor Technologies traded higher due, in part, to favorable acquisition activity and fuel spreads which positively affected earnings.
During the reporting period, the fund’s currency exposure contributed to relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and, as such, it is common for our portfolios to have different currency exposure than the benchmark.
Detractors from Performance
Security selection and, to a lesser extent, the fund’s underweight position in the financial services sector was a negative factor for relative performance. There were no individual holdings within this sector that were among the fund’s top relative detractors for the reporting period.
Stock selection in the special products & services sector also hindered relative performance. Holding shares of weak-performing marketing software provider Constant Contact and Indian e-commerce travel agency MakeMyTrip Limited (b) held back relative returns. Constant Contact’s stock declined during the reporting period after investors appeared to have reacted negatively to the firm’s acquisition of internet software and services provider SinglePlatform.
Stocks in other sectors that were among the fund’s top relative detractors for the period included holdings of the world’s largest McDonald’s franchisee Arcos Dorados Holdings (b), semiconductor company CEVA (h), medical device manufacturer NxStage Medical,
3
MFS New Discovery Series
Management Review – continued
cloud software and services company ServiceSource International (h), independent oil exploration and production company Midstates Petroleum (h), health information services provider WebMD (b)(h), and mobile advertising platform company Millennial Media. Not owning shares of strong-performing biopharmaceutical company Pharmacyclics also weakened relative performance.
Respectfully,
Thomas Wetherald
Portfolio Manager
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio manager only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
4
MFS New Discovery Series
PERFORMANCE SUMMARY THROUGH 12/31/12
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/12
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 5/01/98 | | 21.22% | | 7.98% | | 9.83% | | |
| | | Service Class | | 5/01/00 | | 20.90% | | 7.71% | | 9.56% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Russell 2000 Growth Index (f) | | 14.59% | | 3.49% | | 9.80% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Russell 2000 Growth Index – constructed to provide a comprehensive barometer for growth securities in the small-cap segment of the U.S. equity universe. Companies in this index generally have higher price-to-book ratios and higher forecasted growth values.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS New Discovery Series
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2012 through December 31, 2012
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2012 through December 31, 2012.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | | Beginning
Account Value
7/01/12 | | | Ending
Account Value
12/31/12 | | | Expenses Paid
During Period (p)
7/01/12-12/31/12 | |
| Initial Class | | Actual | | | 0.97% | | | | $1,000.00 | | | | $1,083.36 | | | | $5.08 | |
| | Hypothetical (h) | | | 0.97% | | | | $1,000.00 | | | | $1,020.26 | | | | $4.93 | |
| Service Class | | Actual | | | 1.22% | | | | $1,000.00 | | | | $1,081.47 | | | | $6.38 | |
| | Hypothetical (h) | | | 1.22% | | | | $1,000.00 | | | | $1,019.00 | | | | $6.19 | |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS New Discovery Series
PORTFOLIO OF INVESTMENTS – 12/31/12
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 99.7% | |
| Aerospace – 0.5% | | | | | |
| Kaman Corp. | | | 105,119 | | | $ | 3,868,376 | |
| | | | | | | | |
| Automotive – 0.4% | | | | | |
| Delphi Automotive PLC (a) | | | 90,870 | | | $ | 3,475,778 | |
| | | | | | | | |
| Biotechnology – 1.2% | | | | | |
| Anacor Pharmaceuticals, Inc. (a) | | | 418,382 | | | $ | 2,175,586 | |
| Hyperion Therapeutics, Inc. (a) | | | 69,617 | | | | 785,280 | |
| ViroPharma, Inc. (a) | | | 273,520 | | | | 6,225,315 | |
| | | | | | | | |
| | | | | | $ | 9,186,181 | |
| | | | | | | | |
| Business Services – 5.4% | | | | | |
| Concur Technologies, Inc. (a) | | | 136,680 | | | $ | 9,228,634 | |
| Constant Contact, Inc. (a) | | | 914,248 | | | | 12,991,464 | |
| FleetCor Technologies, Inc. (a) | | | 114,886 | | | | 6,163,634 | |
| Gartner, Inc. (a) | | | 163,130 | | | | 7,507,243 | |
| Performant Financial Corp. (a) | | | 632,015 | | | | 6,383,352 | |
| | | | | | | | |
| | | | | | $ | 42,274,327 | |
| | | | | | | | |
| Chemicals – 1.0% | | | | | |
| Intrepid Potash, Inc. | | | 355,090 | | | $ | 7,559,866 | |
| | | | | | | | |
| Computer Software – 5.0% | | | | | |
| ANSYS, Inc. (a) | | | 127,980 | | | $ | 8,618,173 | |
| CommVault Systems, Inc. (a) | | | 100,100 | | | | 6,977,971 | |
| Nuance Communications, Inc. (a) | | | 369,607 | | | | 8,249,628 | |
| Qlik Technologies, Inc. (a) | | | 413,104 | | | | 8,972,619 | |
| SolarWinds, Inc. (a) | | | 122,202 | | | | 6,409,495 | |
| | | | | | | | |
| | | | | | $ | 39,227,886 | |
| | | | | | | | |
| Computer Software – Systems – 7.4% | | | | | |
| E2open, Inc. (a) | | | 145,950 | | | $ | 2,066,652 | |
| Ellie Mae, Inc. (a) | | | 112,590 | | | | 3,124,373 | |
| Exa Corp. (a) | | | 320,930 | | | | 3,122,649 | |
| ExactTarget, Inc. (a) | | | 314,930 | | | | 6,298,600 | |
| FleetMatics Group PLC (a) | | | 522,990 | | | | 13,158,428 | |
| Fusion-io, Inc. (a) | | | 207,295 | | | | 4,753,274 | |
| Greenway Medical Technologies, Inc. (a) | | | 230,901 | | | | 3,546,639 | |
| Guidewire Software, Inc. (a) | | | 220,730 | | | | 6,560,096 | |
| PROS Holdings, Inc. (a) | | | 222,756 | | | | 4,074,207 | |
| SciQuest, Inc. (a) | | | 745,131 | | | | 11,817,778 | |
| | | | | | | | |
| | | | | | $ | 58,522,696 | |
| | | | | | | | |
| Construction – 0.8% | | | | | |
| NVR, Inc. (a) | | | 6,482 | | | $ | 5,963,440 | |
| | | | | | | | |
| Consumer Services – 2.3% | | | | | |
| HomeAway, Inc. (a) | | | 606,767 | | | $ | 13,348,874 | |
| MakeMyTrip Ltd. (a) | | | 409,937 | | | | 5,099,616 | |
| | | | | | | | |
| | | | | | $ | 18,448,490 | |
| | | | | | | | |
| Electrical Equipment – 2.8% | | | | | |
| MSC Industrial Direct Co., Inc., “A” | | | 140,670 | | | $ | 10,603,705 | |
| Sensata Technologies Holding B.V. (a) | | | 349,796 | | | | 11,361,374 | |
| | | | | | | | |
| | | | | | $ | 21,965,079 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Electronics – 4.5% | | | | | |
| 3D Systems, Inc. (a) | | | 58,070 | | | $ | 3,098,035 | |
| Monolithic Power Systems, Inc. | | | 466,424 | | | | 10,391,927 | |
| Stratasys Ltd. (a) | | | 40,478 | | | | 3,244,312 | |
| Ultratech, Inc. (a) | | | 217,500 | | | | 8,112,750 | |
| Universal Display Corp. (a) | | | 74,740 | | | | 1,914,839 | |
| Veeco Instruments, Inc. (a) | | | 298,339 | | | | 8,806,967 | |
| | | | | | | | |
| | | | | | $ | 35,568,830 | |
| | | | | | | | |
| Energy – Independent – 3.9% | | | | | |
| Cabot Oil & Gas Corp. | | | 365,368 | | | $ | 18,173,404 | |
| Range Resources Corp. | | | 207,179 | | | | 13,017,057 | |
| | | | | | | | |
| | | | | | $ | 31,190,461 | |
| | | | | | | | |
| Entertainment – 0.5% | | | | | |
| Six Flags Entertainment Corp. | | | 68,733 | | | $ | 4,206,460 | |
| | | | | | | | |
| Food & Beverages – 2.5% | | | | | |
| Flowers Foods, Inc. | | | 240,470 | | | $ | 5,595,737 | |
| Green Mountain Coffee Roasters, Inc. (a) | | | 347,030 | | | | 14,353,161 | |
| | | | | | | | |
| | | | | | $ | 19,948,898 | |
| | | | | | | | |
| General Merchandise – 1.2% | | | | | |
| Five Below, Inc. (a) | | | 292,074 | | | $ | 9,358,051 | |
| | | | | | | | |
| Internet – 3.1% | | | | | |
| Millennial Media, Inc. (a) | | | 415,830 | | | $ | 5,210,350 | |
| Rackspace Hosting, Inc. (a) | | | 111,060 | | | | 8,248,426 | |
| Shutterfly, Inc. (a) | | | 274,270 | | | | 8,192,445 | |
| Shutterstock, Inc. (a) | | | 99,881 | | | | 2,596,906 | |
| | | | | | | | |
| | | | | | $ | 24,248,127 | |
| | | | | | | | |
| Machinery & Tools – 11.4% | | | | | |
| Allison Transmission Holdings, Inc. | | | 429,080 | | | $ | 8,761,814 | |
| IPG Photonics Corp. (l) | | | 140,645 | | | | 9,373,989 | |
| Joy Global, Inc. | | | 203,752 | | | | 12,995,303 | |
| Kennametal, Inc. | | | 270,536 | | | | 10,821,440 | |
| Polypore International, Inc. (a) | | | 287,140 | | | | 13,352,010 | |
| Proto Labs, Inc. (a) | | | 211,970 | | | | 8,355,857 | |
| Titan Machinery, Inc. (a) | | | 344,250 | | | | 8,502,975 | |
| United Rentals, Inc. (a) | | | 176,996 | | | | 8,056,858 | |
| WABCO Holdings, Inc. (a) | | | 142,841 | | | | 9,311,805 | |
| | | | | | | | |
| | | | | | $ | 89,532,051 | |
| | | | | | | | |
| Medical & Health Technology & Services – 5.7% | |
| Advisory Board Co. (a) | | | 119,172 | | | $ | 5,576,058 | |
| Brookdale Senior Living, Inc. (a) | | | 490,797 | | | | 12,426,980 | |
| Capital Senior Living Corp. (a) | | | 355,790 | | | | 6,649,715 | |
| Healthcare Services Group, Inc. | | | 313,128 | | | | 7,273,963 | |
| HMS Holdings Corp. (a) | | | 289,970 | | | | 7,516,022 | |
| IDEXX Laboratories, Inc. (a) | | | 56,740 | | | | 5,265,472 | |
| | | | | | | | |
| | | | | | $ | 44,708,210 | |
| | | | | | | | |
| Medical Equipment – 10.9% | | | | | |
| Align Technology, Inc. (a) | | | 416,687 | | | $ | 11,563,064 | |
| Cepheid, Inc. (a) | | | 343,628 | | | | 11,618,063 | |
7
MFS New Discovery Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Medical Equipment – continued | | | | | |
| Conceptus, Inc. (a) | | | 790,690 | | | $ | 16,612,397 | |
| DexCom, Inc. (a) | | | 367,858 | | | | 5,006,547 | |
| Endologix, Inc. (a) | | | 791,141 | | | | 11,265,848 | |
| EnteroMedics, Inc. (a) | | | 770,630 | | | | 2,157,764 | |
| Globus Medical, Inc., “A” (a) | | | 503,400 | | | | 5,280,666 | |
| Novadaq Technologies, Inc. (a) | | | 118,380 | | | | 1,051,214 | |
| NxStage Medical, Inc. (a) | | | 679,891 | | | | 7,648,774 | |
| Uroplasty, Inc. (a) | | | 795,713 | | | | 2,570,153 | |
| Varian Medical Systems, Inc. (a) | | | 79,540 | | | | 5,586,890 | |
| Volcano Corp. (a) | | | 251,745 | | | | 5,943,699 | |
| | | | | | | | |
| | | | | | $ | 86,305,079 | |
| | | | | | | | |
| Metals & Mining – 3.9% | | | | | |
| Globe Specialty Metals, Inc. | | | 814,569 | | | $ | 11,200,324 | |
| GrafTech International Ltd. (a) | | | 669,940 | | | | 6,290,737 | |
| Iluka Resources Ltd. | | | 1,060,728 | | | | 10,279,248 | |
| Molycorp, Inc. (a)(l) | | | 326,350 | | | | 3,080,744 | |
| | | | | | | | |
| | | | | | $ | 30,851,053 | |
| | | | | | | | |
| Oil Services – 7.6% | | | | | |
| Atwood Oceanics, Inc. (a) | | | 329,808 | | | $ | 15,101,908 | |
| Basic Energy Services, Inc. (a) | | | 530,920 | | | | 6,057,797 | |
| Core Laboratories N.V. | | | 37,680 | | | | 4,118,801 | |
| Dresser-Rand Group, Inc. (a) | | | 227,957 | | | | 12,797,506 | |
| Helmerich & Payne, Inc. | | | 109,960 | | | | 6,158,860 | |
| Key Energy Services, Inc. (a) | | | 833,410 | | | | 5,792,200 | |
| Superior Energy Services, Inc. (a) | | | 474,120 | | | | 9,823,766 | |
| | | | | | | | |
| | | | | | $ | 59,850,838 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 0.9% | | | | | |
| Air Lease Corp. (a) | | | 225,005 | | | $ | 4,837,608 | |
| First Republic Bank | | | 61,716 | | | | 2,023,050 | |
| | | | | | | | |
| | | | | | $ | 6,860,658 | |
| | | | | | | | |
| Pharmaceuticals – 0.5% | | | | | |
| Kythera Biopharmaceuticals, Inc. (a) | | | 144,540 | | | $ | 4,385,344 | |
| | | | | | | | |
| Precious Metals & Minerals – 0.3% | | | | | |
| Colossus Minerals, Inc. (a) | | | 487,679 | | | $ | 2,260,179 | |
| | | | | | | | |
| Railroad & Shipping – 2.3% | | | | | |
| Diana Shipping, Inc. (a) | | | 1,956,100 | | | $ | 14,279,530 | |
| Navios Maritime Holdings, Inc. | | | 1,108,020 | | | | 3,734,027 | |
| | | | | | | | |
| | | | | | $ | 18,013,557 | |
| | | | | | | | |
| Restaurants – 3.5% | | | | | |
| Arcos Dorados Holdings, Inc. | | | 948,738 | | | $ | 11,346,906 | |
| BJ’s Restaurants, Inc. (a) | | | 115,770 | | | | 3,808,833 | |
| Chuy’s Holdings, Inc. (a) | | | 274,727 | | | | 6,137,401 | |
| Dunkin Brands Group, Inc. | | | 181,410 | | | | 6,019,184 | |
| | | | | | | | |
| | | | | | $ | 27,312,324 | |
| | | | | | | | |
| Specialty Chemicals – 1.5% | | | | | |
| Rockwood Holdings, Inc. | | | 124,500 | | | $ | 6,157,770 | |
| Tronox Ltd., “A” | | | 332,730 | | | | 6,072,323 | |
| | | | | | | | |
| | | | | | $ | 12,230,093 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Specialty Stores – 5.4% | | | | | |
| Citi Trends, Inc. (a) | | | 680,180 | | | $ | 9,359,277 | |
| Monro Muffler Brake, Inc. | | | 304,718 | | | | 10,655,988 | |
| Tiffany & Co. | | | 84,990 | | | | 4,873,327 | |
| Tile Shop Holdings, Inc. (a) | | | 121,400 | | | | 2,043,162 | |
| Urban Outfitters, Inc. (a) | | | 103,839 | | | | 4,087,103 | |
| Zumiez, Inc. (a) | | | 606,770 | | | | 11,777,406 | |
| | | | | | | | |
| | | | | | $ | 42,796,263 | |
| | | | | | | | |
| Trucking – 3.3% | | | | | |
| Atlas Air Worldwide Holdings, Inc. (a) | | | 271,243 | | | $ | 12,018,777 | |
| Swift Transportation Co. (a) | | | 1,505,171 | | | | 13,727,160 | |
| | | | | | | | |
| | | | | | $ | 25,745,937 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $708,209,025) | | | | | | $ | 785,864,532 | |
| | | | | | | | |
|
| MONEY MARKET FUNDS – 0.3% | |
| MFS Institutional Money Market Portfolio, 0.16%, at Cost and Net Asset Value (v) | | | 2,899,425 | | | $ | 2,899,425 | |
| | | | | | | | |
|
| COLLATERAL FOR SECURITIES LOANED – 0.2% | |
| Navigator Securities Lending Prime Portfolio, 0.28%, at Cost and Net Asset Value (j) | | | 1,421,978 | | | $ | 1,421,978 | |
| | | | | | | | |
Total Investments
(Identified Cost, $712,530,428) | | | | | | $ | 790,185,935 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.2)% | | | | | | | (1,854,979 | ) |
| | | | | | | | |
| Net Assets – 100.0% | | | | | | $ | 788,330,956 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (j) | | The rate quoted is the annualized seven-day yield of the fund at period end. |
| (l) | | A portion of this security is on loan. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
The following abbreviations are used in this report and are defined:
| PLC | | Public Limited Company |
See Notes to Financial Statements
8
MFS New Discovery Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | | | | |
At 12/31/12 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $709,631,003) | | | $787,286,510 | | | | | |
Underlying affiliated funds, at cost and value | | | 2,899,425 | | | | | |
Total investments, at value, including $1,421,181 of securities on loan (identified cost, $712,530,428) | | | $790,185,935 | | | | | |
Cash | | | 1,998 | | | | | |
Foreign currency, at value (identified cost, $312,764) | | | 309,935 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 138,323 | | | | | |
Fund shares sold | | | 639,832 | | | | | |
Interest and dividends | | | 109,959 | | | | | |
Other assets | | | 6,439 | | | | | |
Total assets | | | | | | | $791,392,421 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | $15,068 | | | | | |
Fund shares reacquired | | | 1,400,961 | | | | | |
Collateral for securities loaned, at value | | | 1,421,978 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 77,255 | | | | | |
Shareholder servicing costs | | | 997 | | | | | |
Distribution and/or service fees | | | 10,525 | | | | | |
Payable for independent Trustees’ compensation | | | 539 | | | | | |
Accrued expenses and other liabilities | | | 134,142 | | | | | |
Total liabilities | | | | | | | $3,061,465 | |
Net assets | | | | | | | $788,330,956 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $714,670,986 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 77,652,678 | | | | | |
Accumulated distributions in excess of net realized gain on investments and foreign currency | | | (3,992,708 | ) | | | | |
Net assets | | | | | | | $788,330,956 | |
Shares of beneficial interest outstanding | | | | | | | 51,330,419 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $395,107,425 | | | | 25,137,543 | | | | $15.72 | |
Service Class | | | 393,223,531 | | | | 26,192,876 | | | | 15.01 | |
See Notes to Financial Statements
9
MFS New Discovery Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | | | | | | |
Year ended 12/31/12 | | | | | | | | |
Net investment loss | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $4,444,948 | | | | | |
Income on securities loaned | | | 545,673 | | | | | |
Dividends from underlying affiliated funds | | | 4,090 | | | | | |
Foreign taxes withheld | | | (25,378 | ) | | | | |
Total investment income | | | | | | | $4,969,333 | |
Expenses | | | | | | | | |
Management fee | | | $6,501,060 | | | | | |
Distribution and/or service fees | | | 887,777 | | | | | |
Shareholder servicing costs | | | 68,204 | | | | | |
Administrative services fee | | | 113,358 | | | | | |
Independent Trustees’ compensation | | | 19,253 | | | | | |
Custodian fee | | | 96,912 | | | | | |
Shareholder communications | | | 127,099 | | | | | |
Audit and tax fees | | | 55,242 | | | | | |
Legal fees | | | 9,846 | | | | | |
Miscellaneous | | | 45,015 | | | | | |
Total expenses | | | | | | | $7,923,766 | |
Fees paid indirectly | | | (104 | ) | | | | |
Reduction of expenses by investment adviser | | | (2,550 | ) | | | | |
Net expenses | | | | | | | $7,921,112 | |
Net investment loss | | | | | | | $(2,951,779 | ) |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $17,766,140 | | | | | |
Foreign currency | | | (121,812 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $17,644,328 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $121,532,542 | | | | | |
Translation of assets and liabilities in foreign currencies | | | 1,594 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $121,534,136 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $139,178,464 | |
Change in net assets from operations | | | | | | | $136,226,685 | |
See Notes to Financial Statements
10
MFS New Discovery Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | | | |
For years ended 12/31 | | | 2012 | | | | 2011 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment loss | | | $(2,951,779 | ) | | | $(5,355,422 | ) |
Net realized gain (loss) on investments and foreign currency | | | 17,644,328 | | | | 54,611,110 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 121,534,136 | | | | (125,805,522 | ) |
Change in net assets from operations | | | $136,226,685 | | | | $(76,549,834 | ) |
Distributions declared to shareholders | |
From net realized gain on investments | | | $(66,916,984 | ) | | | $(94,303,410 | ) |
Change in net assets from fund share transactions | | | $43,021,119 | | | | $23,275,762 | |
Total change in net assets | | | $112,330,820 | | | | $(147,577,482 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 676,000,136 | | | | 823,577,618 | |
At end of period | | | $788,330,956 | | | | $676,000,136 | |
See Notes to Financial Statements
11
MFS New Discovery Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $14.29 | | | | $18.31 | | | | $13.43 | | | | $8.23 | | | | $16.63 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment loss (d) | | | $(0.05 | ) | | | $(0.10 | ) | | | $(0.08 | ) | | | $(0.06 | ) | | | $(0.04 | ) |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 3.00 | | | | (1.70 | ) | | | 4.96 | | | | 5.26 | | | | (5.54 | ) |
Total from investment operations | | | $2.95 | | | | $(1.80 | ) | | | $4.88 | | | | $5.20 | | | | $(5.58 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net realized gain on investments | | | $(1.52 | ) | | | $(2.22 | ) | | | $— | | | | $— | | | | $(2.82 | ) |
Net asset value, end of period (x) | | | $15.72 | | | | $14.29 | | | | $18.31 | | | | $13.43 | | | | $8.23 | |
Total return (%) (k)(r)(s)(x) | | | 21.22 | | | | (10.27 | ) | | | 36.34 | | | | 63.18 | | | | (39.33 | ) |
Ratios (%) (to average net assets) and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.97 | | | | 0.98 | | | | 1.01 | | | | 1.03 | | | | 1.01 | |
Expenses after expense reductions (f) | | | 0.97 | | | | 0.98 | | | | 1.01 | | | | 1.03 | | | | 1.01 | |
Net investment loss | | | (0.29 | ) | | | (0.56 | ) | | | (0.54 | ) | | | (0.57 | ) | | | (0.36 | ) |
Portfolio turnover | | | 122 | | | | 177 | | | | 195 | | | | 158 | | | | 121 | |
Net assets at end of period (000 omitted) | | | $395,107 | | | | $363,412 | | | | $499,020 | | | | $423,042 | | | | $289,596 | |
See Notes to Financial Statements
12
MFS New Discovery Series
Financial Highlights - continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $13.74 | | | | $17.74 | | | | $13.05 | | | | $8.01 | | | | $16.31 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment loss (d) | | | $(0.08 | ) | | | $(0.14 | ) | | | $(0.11 | ) | | | $(0.08 | ) | | | $(0.07 | ) |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 2.87 | | | | (1.64 | ) | | | 4.80 | | | | 5.12 | | | | (5.41 | ) |
Total from investment operations | | | $2.79 | | | | $(1.78 | ) | | | $4.69 | | | | $5.04 | | | | $(5.48 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net realized gain on investments | | | $(1.52 | ) | | | $(2.22 | ) | | | $— | | | | $— | | | | $(2.82 | ) |
Net asset value, end of period (x) | | | $15.01 | | | | $13.74 | | | | $17.74 | | | | $13.05 | | | | $8.01 | |
Total return (%) (k)(r)(s)(x) | | | 20.90 | | | | (10.49 | ) | | | 35.94 | | | | 62.92 | | | | (39.52 | ) |
Ratios (%) (to average net assets) and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.22 | | | | 1.23 | | | | 1.26 | | | | 1.28 | | | | 1.26 | |
Expenses after expense reductions (f) | | | 1.22 | | | | 1.23 | | | | 1.26 | | | | 1.28 | | | | 1.26 | |
Net investment loss | | | (0.53 | ) | | | (0.80 | ) | | | (0.79 | ) | | | (0.82 | ) | | | (0.60 | ) |
Portfolio turnover | | | 122 | | | | 177 | | | | 195 | | | | 158 | | | | 121 | |
Net assets at end of period (000 omitted) | | | $393,224 | | | | $312,589 | | | | $324,557 | | | | $219,982 | | | | $125,421 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (r) | Certain expenses have been reduced without which performance would have been lower. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (x) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
13
MFS New Discovery Series
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS New Discovery Series (the fund) is a series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In this reporting period the fund adopted Financial Accounting Standards Board (FASB) Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 seeks to improve the comparability of fair value measurements as presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) by providing common requirements for fair value measurement and disclosure.
In December 2011, the FASB issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods, ASU 2011-11 is intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. Although still evaluating the potential impacts of ASU 2011-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
14
MFS New Discovery Series
Notes to Financial Statements – continued
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of December 31, 2012 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $734,569,498 | | | | $— | | | | $— | | | | $734,569,498 | |
Greece | | | 18,013,557 | | | | — | | | | — | | | | 18,013,557 | |
British Virgin Islands | | | 11,346,907 | | | | — | | | | — | | | | 11,346,907 | |
Australia | | | — | | | | 10,279,248 | | | | — | | | | 10,279,248 | |
India | | | 5,099,616 | | | | — | | | | — | | | | 5,099,616 | |
Canada | | | 3,311,394 | | | | — | | | | — | | | | 3,311,394 | |
Israel | | | 3,244,312 | | | | — | | | | — | | | | 3,244,312 | |
| Mutual Funds | | | 4,321,403 | | | | — | | | | — | | | | 4,321,403 | |
| Total Investments | | | $779,906,687 | | | | $10,279,248 | | | | $— | | | | $790,185,935 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. Collateral for securities loaned is held at carrying value, which approximates fair value. If the collateral for securities loaned was carried at fair value, its fair value would be considered level 2 under the fair value hierarchy. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is separately reported in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
15
MFS New Discovery Series
Notes to Financial Statements – continued
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount, for the year ended December 31, 2012, is shown as a reduction of total expenses in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Foreign taxes have been accrued by the fund in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to net operating losses and wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/12 | | | 12/31/11 | |
| Ordinary income (including any short-term capital gains) | | | $63,972,122 | | | | $29,763,811 | |
| Long-term capital gains | | | 2,944,862 | | | | 64,539,599 | |
| Total distributions | | | $66,916,984 | | | | $94,303,410 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/12 | | | | |
| Cost of investments | | | $724,164,919 | |
| Gross appreciation | | | 100,311,457 | |
| Gross depreciation | | | (34,290,441 | ) |
| Net unrealized appreciation (depreciation) | | | $66,021,016 | |
| Undistributed ordinary income | | | 7,641,783 | |
| Other temporary differences | | | (2,829 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net realized gain on
investments | |
| | | Year ended
12/31/12 | | | Year ended
12/31/11 | |
| Initial Class | | | $32,481,201 | | | | $50,955,129 | |
| Service Class | | | 34,435,783 | | | | 43,348,281 | |
| Total | | | $66,916,984 | | | | $94,303,410 | |
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
| | | | |
| First $1 billion of average daily net assets | | | 0.90% | |
| Average daily net assets in excess of $1 billion | | | 0.80% | |
The management fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.90% of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
16
MFS New Discovery Series
Notes to Financial Statements – continued
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2012, the fee was $65,837, which equated to 0.0091% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2012, these costs amounted to $2,367.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.0157% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended December 31, 2012, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $6,023 and are included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $2,550, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
Purchases and sales of investments, other than short-term obligations, aggregated $873,874,593 and $958,894,623, respectively. Purchases exclude the value of securities acquired in connection with the SC Invesco Small Cap Growth Fund merger. (See Note 8.)
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 2,746,390 | | | | $43,775,613 | | | | 6,070,255 | | | | $105,677,682 | |
Service Class | | | 6,587,168 | | | | 98,896,957 | | | | 7,612,042 | | | | 131,491,764 | |
| | | 9,333,558 | | | | $142,672,570 | | | | 13,682,297 | | | | $237,169,446 | |
| Shares issued in connection with acquisition of SC Invesco Small Cap Growth Fund | | | | | | | | | | | | | | | | |
Initial Class | | | 3,344,064 | | | | $50,696,015 | | | | | | | | | |
Service Class | | | 978,602 | | | | 14,170,159 | | | | | | | | | |
| | | 4,322,666 | | | | $64,866,174 | | | | | | | | | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 2,175,566 | | | | $32,481,201 | | | | 3,433,634 | | | | $50,955,129 | |
Service Class | | | 2,413,159 | | | | 34,435,783 | | | | 3,035,594 | | | | 43,348,281 | |
| | | 4,588,725 | | | | $66,916,984 | | | | 6,469,228 | | | | $94,303,410 | |
17
MFS New Discovery Series
Notes to Financial Statements – continued
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (8,565,708 | ) | | | $(133,371,779 | ) | | | (11,317,023 | ) | | | $(204,277,916 | ) |
Service Class | | | (6,538,410 | ) | | | (98,062,830 | ) | | | (6,185,971 | ) | | | (103,919,178 | ) |
| | | (15,104,118 | ) | | | $(231,434,609 | ) | | | (17,502,994 | ) | | | $(308,197,094 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (299,688 | ) | | | $(6,418,950 | ) | | | (1,813,134 | ) | | | $(47,645,105 | ) |
Service Class | | | 3,440,519 | | | | 49,440,069 | | | | 4,461,665 | | | | 70,920,867 | |
| | | 3,140,831 | | | | $43,021,119 | | | | 2,648,531 | | | | $23,275,762 | |
The fund is one of several mutual funds in which the MFS funds-of-funds may invest. The MFS funds-of-funds do not invest in the underlying MFS funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio, the MFS Conservative Allocation Portfolio, and the MFS Growth Allocation Portfolio were the owners of record of approximately 4%, 1%, and 1%, respectively, of the value of outstanding voting shares of the fund.
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2012, the fund’s commitment fee and interest expense were $4,593 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 2,841,923 | | | | 199,725,840 | | | | (199,668,338 | ) | | | 2,899,425 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $4,090 | | | | $2,899,425 | |
At close of business on December 7, 2012, the fund with net assets of approximately $696,346,137, acquired all of the assets and liabilities of SC Invesco Small Cap Growth Fund, a series of Sun Capital Advisers Trust. The purpose of the transaction was to provide shareholders of SC Invesco Small Cap Growth Fund the opportunity to participate in a larger combined portfolio with a similar investment objective and similar investment policies and strategies. The acquisition was accomplished by a tax-free exchange of approximately 4,322,666 shares of the fund (valued at approximately $64,866,174) for all of the assets and liabilities of SC Invesco Small Cap Growth Fund. SC Invesco Small Cap Growth Fund then distributed the shares of the fund that SC Invesco Small Cap Growth Fund received from the fund to its shareholders. SC Invesco Small Cap Growth Fund’s investments on that date were valued at approximately $64,381,321 with a cost basis of approximately $63,503,848. For financial reporting purposes, assets received and shares issued by the fund were recorded at fair value; however, the cost basis of the investments received from SC Invesco Small Cap Growth Fund were carried forward to align ongoing reporting of the fund’s realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes. Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of SC Invesco Small Cap Growth Fund that have been included in the fund’s Statement of Operations since December 7, 2012. No pro forma information is provided as it is not material to the combined fund results.
18
MFS New Discovery Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of
MFS New Discovery Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS New Discovery Series (the “Fund”) (one of the series comprising MFS Variable Insurance Trust) as of December 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS New Discovery Series as of December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2013
19
MFS New Discovery Series
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 1, 2013, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES | | | | | | | | |
Robert J. Manning (k) (age 49) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Chief Executive Officer and Director; President (until December 2009); Chief Investment Officer (until July 2010) | | N/A |
| | | | |
| INDEPENDENT TRUSTEES | | | | | | | | |
David H. Gunning (age 70) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman; Portman Limited (mining), Director (until 2008) |
| | | | |
Robert E. Butler (age 71) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 57) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 71) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 68) | | Trustee | | December 2004 | | Private investor; Rouse Properties Inc. (real estate), Director | | N/A |
| | | | |
John P. Kavanaugh (age 58) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
J. Dale Sherratt (age 74) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner | | N/A |
| | | | |
Laurie J. Thomsen
(age 55) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 71) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
John M. Corcoran (k) (age 47) | | President | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) | | N/A |
| | | | |
| Christopher R. Bohane (k) (age 39) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kino Clark (k) (age 44) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 53) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
| | | | |
Ethan D. Corey (k) (age 49) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
20
MFS New Discovery Series
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
David L. DiLorenzo (k) (age 44) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Robyn L. Griffin (age 37) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 39) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 62) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 42) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 42) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 60) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Frank L. Tarantino (age 68) | | Independent
Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 52) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. For the period October 2008, until January 2012, Mr. Corcoran served as Treasurer of the Funds. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2013, the Trustees served as board members of 143 funds within the MFS Family of Funds.
21
MFS New Discovery Series
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Manager Thomas Wetherald | | |
22
MFS New Discovery Series
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2012 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2011 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2011, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 5th quintile for the one-year period and the 1st quintile for the five-year period ended December 31, 2011 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
23
MFS New Discovery Series
Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each higher than the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to institutional accounts, if any. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund is likely to benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2012.
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of the MFS Web site (mfs.com).
24
MFS New Discovery Series
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling
1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $3,240,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 3.02% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received reduction.
25
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
26
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
27
ANNUAL REPORT
December 31, 2012
MFS® RESEARCH INTERNATIONAL SERIES
MFS® Variable Insurance Trust
VRI-ANN
MFS® RESEARCH INTERNATIONAL SERIES
CONTENTS
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ NO BANK OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Research International Series
LETTER FROM THE CHAIRMAN AND CEO
Dear Contract Owners:
The global market outlook for 2013 is one of cautious optimism. While we are seeing some positive economic trends in the United States, Europe and China, the overall environment remains challenging. In the United States, the recent fiscal cliff agreement was received positively by investors, even though it mostly addressed pressing taxation issues and did not resolve additional concerns, including the need for spending cuts and a large-scale reduction of the federal debt. These issues will be front and center again in the spring. Despite the ongoing uncertainty, economic tailwinds are gathering strength as the U.S. housing and job markets are improving and consumer confidence is rising.
Overseas, the debt crisis continues to weigh heavily on eurozone markets, with even Germany — long an economic stalwart — experiencing some contraction. These ongoing challenges could be a drag on global market performance this year. In Asia, manufacturing activity has accelerated in emerging markets such as China and India, and we are seeing signs of stabilized loan growth in China, a leading indicator of that country’s economic health. In contrast, Japan’s economy is contracting sharply under deflationary pressures. Nevertheless, Japanese markets have responded favorably to early actions by the new government, which appears determined to act aggressively, along with the Bank of Japan, to stimulate growth.
As always, managing risk in the face of uncertainty remains a top priority for investors. At MFS®, our uniquely collaborative investment process revolves around global research and our disciplined risk management approach. Our global team of investment professionals shares ideas and evaluates opportunities across continents, investment disciplines and asset classes — all with a goal of building better insights, and ultimately better results, for our clients.
We remain mindful of the many economic challenges investors face today, and believe it is more important than ever to maintain a long-term view, employ time-tested principles, such as asset allocation and diversification, and work closely with investment advisors to identify and pursue the most suitable opportunities.
Respectfully,
Robert J. Manning
Chairman and Chief Executive Officer
MFS Investment Management®
February 15, 2013
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
MFS Research International Series
PORTFOLIO COMPOSITION
Portfolio structure
| | | | |
| Top ten holdings | | | | |
| Royal Dutch Shell PLC, “A” | | | 3.1% | |
| Roche Holding AG | | | 2.9% | |
| Nestle S.A. | | | 2.8% | |
| Rio Tinto Ltd. | | | 2.6% | |
| Novartis AG | | | 2.2% | |
| BP PLC | | | 2.1% | |
| Heineken N.V. | | | 2.0% | |
| Westpac Banking Corp. | | | 2.0% | |
| Bayer AG | | | 2.0% | |
| Barclays PLC | | | 1.9% | |
| |
| Global equity sectors | | | | |
| Financial Services | | | 24.5% | |
| Capital Goods | | | 24.3% | |
| Energy | | | 11.4% | |
| Consumer Staples | | | 9.9% | |
| Health Care | | | 9.8% | |
| Consumer Cyclicals | | | 7.4% | |
| Technology | | | 7.1% | |
| Telecommunications/Cable Television | | | 5.1% | |
| | | | |
| Issuer country weightings (x) | | | | |
| Japan | | | 21.1% | |
| United Kingdom | | | 18.3% | |
| Switzerland | | | 12.7% | |
| France | | | 8.7% | |
| Germany | | | 6.3% | |
| Netherlands | | | 5.6% | |
| Hong Kong | | | 5.1% | |
| Australia | | | 3.4% | |
| Brazil | | | 2.4% | |
| Other Countries | | | 16.4% | |
| |
| Currency exposure weightings (y) | | | | |
| Euro | | | 24.6% | |
| Japanese Yen | | | 21.1% | |
| British Pound Sterling | | | 18.3% | |
| Swiss Franc | | | 12.7% | |
| Hong Kong Dollar | | | 6.6% | |
| Australian Dollar | | | 3.4% | |
| United States Dollar | | | 2.7% | |
| Brazilian Real | | | 2.4% | |
| Swedish Krona | | | 1.8% | |
| Other Currencies | | | 6.4% | |
| (x) | Represents the portfolio’s exposure to issuer countries as a percentage of a portfolio’s net assets. |
| (y) | Represents the portfolio’s exposure to a particular currency as a percentage of a portfolio’s net assets. |
Percentages are based on net assets as of 12/31/12.
The portfolio is actively managed and current holdings may be different.
2
MFS Research International Series
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2012, Initial Class shares of the MFS Research International Series (“fund”) provided a total return of 16.70%, while Service Class shares of the fund provided a total return of 16.41%. These compare with a return of 17.90% over the same period for the fund’s benchmark, the MSCI EAFE Index.
Market Environment
The beginning of the period was characterized by a risk-on sentiment as a result of additional liquidity measures by the Federal Reserve Bank (“Fed”) and the European Central Bank (“ECB”) as well as a commensurate improvement in macroeconomic conditions. During this time, global equity valuations rose, credit spreads contracted, and high-quality sovereign yields increased modestly.
During the middle of the period, however, conditions worsened, driven by broadly weaker global macroeconomic indicators, as well as renewed concerns over the eurozone’s capacity and determination to address its ongoing crisis. Despite this deterioration, broad market sentiment remained relatively resilient as equity markets generally maintained gains and credit spreads did not indicate deterioration.
However, this renewed weakness in the fundamentals precipitated a further round of monetary easing by both the Fed (through a third round of quantitative easing) and the ECB (through a new bond purchase facility) in the second half of the period, which soon instilled additional confidence in risk markets. Nonetheless, towards the end of the period, weaker equity earnings reports and declining forward guidance caused market sentiment to soften. In addition, as we moved toward year end, the fiscal cliff negotiations between the Republicans in the U.S. Congress and President Obama were a particular source of market attention, where uncertainty surrounding the fiscal negotiations continued right up to the end-of-year deadline.
Detractors from Performance
Stock selection in the financial services sector detracted from performance relative to the MSCI EAFE Index. Holdings of financial services firm Itau Unibanco Holding (b) (Brazil) were among the fund’s top relative detractors for the reporting period. Shares of Itau Unibanco Holding declined after the company reported that it expected a continued increase in its loan loss provisions, attributable to slower-than-expected growth of the Brazilian economy.
Stock selection in the capital goods sector was another negative factor for relative results. Holdings of mining company Iluka Resources (Australia), Japanese parcel delivery services company Yamato Holdings, and mining equipment manufacturer Joy Global (b) weighed on relative returns as all three stocks lagged the benchmark during the reporting period. Shares of Iluka Resources declined as a result of lower sales volume and softened demand for high-grade titanium dioxide products and Zircon, a mineral used widely in electronics manufacturing and one of the company’s main commodities.
Stock selection in the telecom/cable TV sector also dampened relative performance. The fund’s holdings of Hong Kong listed telecommunication services provider China Unicom (Hong Kong) (b) held back relative results. Shares of the company underperformed the market after its management reported lower-than-expected profits. Slower growth in mobile average revenue per user, in the face of heightened competition in China, was cited as the main reason for the lower earnings.
Stocks in other sectors that held back relative returns included oil and gas exploration company INPEX (Japan), pharmaceutical company Santen Pharmaceutical (Japan), printers and computer peripherals maker Canon (Japan), Brazilian medical diagnostics company Diagnosticos da America (b), and television broadcasting services provider Nippon Television Holdings (b) (Japan).
During the reporting period, the fund’s relative currency exposure, resulting primarily from differences between the fund’s and the benchmark’s exposures to holdings of securities denominated in foreign currencies, was another detractor from relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our portfolios to have different currency exposure than the benchmark.
Contributors to Performance
Stock selection in the health care sector contributed to relative performance. Holdings of healthcare products maker Bayer (Germany) and healthcare services provider Rhoen-Klinikum (b)(h) (Germany) aided relative results as both stocks significantly outpaced the benchmark during the reporting period. Shares of Bayer benefited from results that exceeded consensus estimates driven primarily by positive results in the company’s Crop Science division which, due to favorable weather, benefited from an early start to the season. Additionally, management announced that its blockbuster Xarelto was approved by the European Union for the treatment of Pulmonary Embolism and the prevention of Deep Vein Thrombosis.
Stock selection in the technology sector also supported relative results. No individual securities within this sector were among the fund’s top relative contributors for the reporting period.
3
MFS Research International Series
Management Review – continued
Top relative contributors in other sectors included Dutch brewer Heineken, financial services firm Barclays (United Kingdom), paint and specialty chemicals manufacturer Akzo Nobel (Netherlands), Austrian financial services company Erste Group Bank, reinsurance company Swiss Re (Switzerland), casino resort operator Sands China (Hong Kong), and Australian financial services firm Westpac Banking. Shares of Heineken rose as the firm reached an agreement to purchase Fraser & Neave’s stake in their joint venture, Asia Pacific Breweries, effectively consolidating ownership under Heineken. Adding Singapore-based Asia Pacific Breweries, whose flagship brand is Tiger Beer, to its portfolio is a key element in Heineken’s growth strategy in the Asia region. The fund’s avoidance of poor-performing Spanish telecommunications company Telefónica also boosted relative results.
Respectfully,
| | |
Jose Luis Garcia | | Thomas Melendez |
| Portfolio Manager | | Portfolio Manager |
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the fund at period end. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
4
MFS Research International Series
PERFORMANCE SUMMARY THROUGH 12/31/12
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment (t)
Total Returns through 12/31/12
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | Life (t) | | |
| | | Initial Class | | 4/29/05 | | 16.70% | | (2.77)% | | 5.32% | | |
| | | Service Class | | 4/29/05 | | 16.41% | | (3.01)% | | 5.05% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | MSCI EAFE Index (f) | | 17.90% | | (3.21)% | | 4.56% | | |
| (f) | Source: FactSet Research Systems Inc. |
| (t) | For the period from the class inception date through the stated period end. (See Notes to Performance Summary.) |
Benchmark Definition
MSCI EAFE (Europe, Australasia, Far East) Index – a market capitalization-weighted index that is designed to measure equity market performance in the developed markets, excluding the U.S. and Canada.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented. Life returns are presented where the share class has less than 10 years of performance history and represent the average annual total return from the class inception date to the stated period end date.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Research International Series
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders during the Period,
July 1, 2012 through December 31, 2012
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2012 through December 31, 2012.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | | Beginning
Account Value
7/01/12 | | | Ending
Account Value
12/31/12 | | | Expenses Paid
During Period (p)
7/01/12-12/31/12 | |
| Initial Class | | Actual | | | 1.10% | | | | $1,000.00 | | | | $1,129.54 | | | | $5.89 | |
| | Hypothetical (h) | | | 1.10% | | | | $1,000.00 | | | | $1,019.61 | | | | $5.58 | |
| Service Class | | Actual | | | 1.35% | | | | $1,000.00 | | | | $1,128.55 | | | | $7.22 | |
| | Hypothetical (h) | | | 1.35% | | | | $1,000.00 | | | | $1,018.35 | | | | $6.85 | |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS Research International Series
PORTFOLIO OF INVESTMENTS – 12/31/12
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 99.5% | | | | | | | | |
| Alcoholic Beverages – 2.0% | | | | | |
| Heineken N.V. | | | 42,028 | | | $ | 2,803,390 | |
| | | | | | | | |
| Apparel Manufacturers – 1.9% | | | | | |
| Li & Fung Ltd. | | | 712,000 | | | $ | 1,279,110 | |
| LVMH Moet Hennessy Louis Vuitton S.A. | | | 7,600 | | | | 1,416,239 | |
| | | | | | | | |
| | | | | | $ | 2,695,349 | |
| | | | | | | | |
| Automotive – 3.6% | | | | | |
| DENSO Corp. | | | 51,500 | | | $ | 1,791,939 | |
| GKN PLC | | | 220,626 | | | | 823,211 | |
| Honda Motor Co. Ltd. | | | 63,900 | | | | 2,355,253 | |
| | | | | | | | |
| | | | | | $ | 4,970,403 | |
| | | | | | | | |
| Broadcasting – 1.5% | | | | | |
| Nippon Television Holdings, Inc. | | | 62,000 | | | $ | 823,709 | |
| Publicis Groupe S.A. | | | 21,420 | | | | 1,283,395 | |
| | | | | | | | |
| | | | | | $ | 2,107,104 | |
| | | | | | | | |
| Business Services – 2.8% | | | | | |
| Amadeus IT Holding S.A. | | | 33,270 | | | $ | 834,886 | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 9,840 | | | | 728,652 | |
| Compass Group PLC | | | 58,450 | | | | 691,274 | |
| Mitsubishi Corp. | | | 47,500 | | | | 913,032 | |
| Nomura Research, Inc. | | | 34,500 | | | | 713,615 | |
| | | | | | | | |
| | | | | | $ | 3,881,459 | |
| | | | | | | | |
| Computer Software – 0.6% | | | | | |
| Dassault Systems S.A. | | | 7,983 | | | $ | 893,659 | |
| | | | | | | | |
| Computer Software – Systems – 1.1% | | | | | |
| Canon, Inc. | | | 37,700 | | | $ | 1,478,676 | |
| | | | | | | | |
| Conglomerates – 0.9% | | | | | |
| Hutchison Whampoa Ltd. | | | 115,000 | | | $ | 1,219,955 | |
| | | | | | | | |
| Consumer Products – 1.2% | | | | | |
| Reckitt Benckiser Group PLC | | | 26,693 | | | $ | 1,672,149 | |
| | | | | | | | |
| Electrical Equipment – 3.7% | | | | | |
| Legrand S.A. | | | 11,244 | | | $ | 474,573 | |
| Schneider Electric S.A. | | | 29,436 | | | | 2,195,441 | |
| Siemens AG | | | 22,531 | | | | 2,448,886 | |
| | | | | | | | |
| | | | | | $ | 5,118,900 | |
| | | | | | | | |
| Electronics – 1.0% | | | | | |
| ASML Holding N.V. | | | 5,000 | | | $ | 323,698 | |
| Taiwan Semiconductor Manufacturing Co. Ltd. | | | 321,174 | | | | 1,074,941 | |
| | | | | | | | |
| | | | | | $ | 1,398,639 | |
| | | | | | | | |
| Energy – Independent – 2.3% | | | | | |
| Cairn Energy PLC | | | 59,647 | | | $ | 261,307 | |
| Cenovus Energy, Inc. | | | 17,020 | | | | 569,615 | |
| CNOOC Ltd. | | | 248,000 | | | | 544,548 | |
| INPEX Corp. | | | 202 | | | | 1,078,044 | |
| Reliance Industries Ltd. | | | 46,175 | | | | 715,401 | |
| | | | | | | | |
| | | | | | $ | 3,168,915 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Energy – Integrated – 5.9% | | | | | |
| BG Group PLC | | | 63,280 | | | $ | 1,061,096 | |
| BP PLC | | | 416,032 | | | | 2,882,587 | |
| Royal Dutch Shell PLC, “A” | | | 120,909 | | | | 4,272,262 | |
| | | | | | | | |
| | | | | | $ | 8,215,945 | |
| | | | | | | | |
| Engineering – Construction – 1.9% | | | | | |
| JGC Corp. | | | 59,000 | | | $ | 1,837,982 | |
| Keppel Corp. Ltd. | | | 91,900 | | | | 835,048 | |
| | | | | | | | |
| | | | | | $ | 2,673,030 | |
| | | | | | | | |
| Food & Beverages – 5.2% | | | | | |
| Groupe Danone | | | 38,355 | | | $ | 2,534,101 | |
| M. Dias Branco S.A. Industria e Comercio de Alimentos | | | 20,200 | | | | 774,864 | |
| Nestle S.A. | | | 59,130 | | | | 3,853,002 | |
| | | | | | | | |
| | | | | | $ | 7,161,967 | |
| | | | | | | | |
| Food & Drug Stores – 0.8% | | | | | |
| Lawson, Inc. | | | 12,300 | | | $ | 836,072 | |
| Wumart Stores, Inc., “H” | | | 138,000 | | | | 299,874 | |
| | | | | | | | |
| | | | | | $ | 1,135,946 | |
| | | | | | | | |
| Gaming & Lodging – 1.1% | | | | | |
| Sands China Ltd. | | | 349,200 | | | $ | 1,564,192 | |
| | | | | | | | |
| Insurance – 4.9% | | | | | |
| AIA Group Ltd. | | | 343,000 | | | $ | 1,367,006 | |
| Delta Lloyd N.V. | | | 29,290 | | | | 487,456 | |
| Hiscox Ltd. | | | 83,676 | | | | 609,099 | |
| ING Groep N.V. (a) | | | 189,331 | | | | 1,810,514 | |
| Sony Financial Holdings, Inc. | | | 36,600 | | | | 658,365 | |
| Swiss Re Ltd. | | | 26,145 | | | | 1,908,173 | |
| | | | | | | | |
| | | | | | $ | 6,840,613 | |
| | | | | | | | |
| Internet – 0.5% | | | | | |
| Yahoo Japan Corp. | | | 2,265 | | | $ | 733,110 | |
| | | | | | | | |
| Machinery & Tools – 3.3% | | | | | |
| Glory Ltd. | | | 44,500 | | | $ | 1,030,809 | |
| Joy Global, Inc. | | | 22,370 | | | | 1,426,759 | |
| Schindler Holding AG | | | 12,013 | | | | 1,735,172 | |
| Sinotruk Hong Kong Ltd. | | | 415,500 | | | | 319,731 | |
| | | | | | | | |
| | | | | | $ | 4,512,471 | |
| | | | | | | | |
| Major Banks – 11.3% | | | | | |
| Banco Santander S.A. | | | 113,549 | | | $ | 915,555 | |
| Barclays PLC | | | 615,786 | | | | 2,659,200 | |
| BNP Paribas | | | 34,490 | | | | 1,944,103 | |
| BOC Hong Kong Holdings Ltd. | | | 164,500 | | | | 516,083 | |
| HSBC Holdings PLC | | | 126,645 | | | | 1,339,503 | |
| Mitsubishi UFJ Financial Group, Inc. | | | 182,000 | | | | 979,367 | |
| Standard Chartered PLC | | | 88,813 | | | | 2,251,291 | |
| Sumitomo Mitsui Financial Group, Inc. | | | 64,100 | | | | 2,328,690 | |
| Westpac Banking Corp. | | | 102,110 | | | | 2,791,525 | |
| | | | | | | | |
| | | | | | $ | 15,725,317 | |
| | | | | | | | |
7
MFS Research International Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Medical & Health Technology & Services – 1.0% | | | | | |
| Diagnosticos da America S.A. | | | 87,200 | | | $ | 566,673 | |
| Miraca Holdings, Inc. | | | 19,700 | | | | 793,213 | |
| | | | | | | | |
| | | | | | $ | 1,359,886 | |
| | | | | | | | |
| Medical Equipment – 0.5% | | | | | |
| Sonova Holding AG | | | 6,830 | | | $ | 757,188 | |
| | | | | | | | |
| Metals & Mining – 3.6% | | | | | |
| Iluka Resources Ltd. | | | 147,601 | | | $ | 1,430,364 | |
| Rio Tinto Ltd. | | | 61,280 | | | | 3,570,936 | |
| | | | | | | | |
| | | | | | $ | 5,001,300 | |
| | | | | | | | |
| Natural Gas – Distribution – 1.5% | | | | | |
| China Resources Gas Group Ltd. | | | 70,000 | | | $ | 144,782 | |
| GDF SUEZ | | | 40,197 | | | | 826,379 | |
| Tokyo Gas Co. Ltd. | | | 242,000 | | | | 1,106,413 | |
| | | | | | | | |
| | | | | | $ | 2,077,574 | |
| | | | | | | | |
| Network & Telecom – 1.1% | | | | | |
| Ericsson, Inc., “B” | | | 154,920 | | | $ | 1,558,226 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 7.0% | | | | | |
| Aeon Credit Service Co. Ltd. | | | 36,200 | | | $ | 730,884 | |
| Bank Rakyat Indonesia | | | 639,500 | | | | 465,730 | |
| DBS Group Holdings Ltd. | | | 98,000 | | | | 1,199,650 | |
| Erste Group Bank AG (a) | | | 60,116 | | | | 1,922,241 | |
| Grupo Financiero Santander Mexico S.A.B. de C.V., ADR (a) | | | 36,190 | | | | 585,554 | |
| HDFC Bank Ltd., ADR | | | 15,250 | | | | 620,980 | |
| ICICI Bank Ltd. | | | 24,301 | | | | 511,871 | |
| Itau Unibanco Holding S.A., ADR | | | 26,690 | | | | 439,317 | |
| KBC Group N.V. | | | 27,511 | | | | 957,591 | |
| PT Bank Mandiri Tbk. | | | 535,000 | | | | 452,435 | |
| Siam Commercial Bank Co. Ltd. | | | 100,200 | | | | 592,880 | |
| UBS AG | | | 79,536 | | | | 1,250,797 | |
| | | | | | | | |
| | | | | | $ | 9,729,930 | |
| | | | | | | | |
| Pharmaceuticals – 8.3% | | | | | |
| Bayer AG | | | 28,889 | | | $ | 2,743,377 | |
| Novartis AG | | | 48,780 | | | | 3,088,336 | |
| Roche Holding AG | | | 19,480 | | | | 3,968,561 | |
| Santen Pharmaceutical Co. Ltd. | | | 46,800 | | | | 1,790,754 | |
| | | | | | | | |
| | | | | | $ | 11,591,028 | |
| | | | | | | | |
| Precious Metals & Minerals – 0.4% | | | | | |
| Newcrest Mining Ltd. | | | 23,499 | | | $ | 548,630 | |
| | | | | | | | |
| Railroad & Shipping – 1.4% | | | | | |
| East Japan Railway Co. | | | 12,400 | | | $ | 801,738 | |
| Kuehne & Nagel, Inc. AG | | | 9,480 | | | | 1,153,723 | |
| | | | | | | | |
| | | | | | $ | 1,955,461 | |
| | | | | | | | |
| Real Estate – 1.3% | | | | | |
| GSW Immobilien AG | | | 13,997 | | | $ | 591,626 | |
| Hang Lung Properties Ltd. | | | 292,000 | | | | 1,170,776 | |
| | | | | | | | |
| | | | | | $ | 1,762,402 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Restaurants – 1.4% | | | | | |
| Arcos Dorados Holdings, Inc. | | | 79,290 | | | $ | 948,308 | |
| Whitbread PLC | | | 24,992 | | | | 996,346 | |
| | | | | | | | |
| | | | | | $ | 1,944,654 | |
| | | | | | | | |
| Specialty Chemicals – 4.4% | | | | | |
| Akzo Nobel N.V. | | | 36,040 | | | $ | 2,378,172 | |
| Chugoku Marine Paints Ltd. | | | 48,000 | | | | 286,443 | |
| Linde AG | | | 13,448 | | | | 2,345,189 | |
| Nippon Paint Co. Ltd. | | | 53,000 | | | | 455,562 | |
| Symrise AG | | | 16,518 | | | | 591,296 | |
| | | | | | | | |
| | | | | | $ | 6,056,662 | |
| | | | | | | | |
| Specialty Stores – 0.7% | | | | | |
| Hennes & Mauritz AB, “B” | | | 27,990 | | | $ | 972,634 | |
| | | | | | | | |
| Telecommunications – Wireless – 3.2% | | | | | |
| KDDI Corp. | | | 30,400 | | | $ | 2,147,304 | |
| TIM Participacoes S.A., ADR | | | 20,660 | | | | 409,481 | |
| Vodafone Group PLC | | | 738,020 | | | | 1,856,022 | |
| | | | | | | | |
| | | | | | $ | 4,412,807 | |
| | | | | | | | |
| Telephone Services – 1.9% | | | | | |
| Bezeq – The Israel Telecommunication Corp. Ltd. | | | 365,720 | | | $ | 422,341 | |
| BT Group PLC | | | 143,770 | | | | 541,940 | |
| China Unicom (Hong Kong) Ltd. | | | 500,000 | | | | 810,757 | |
| Telecom Italia S.p.A. | | | 284,394 | | | | 257,070 | |
| Telecom Italia S.p.A. | | | 799,196 | | | | 632,406 | |
| | | | | | | | |
| | | | | | $ | 2,664,514 | |
| | | | | | | | |
| Tobacco – 1.5% | | | | | |
| Japan Tobacco, Inc. | | | 75,500 | | | $ | 2,126,392 | |
| | | | | | | | |
| Trucking – 1.1% | | | | | |
| Yamato Holdings Co. Ltd. | | | 97,700 | | | $ | 1,485,579 | |
| | | | | | | | |
| Utilities – Electric Power – 1.1% | | | | | |
| CEZ A.S. | | | 16,448 | | | $ | 588,408 | |
| Energias do Brasil S.A. | | | 152,000 | | | | 934,386 | |
| | | | | | | | |
| | | | | | $ | 1,522,794 | |
| | | | | | | | |
| Utilities – Water – 0.6% | | | | | |
| Companhia de Saneamento Basico do Estado de Sao Paulo | | | 5,600 | | | $ | 234,966 | |
| SUEZ Environment | | | 46,830 | | | | 564,664 | |
| | | | | | | | |
| | | | | | $ | 799,630 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $134,829,947) | | | | | | $ | 138,298,480 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 0.5% | | | | | |
| MFS Institutional Money Market Portfolio, 0.16%, at Cost and Net Asset Value (v) | | | 739,736 | | | $ | 739,736 | |
| | | | | | | | |
Total Investments
(Identified Cost, $135,569,683) | | | | | | $ | 139,038,216 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.0)% | | | | | | | (20,933 | ) |
| | | | | | | | |
| Net Assets – 100.0% | | | | | | $ | 139,017,283 | |
| | | | | | | | |
8
MFS Research International Series
Portfolio of Investments – continued
| (a) | | Non-income producing security. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
The following abbreviations are used in this report and are defined:
| ADR | | American Depositary Receipt |
| PLC | | Public Limited Company |
See Notes to Financial Statements
9
MFS Research International Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | | | | |
At 12/31/12 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $134,829,947) | | | $138,298,480 | | | | | |
Underlying affiliated funds, at cost and value | | | 739,736 | | | | | |
Total investments, at value (identified cost, $135,569,683) | | | $139,038,216 | | | | | |
Foreign currency, at value (identified cost, $3,222) | | | 3,227 | | | | | |
Receivables for | | | | | | | | |
Fund shares sold | | | 107,800 | | | | | |
Interest and dividends | | | 194,697 | | | | | |
Other assets | | | 1,439 | | | | | |
Total assets | | | | | | | $139,345,379 | |
Liabilities | | | | | | | | |
Payable for fund shares reacquired | | | $179,714 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 27,886 | | | | | |
Shareholder servicing costs | | | 258 | | | | | |
Distribution and/or service fees | | | 1,032 | | | | | |
Payable for independent Trustees’ compensation | | | 89 | | | | | |
Deferred country tax expense payable | | | 33,169 | | | | | |
Accrued expenses and other liabilities | | | 85,948 | | | | | |
Total liabilities | | | | | | | $328,096 | |
Net assets | | | | | | | $139,017,283 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $159,524,167 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign
currencies (net of $33,169 deferred country tax) | | | 3,435,120 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (26,535,641 | ) | | | | |
Undistributed net investment income | | | 2,593,637 | | | | | |
Net assets | | | | | | | $139,017,283 | |
Shares of beneficial interest outstanding | | | | | | | 11,257,135 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $101,015,960 | | | | 8,165,292 | | | | $12.37 | |
Service Class | | | 38,001,323 | | | | 3,091,843 | | | | 12.29 | |
See Notes to Financial Statements
10
MFS Research International Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | | | | | | |
Year ended 12/31/12 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $4,443,904 | | | | | |
Interest | | | 55,436 | | | | | |
Dividends from underlying affiliated funds | | | 1,525 | | | | | |
Foreign taxes withheld | | | (331,643 | ) | | | | |
Total investment income | | | | | | | $4,169,222 | |
Expenses | | | | | | | | |
Management fee | | | $1,185,467 | | | | | |
Distribution and/or service fees | | | 82,220 | | | | | |
Shareholder servicing costs | | | 12,853 | | | | | |
Administrative services fee | | | 29,150 | | | | | |
Independent Trustees’ compensation | | | 5,317 | | | | | |
Custodian fee | | | 90,921 | | | | | |
Shareholder communications | | | 38,352 | | | | | |
Audit and tax fees | | | 68,974 | | | | | |
Legal fees | | | 1,674 | | | | | |
Miscellaneous | | | 18,902 | | | | | |
Total expenses | | | | | | | $1,533,830 | |
Fees paid indirectly | | | (7 | ) | | | | |
Reduction of expenses by investment adviser | | | (2,865 | ) | | | | |
Net expenses | | | | | | | $1,530,958 | |
Net investment income | | | | | | | $2,638,264 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments (net of $1,735 country tax) | | | $(102,379 | ) | | | | |
Foreign currency | | | (43,041 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $(145,420 | ) |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments (net of $29,393 increase in deferred country tax) | | | $18,213,960 | | | | | |
Translation of assets and liabilities in foreign currencies | | | 4,782 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $18,218,742 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $18,073,322 | |
Change in net assets from operations | | | | | | | $20,711,586 | |
See Notes to Financial Statements
11
MFS Research International Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | | | |
For years ended 12/31 | | | 2012 | | | | 2011 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $2,638,264 | | | | $3,133,930 | |
Net realized gain (loss) on investments and foreign currency | | | (145,420 | ) | | | 11,259,517 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 18,218,742 | | | | (26,864,187 | ) |
Change in net assets from operations | | | $20,711,586 | | | | $(12,470,740 | ) |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(3,113,056 | ) | | | $(2,592,949 | ) |
Change in net assets from fund share transactions | | | $(2,678,640 | ) | | | $(48,406,200 | ) |
Total change in net assets | | | $14,919,890 | | | | $(63,469,889 | ) |
Net assets | | | | | | | | |
| At beginning of period | | | 124,097,393 | | | | 187,567,282 | |
At end of period (including undistributed net investment income of $2,593,637 and
$3,105,975, respectively) | | | $139,017,283 | | | | $124,097,393 | |
See Notes to Financial Statements
12
MFS Research International Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $10.86 | | | | $12.44 | | | | $11.40 | | | | $8.89 | | | | $16.12 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.24 | | | | $0.25 | | | | $0.18 | | | | $0.17 | | | | $0.25 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 1.55 | | | | (1.59 | ) | | | 1.03 | | | | 2.51 | | | | (6.82 | ) |
Total from investment operations | | | $1.79 | | | | $(1.34 | ) | | | $1.21 | | | | $2.68 | | | | $(6.57 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.28 | ) | | | $(0.24 | ) | | | $(0.17 | ) | | | $(0.17 | ) | | | $(0.10 | ) |
From net realized gain on investments | | | — | | | | — | | | | — | | | | — | | | | (0.56 | ) |
Total distributions declared to shareholders | | | $(0.28 | ) | | | $(0.24 | ) | | | $(0.17 | ) | | | $(0.17 | ) | | | $(0.66 | ) |
Net asset value, end of period (x) | | | $12.37 | | | | $10.86 | | | | $12.44 | | | | $11.40 | | | | $8.89 | |
Total return (%) (k)(r)(s)(x) | | | 16.70 | | | | (10.88 | ) | | | 10.81 | | | | 30.86 | | | | (42.39 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.10 | | | | 1.14 | | | | 1.15 | | | | 1.23 | | | | 1.35 | |
Expenses after expense reductions (f) | | | 1.10 | | | | 1.10 | | | | 1.10 | | | | 1.10 | | | | 1.10 | |
Net investment income | | | 2.08 | | | | 2.04 | | | | 1.60 | | | | 1.78 | | | | 2.06 | |
Portfolio turnover | | | 37 | | | | 47 | | | | 61 | | | | 92 | | | | 77 | |
Net assets at end of period (000 omitted) | | | $101,016 | | | | $95,151 | | | | $145,085 | | | | $146,044 | | | | $115,944 | |
See Notes to Financial Statements
13
MFS Research International Series
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $10.79 | | | | $12.35 | | | | $11.33 | | | | $8.83 | | | | $16.02 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.20 | | | | $0.21 | | | | $0.14 | | | | $0.15 | | | | $0.25 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 1.55 | | | | (1.56 | ) | | | 1.03 | | | | 2.49 | | | | (6.81 | ) |
Total from investment operations | | | $1.75 | | | | $(1.35 | ) | | | $1.17 | | | | $2.64 | | | | $(6.56 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.25 | ) | | | $(0.21 | ) | | | $(0.15 | ) | | | $(0.14 | ) | | | $(0.07 | ) |
From net realized gain on investments | | | — | | | | — | | | | — | | | | — | | | | (0.56 | ) |
Total distributions declared to shareholders | | | $(0.25 | ) | | | $(0.21 | ) | | | $(0.15 | ) | | | $(0.14 | ) | | | $(0.63 | ) |
Net asset value, end of period (x) | | | $12.29 | | | | $10.79 | | | | $12.35 | | | | $11.33 | | | | $8.83 | |
Total return (%) (k)(r)(s)(x) | | | 16.41 | | | | (11.06 | ) | | | 10.48 | | | | 30.57 | | | | (42.52 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.35 | | | | 1.39 | | | | 1.40 | | | | 1.49 | | | | 1.58 | |
Expenses after expense reductions (f) | | | 1.35 | | | | 1.35 | | | | 1.35 | | | | 1.35 | | | | 1.35 | |
Net investment income | | | 1.78 | | | | 1.72 | | | | 1.27 | | | | 1.56 | | | | 2.01 | |
Portfolio turnover | | | 37 | | | | 47 | | | | 61 | | | | 92 | | | | 77 | |
Net assets at end of period (000 omitted) | | | $38,001 | | | | $28,947 | | | | $42,482 | | | | $34,215 | | | | $22,000 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (r) | Certain expenses have been reduced without which performance would have been lower. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (x) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
14
MFS Research International Series
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Research International Series (the fund) is a series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests in foreign securities. Investments in foreign securities are vulnerable to the effects of changes in the relative values of the local currency and the U.S. dollar and to the effects of changes in each country’s legal, political, and economic environment.
In this reporting period the fund adopted Financial Accounting Standards Board (FASB) Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 seeks to improve the comparability of fair value measurements as presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) by providing common requirements for fair value measurement and disclosure.
In December 2011, the FASB issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods, ASU 2011-11 is intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. Although still evaluating the potential impacts of ASU 2011-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to
15
MFS Research International Series
Notes to Financial Statements – continued
determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of December 31, 2012 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
Japan | | | $5,740,913 | | | | $23,542,032 | | | | $— | | | | $29,282,945 | |
United Kingdom | | | — | | | | 25,488,224 | | | | — | | | | 25,488,224 | |
Switzerland | | | 4,610,190 | | | | 13,104,763 | | | | — | | | | 17,714,953 | |
France | | | 826,379 | | | | 11,306,175 | | | | — | | | | 12,132,554 | |
Germany | | | 591,296 | | | | 8,129,074 | | | | — | | | | 8,720,370 | |
Netherlands | | | — | | | | 7,803,231 | | | | — | | | | 7,803,231 | |
Hong Kong | | | — | | | | 7,117,121 | | | | — | | | | 7,117,121 | |
Australia | | | — | | | | 4,770,520 | | | | — | | | | 4,770,520 | |
Brazil | | | 848,798 | | | | 2,510,889 | | | | — | | | | 3,359,687 | |
Other Countries | | | 6,061,156 | | | | 15,847,719 | | | | — | | | | 21,908,875 | |
| Mutual Funds | | | 739,736 | | | | — | | | | — | | | | 739,736 | |
| Total Investments | | | $19,418,468 | | | | $119,619,748 | | | | $— | | | | $139,038,216 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $57,684,886 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $3,853,002 would have been considered level 2 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2012, there were no securities on loan or collateral outstanding.
16
MFS Research International Series
Notes to Financial Statements – continued
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount, for the year ended December 31, 2012, is shown as a reduction of total expenses in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Foreign taxes have been accrued by the fund in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/12 | | | 12/31/11 | |
| Ordinary income (including any short-term capital gains) | | | $3,113,056 | | | | $2,592,949 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/12 | | | | |
| Cost of investments | | | $136,365,174 | |
| Gross appreciation | | | 12,888,263 | |
| Gross depreciation | | | (10,215,221 | ) |
| Net unrealized appreciation (depreciation) | | | $2,673,042 | |
| Undistributed ordinary income | | | 2,601,468 | |
| Capital loss carryforwards | | | (25,740,150 | ) |
| Other temporary differences | | | (41,244 | ) |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized after December 31, 2010 may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
17
MFS Research International Series
Notes to Financial Statements – continued
As of December 31, 2012, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | | |
| Pre-enactment losses: | | | | |
| 12/31/16 | | | $(20,084,186 | ) |
| 12/31/17 | | | (3,004,405 | ) |
| 12/31/18 | | | (2,184,929 | ) |
| Total | | | $(25,273,520 | ) |
| Post-enactment losses: | | | | |
| Long-Term | | | $(466,630 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/12 | | | Year ended
12/31/11 | |
| Initial Class | | | $2,394,595 | | | | $2,068,928 | |
| Service Class | | | 718,461 | | | | 524,021 | |
| Total | | | $3,113,056 | | | | $2,592,949 | |
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at an annual rate of 0.90% of the fund’s average daily net assets.
The investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses, such that total annual operating expenses do not exceed 1.10% of average daily net assets for the Initial Class shares and 1.35% of average daily net assets for the Service Class shares. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2014. For the year ended December 31, 2012, this reduction amounted to $2,402 and is reflected as a reduction of total expenses in the Statement of Operations.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2012, the fee was $11,989, which equated to 0.0091% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2012, these costs amounted to $864.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.0221% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
18
MFS Research International Series
Notes to Financial Statements – continued
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended December 31, 2012, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $1,096 and are included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $463, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
Purchases and sales of investments, other than short-term obligations, aggregated $47,712,786 and $50,861,782, respectively.
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 978,518 | | | | $10,913,908 | | | | 1,306,904 | | | | $15,524,751 | |
Service Class | | | 858,903 | | | | 9,908,302 | | | | 919,669 | | | | 10,732,113 | |
| | | 1,837,421 | | | | $20,822,210 | | | | 2,226,573 | | | | $26,256,864 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 210,421 | | | | $2,394,595 | | | | 176,983 | | | | $2,068,928 | |
Service Class | | | 63,468 | | | | 718,461 | | | | 45,096 | | | | 524,021 | |
| | | 273,889 | | | | $3,113,056 | | | | 222,079 | | | | $2,592,949 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (1,783,237 | ) | | | $(20,723,000 | ) | | | (4,390,766 | ) | | | $(56,183,520 | ) |
Service Class | | | (512,636 | ) | | | (5,890,906 | ) | | | (1,721,998 | ) | | | (21,072,493 | ) |
| | | (2,295,873 | ) | | | $(26,613,906 | ) | | | (6,112,764 | ) | | | $(77,256,013 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (594,298 | ) | | | $(7,414,497 | ) | | | (2,906,879 | ) | | | $(38,589,841 | ) |
Service Class | | | 409,735 | | | | 4,735,857 | | | | (757,233 | ) | | | (9,816,359 | ) |
| | | (184,563 | ) | | | $(2,678,640 | ) | | | (3,664,112 | ) | | | $(48,406,200 | ) |
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2012, the fund’s commitment fee and interest expense were $836 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
19
MFS Research International Series
Notes to Financial Statements – continued
| (7) | | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 214,504 | | | | 31,393,003 | | | | (30,867,771 | ) | | | 739,736 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $1,525 | | | | $739,736 | |
20
MFS Research International Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of
MFS Research International Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Research International Series (the “Fund”) (one of the series comprising MFS Variable Insurance Trust) as of December 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Research International Series as of December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2013
21
MFS Research International Series
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 1, 2013, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES | | | | | | | | |
Robert J. Manning (k) (age 49) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Chief Executive Officer and Director; President (until December 2009); Chief Investment Officer (until July 2010) | | N/A |
| | | | |
| INDEPENDENT TRUSTEES | | | | | | | | |
David H. Gunning (age 70) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman; Portman Limited (mining), Director (until 2008) |
| | | | |
Robert E. Butler (age 71) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 57) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 71) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 68) | | Trustee | | December 2004 | | Private investor; Rouse Properties Inc. (real estate), Director | | N/A |
| | | | |
John P. Kavanaugh (age 58) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
J. Dale Sherratt (age 74) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner | | N/A |
| | | | |
Laurie J. Thomsen
(age 55) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 71) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
John M. Corcoran (k) (age 47) | | President | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) | | N/A |
| | | | |
| Christopher R. Bohane (k) (age 39) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kino Clark (k) (age 44) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 53) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
| | | | |
Ethan D. Corey (k) (age 49) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
22
MFS Research International Series
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
David L. DiLorenzo (k) (age 44) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Robyn L. Griffin (age 37) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 39) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 62) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 42) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 42) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 60) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Frank L. Tarantino (age 68) | | Independent
Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 52) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. For the period October 2008, until January 2012, Mr. Corcoran served as Treasurer of the Funds. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2013, the Trustees served as board members of 143 funds within the MFS Family of Funds.
23
MFS Research International Series
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust 1 Lincoln Street Boston MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers Jose Luis Garcia Thomas Melendez | | |
24
MFS Research International Series
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2012 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2011 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2011, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 2nd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 1st quintile for the one-year period and the 2nd quintile for the five-year period ended December 31, 2011 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
25
MFS Research International Series
Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate was approximately at the Lipper expense group median, and the Fund’s total expense ratio was higher than the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to institutional accounts, if any. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund is likely to benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund. They noted that the Fund’s advisory fee rate schedule is not subject to any breakpoints. Taking into account the expense limitation noted above, the Trustees determined not to recommend any advisory fee breakpoints for the Fund at this time.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2012.
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of the MFS Web site (mfs.com).
26
MFS Research International Series
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling
1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
Income derived from foreign sources was $3,974,030. The fund intends to pass through foreign tax credits of $263,837 for the fiscal year.
27
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
28
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
29
ANNUAL REPORT
December 31, 2012
MFS® UTILITIES SERIES
MFS® Variable Insurance Trust
VUF-ANN
MFS® UTILITIES SERIES
CONTENTS
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ NO BANK OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Utilities Series
LETTER FROM THE CHAIRMAN AND CEO
Dear Contract Owners:
The global market outlook for 2013 is one of cautious optimism. While we are seeing some positive economic trends in the United States, Europe and China, the overall environment remains challenging. In the United States, the recent fiscal cliff agreement was received positively by investors, even though it mostly addressed pressing taxation issues and did not resolve additional concerns, including the need for spending cuts and a large-scale reduction of the federal debt. These issues will be front and center again in the spring. Despite the ongoing uncertainty, economic tailwinds are gathering strength as the U.S. housing and job markets are improving and consumer confidence is rising.
Overseas, the debt crisis continues to weigh heavily on eurozone markets, with even Germany — long an economic stalwart — experiencing some contraction. These ongoing challenges could be a drag on global market performance this year. In Asia, manufacturing activity has accelerated in emerging markets such as China and India, and we are seeing signs of stabilized loan growth in China, a leading indicator of that country’s economic health. In contrast, Japan’s economy is contracting sharply under deflationary pressures. Nevertheless, Japanese markets have responded favorably to early actions by the new government, which appears determined to act aggressively, along with the Bank of Japan, to stimulate growth.
As always, managing risk in the face of uncertainty remains a top priority for investors. At MFS®, our uniquely collaborative investment process revolves around global research and our disciplined risk management approach. Our global team of investment professionals shares ideas and evaluates opportunities across continents, investment disciplines and asset classes — all with a goal of building better insights, and ultimately better results, for our clients.
We remain mindful of the many economic challenges investors face today, and believe it is more important than ever to maintain a long-term view, employ time-tested principles, such as asset allocation and diversification, and work closely with investment advisors to identify and pursue the most suitable opportunities.
Respectfully,
Robert J. Manning
Chairman and Chief Executive Officer
MFS Investment Management®
February 15, 2013
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
MFS Utilities Series
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | | | |
| Top ten holdings (i) | | | | |
| Comcast Corp., “Special A” | | | 3.7% | |
| CMS Energy Corp. | | | 3.3% | |
| Kinder Morgan, Inc. | | | 3.3% | |
| Virgin Media, Inc. | | | 3.3% | |
| Energias de Portugal S.A. | | | 2.7% | |
| Edison International | | | 2.7% | |
| NRG Energy, Inc. | | | 2.3% | |
| Calpine Corp. | | | 2.3% | |
| Time Warner Cable, Inc. | | | 2.2% | |
| Williams Cos., Inc. | | | 2.2% | |
| | | | |
| Top five industries (i) | | | | |
| Utilities – Electric Power | | | 47.9% | |
| Cable TV | | | 13.0% | |
| Natural Gas – Pipeline | | | 9.2% | |
| Telephone Services | | | 8.2% | |
| Natural Gas – Distribution | | | 6.8% | |
| |
| Issuer country weightings (i)(x) | | | | |
| United States | | | 69.4% | |
| Brazil | | | 6.3% | |
| Portugal | | | 4.6% | |
| Spain | | | 3.4% | |
| United Kingdom | | | 2.7% | |
| Germany | | | 1.4% | |
| France | | | 1.4% | |
| Netherlands | | | 1.2% | |
| Italy | | | 1.2% | |
| Other Countries | | | 8.4% | |
| (i) | For purposes of this presentation, the components include the market value of securities, and reflect the impact of the equivalent exposure of derivative positions, if any. These amounts may be negative from time to time. The bond component will include any accrued interest amounts. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than market value. Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio. |
| (x) | Represents the portfolio’s exposure to issuer countries as a percentage of a portfolio’s net assets. |
Percentages are based on net assets as of 12/31/12.
The portfolio is actively managed and current holdings may be different.
2
MFS Utilities Series
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2012, Initial Class shares of the MFS Utilities Series (“fund”) provided a total return of 13.48%, while Service Class shares of the fund provided a total return of 13.21%. These compare with a return of 16.00% over the same period for the fund’s benchmark, the Standard & Poor’s 500 Stock Index, and a return of 1.29% for the fund’s other benchmark, the Standard & Poor’s 500 Utilities Index (“S&P Utilities Index”).
Market Environment
The beginning of the period was characterized by a risk-on sentiment as a result of additional liquidity measures by the Federal Reserve Bank (“Fed”) and the European Central Bank (“ECB”) as well as a commensurate improvement in macroeconomic conditions. During this time, global equity valuations rose, credit spreads contracted, and high-quality sovereign yields increased modestly.
During the middle of the period, however, conditions worsened, driven by broadly weaker global macroeconomic indicators, as well as renewed concerns over the eurozone’s capacity and determination to address its ongoing crisis. Despite this deterioration, broad market sentiment remained relatively resilient as equity markets generally maintained gains and credit spreads did not indicate deterioration.
However, this renewed weakness in the fundamentals precipitated a further round of monetary easing by both the Fed (through a third round of quantitative easing) and the ECB (through a new bond purchase facility) in the second half of the period, which soon instilled additional confidence in risk markets. Nonetheless, towards the end of the period, weaker equity earnings reports and declining forward guidance caused market sentiment to soften. In addition, as we moved toward year end, the fiscal cliff negotiations between the Republicans in the U.S. Congress and President Obama were a particular source of market attention, where uncertainty surrounding the fiscal negotiations continued right up to the end-of-year deadline.
Detractors from Performance
Security selection and an underweight position in the natural gas distribution industry dampened relative performance relative to the S&P Utilities Index. An underweight position in natural gas supplier Sempra Energy negatively impacted relative results as the stock posted strong returns for the reporting period. Despite there being an oversupply of liquefied natural gas in the U.S., Sempra began to earn commercial shipping contracts to export natural gas overseas, creating the potential to finally reduce the oversupply and allow prices to increase.
Elsewhere, underweight positions in electric power companies, NextEra Energy and American Electric Power, and in diversified energy company DTE Energy weakened relative results as all three stocks outperformed the benchmark during the period. NextEra traded higher throughout the period as the company experienced steady income growth. Other top relative detractors for the period included the fund’s holdings of cellular communications services firm Cellcom Israel (Israel), wireless communications company NII Holdings (h), electric power company Companhia Paranaense de Energia (Brazil), wireless and telecommunications provider Tim Participacoes S.A. (Brazil), natural gas supplier Williams Partners, and telecommunications services firm Bezeq-The Israeli Telecommunication Corp.
Contributors to Performance
The fund’s exposure to the cable TV industry, which is not represented in the S&P Utilities Index, was a positive factor for relative performance. The fund’s holdings of media and communications services company Virgin Media and cable providers, Comcast, Time Warner, and Kabel Deutschland (Germany), supported relative results as all four stocks generated strong performance over the period. Shares of Virgin Media traded higher during the latter half of the year on the back of strong earnings due to higher-than-expected net subscriptions in its cable segment.
The combination of an underweight position and strong stock selection in the electric power industry contributed to relative performance. An underweight position in electric power generation holding company, Exelon, and not holding shares of poor-performing retail electric company Southern Company, aided relative returns. Exelon’s stock price declined during the year as management announced in November that if power prices did not increase $3-$6 in the next six months they would have to reevaluate its dividend. This risk to the stock’s dividend yield appeared to have negatively impacted its price performance.
The fund’s exposure to the natural gas pipeline industry, which is not represented in the S&P Utilities Index, also benefited relative results. The fund’s holdings of natural gas pipelines operators Williams Co., Kinder Morgan Energy Partners, and El Paso Corp. (h) bolstered relative performance. Shares of Williams Co. traded higher as colder temperatures during the middle of the period appeared to have drawn investors to the company’s shares. Additionally, industry discussions over efforts to export natural gas were encouraging as gas prices remained depressed due to ample supply. El Paso Corp. was spun-off from El Paso Pipeline Partners and was acquired by Kinder Morgan Energy Partners in May. After the acquisition, the El Paso Corp. stock ceased to exist. The fund
3
MFS Utilities Series
Management Review – continued
continued to hold shares of El Paso Pipeline Partners at the end of the year. Shares of El Paso Corp. performed well as investors appeared to view the acquisition as a positive event for the stock while shares of El Paso Pipeline Partners did not perform as well in comparison.
Elsewhere, the fund’s holding of strong-performing wireless company SBA Communications also supported relative results.
Respectfully,
| | |
| Robert Persons | | Maura Shaughnessy |
| Portfolio Manager | | Portfolio Manager |
| (h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
4
MFS Utilities Series
PERFORMANCE SUMMARY THROUGH 12/31/12
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/12
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 1/03/95 | | 13.48% | | 2.75% | | 14.80% | | |
| | | Service Class | | 5/01/00 | | 13.21% | | 2.49% | | 14.51% | | |
| | | | |
| Comparative benchmarks | | | | | | | | |
| | | Standard & Poor’s 500 Stock Index (f) | | 16.00% | | 1.66% | | 7.10% | | |
| | | Standard & Poor’s 500 Utilities Index (f) | | 1.29% | | 0.36% | | 10.43% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definitions
Standard & Poor’s 500 Stock Index – a market capitalization-weighted index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
Standard & Poor’s 500 Utilities Index – a market capitalization-weighted index designed to measure the utilities sector, including those companies considered electric, gas or water utilities, or companies that operate as independent producers and/or distributors of power.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Utilities Series
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2012 through December 31, 2012
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2012 through December 31, 2012.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | | Beginning
Account Value
7/01/12 | | | Ending
Account Value
12/31/12 | | | Expenses Paid
During Period (p)
7/01/12-12/31/12 | |
| Initial Class | | Actual | | | 0.81% | | | | $1,000.00 | | | | $1,081.75 | | | | $4.24 | |
| | Hypothetical (h) | | | 0.81% | | | | $1,000.00 | | | | $1,021.06 | | | | $4.12 | |
| Service Class | | Actual | | | 1.06% | | | | $1,000.00 | | | | $1,080.47 | | | | $5.54 | |
| | Hypothetical (h) | | | 1.06% | | | | $1,000.00 | | | | $1,019.81 | | | | $5.38 | |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS Utilities Series
PORTFOLIO OF INVESTMENTS – 12/31/12
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 91.8% | | | | | |
| Broadcasting – 0.1% | | | | | |
| News Corp., “A” | | | 26,860 | | | $ | 686,004 | |
| | | | | | | | |
| Cable TV – 12.8% | | | | | |
| Astro Malaysia Holdings Bhd. | | | 7,100,500 | | | $ | 6,965,827 | |
| Charter Communications, Inc., “A” (a) | | | 55,420 | | | | 4,225,221 | |
| Comcast Corp., “Special A” | | | 1,360,745 | | | | 48,918,783 | |
| Kabel Deutschland Holding AG | | | 133,684 | | | | 9,996,667 | |
| Liberty Global, Inc., “A” (a) | | | 147,994 | | | | 9,322,142 | |
| Time Warner Cable, Inc. | | | 302,313 | | | | 29,381,801 | |
| Virgin Media, Inc. | | | 1,170,261 | | | | 43,007,092 | |
| Ziggo N.V. | | | 507,076 | | | | 16,388,164 | |
| | | | | | | | |
| | | | | | $ | 168,205,697 | |
| | | | | | | | |
| Energy – Independent – 4.2% | | | | | |
| Cabot Oil & Gas Corp. | | | 126,581 | | | $ | 6,296,139 | |
| Energen Corp. | | | 160,456 | | | | 7,234,961 | |
| EQT Corp. | | | 322,029 | | | | 18,993,270 | |
| Noble Energy, Inc. | | | 63,250 | | | | 6,435,055 | |
| QEP Resources, Inc. | | | 403,520 | | | | 12,214,550 | |
| WPX Energy, Inc. (a) | | | 289,733 | | | | 4,311,227 | |
| | | | | | | | |
| | | | | | $ | 55,485,202 | |
| | | | | | | | |
| Natural Gas – Distribution – 6.8% | | | | | |
| AGL Energy Ltd. | | | 174,870 | | | $ | 2,808,188 | |
| AGL Resources, Inc. | | | 51,311 | | | | 2,050,901 | |
| Atmos Energy Corp. | | | 39,024 | | | | 1,370,523 | |
| China Resources Gas Group Ltd. | | | 272,000 | | | | 562,580 | |
| Gas Natural SDG S.A. | | | 38,140 | | | | 697,424 | |
| GDF SUEZ | | | 708,262 | | | | 14,560,616 | |
| NiSource, Inc. | | | 688,786 | | | | 17,143,884 | |
| ONEOK, Inc. | | | 261,196 | | | | 11,166,129 | |
| Sempra Energy | | | 228,932 | | | | 16,240,436 | |
| Spectra Energy Corp. | | | 819,067 | | | | 22,426,055 | |
| | | | | | | | |
| | | | | | $ | 89,026,736 | |
| | | | | | | | |
| Natural Gas – Pipeline – 9.2% | | | | | |
| APA Group | | | 265,078 | | | $ | 1,530,108 | |
| Cheniere Energy, Inc. (a) | | | 98,147 | | | | 1,843,201 | |
| El Paso Pipeline Partners LP | | | 54,435 | | | | 2,012,462 | |
| Enagas S.A. | | | 857,931 | | | | 18,358,921 | |
| Enbridge, Inc. | | | 143,280 | | | | 6,196,748 | |
| Kinder Morgan, Inc. | | | 1,224,314 | | | | 43,255,014 | |
| TransCanada Corp. | | | 55,890 | | | | 2,641,950 | |
| Williams Cos., Inc. | | | 864,372 | | | | 28,299,539 | |
| Williams Partners LP | | | 335,809 | | | | 16,340,466 | |
| | | | | | | | |
| | | | | | $ | 120,478,409 | |
| | | | | | | | |
| Telecommunications – Wireless – 5.6% | | | | | |
| American Tower Corp., REIT | | | 136,408 | | | $ | 10,540,246 | |
| Cellcom Israel Ltd. | | | 429,747 | | | | 3,558,305 | |
| Mobile TeleSystems OJSC, ADR | | | 753,201 | | | | 14,047,199 | |
| SBA Communications Corp. (a) | | | 131,398 | | | | 9,331,886 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Telecommunications – Wireless – continued | | | | | |
| Telefonica Deutschland Holding AG (a) | | | 437,490 | | | $ | 3,334,284 | |
| TIM Participacoes S.A., ADR | | | 729,322 | | | | 14,455,162 | |
| Turkcell Iletisim Hizmetleri A.S. (a) | | | 948,980 | | | | 6,144,073 | |
| Vodafone Group PLC | | | 4,923,492 | | | | 12,381,923 | |
| | | | | | | | |
| | | | | | $ | 73,793,078 | |
| | | | | | | | |
| Telephone Services – 8.2% | | | | | |
| Bezeq – The Israel Telecommunication Corp. Ltd. | | | 8,808,161 | | | $ | 10,171,840 | |
| BT Group PLC | | | 1,016,110 | | | | 3,830,222 | |
| CenturyLink, Inc. | | | 239,122 | | | | 9,354,453 | |
| China Unicom (Hong Kong) Ltd. | | | 1,090,000 | | | | 1,767,450 | |
| Empresa Nacional de Telecomunicaciones S.A. | | | 264,306 | | | | 5,465,489 | |
| Frontier Communications Corp. (l) | | | 1,086,493 | | | | 4,650,190 | |
| Portugal Telecom, SGPS, S.A. | | | 574,495 | | | | 2,873,777 | |
| PT XL Axiata Tbk | | | 10,007,000 | | | | 5,942,182 | |
| TDC A.S. | | | 2,132,980 | | | | 15,109,693 | |
| Telecom Italia S.p.A. | | | 20,701,924 | | | | 16,381,486 | |
| Telefonica Brasil S.A., ADR | | | 436,397 | | | | 10,499,712 | |
| Verizon Communications, Inc. | | | 329,510 | | | | 14,257,898 | |
| Windstream Corp. (l) | | | 860,850 | | | | 7,127,838 | |
| | | | | | | | |
| | | | | | $ | 107,432,230 | |
| | | | | | | | |
| Utilities – Electric Power – 43.5% | | | | | |
| AES Corp. | | | 2,120,684 | | | $ | 22,691,319 | |
| AES Gener S.A. | | | 694,880 | | | | 448,482 | |
| Alliant Energy Corp. | | | 14,460 | | | | 634,939 | |
| American Electric Power Co., Inc. | | | 446,257 | | | | 19,046,249 | |
| Calpine Corp. (a) | | | 1,682,992 | | | | 30,512,645 | |
| CenterPoint Energy, Inc. | | | 674,684 | | | | 12,987,667 | |
| CEZ A.S. | | | 259,751 | | | | 9,292,292 | |
| Cheung Kong Infrastructure Holdings Ltd. | | | 29,000 | | | | 178,147 | |
| China Hydroelectric Corp., ADR (a) | | | 119,119 | | | | 204,885 | |
| China Longyuan Power Group | | | 5,269,000 | | | | 3,701,330 | |
| Cleco Corp. | | | 15,810 | | | | 632,558 | |
| CLP Holdings Ltd. | | | 824,500 | | | | 6,923,550 | |
| CMS Energy Corp. | | | 1,797,029 | | | | 43,811,567 | |
| Companhia Energetica de Minas Gerais, IPS | | | 1,077,225 | | | | 11,699,553 | |
| Companhia Paranaense de Energia, ADR | | | 252,317 | | | | 3,873,066 | |
| Companhia Paranaense de Energia, IPS | | | 407,700 | | | | 6,280,912 | |
| Dominion Resources, Inc. | | | 51,790 | | | | 2,682,722 | |
| DTE Energy Co. | | | 52,930 | | | | 3,178,447 | |
| Duke Energy Corp. | | | 306,860 | | | | 19,577,668 | |
| E.On Russia JSC | | | 20,766,243 | | | | 1,777,424 | |
| Edison International | | | 783,948 | | | | 35,426,610 | |
| EDP Renovaveis S.A. (a) | | | 4,080,944 | | | | 21,762,192 | |
| Enel OGK-5 OAO (a) | | | 5,446,165 | | | | 288,777 | |
| Energias de Portugal S.A. | | | 11,898,982 | | | | 35,766,995 | |
| Energias do Brasil S.A. | | | 1,701,600 | | | | 10,460,205 | |
| Exelon Corp. | | | 486,183 | | | | 14,459,082 | |
7
MFS Utilities Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Utilities – Electric Power – continued | | | | | |
| FirstEnergy Corp. | | | 484,450 | | | $ | 20,230,632 | |
| Great Plains Energy, Inc. | | | 375,666 | | | | 7,629,776 | |
| Iberdrola S.A. | | | 1,973,403 | | | | 11,004,456 | |
| ITC Holdings Corp. | | | 189,604 | | | | 14,582,444 | |
| Light S.A. | | | 678,310 | | | | 7,444,724 | |
| National Grid PLC | | | 454,118 | | | | 5,201,662 | |
| NextEra Energy, Inc. | | | 263,202 | | | | 18,210,946 | |
| Northeast Utilities | | | 333,463 | | | | 13,031,734 | |
| NRG Energy, Inc. | | | 1,332,515 | | | | 30,634,510 | |
| NV Energy, Inc. | | | 343,264 | | | | 6,226,809 | |
| OGE Energy Corp. | | | 395,345 | | | | 22,261,877 | |
| PG&E Corp. | | | 232,560 | | | | 9,344,261 | |
| Portland General Electric Co. | | | 117,880 | | | | 3,225,197 | |
| PPL Corp. | | | 584,606 | | | | 16,737,270 | |
| Public Service Enterprise Group, Inc. | | | 820,521 | | | | 25,107,943 | |
| Red Electrica de Espana | | | 300,383 | | | | 14,841,193 | |
| RWE AG | | | 129,782 | | | | 5,357,755 | |
| SSE PLC | | | 514,244 | | | | 11,884,736 | |
| Terna Participacoes S.A., IEU | | | 304,500 | | | | 3,242,051 | |
| Tractebel Energia S.A. | | | 191,800 | | | | 3,124,068 | |
| Xcel Energy, Inc. | | | 168,240 | | | | 4,493,690 | |
| | | | | | | | |
| | | | | | $ | 572,117,017 | |
| | | | | | | | |
| Utilities – Water – 1.4% | | | | | | | | |
| Aguas Andinas S.A. | | | 6,831,776 | | | $ | 4,874,540 | |
| Companhia de Saneamento Basico do Estado de Sao Paulo | | | 135,300 | | | | 5,676,943 | |
| Companhia de Saneamento de Minas Gerais – Copasa MG | | | 251,000 | | | | 5,397,776 | |
| SUEZ Environnement | | | 260,660 | | | | 3,142,972 | |
| | | | | | | | |
| | | | | | $ | 19,092,231 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $1,160,630,906) | | | | | | $ | 1,206,316,604 | |
| | | | | | | | |
|
| CONVERTIBLE PREFERRED STOCKS – 3.7% | |
| Utilities – Electric Power – 3.7% | | | | | |
| NextEra Energy, Inc., 8.375% | | | 181,450 | | | $ | 9,083,387 | |
| NextEra Energy, Inc., 7% | | | 234,402 | | | | 12,423,306 | |
| PPL Corp., 9.5% | | | 259,773 | | | | 13,588,726 | |
| PPL Corp., 8.75% | | | 259,139 | | | | 13,923,538 | |
| | | | | | | | |
Total Convertible Preferred Stocks
(Identified Cost, $49,363,423) | | | | | | $ | 49,018,957 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – 1.2% | | | | | |
| Asset-Backed & Securitized – 0.0% | | | | | |
| Falcon Franchise Loan LLC, FRN, 6.014%, 2023 (i)(z) | | $ | 65,652 | | | $ | 7,386 | |
| | | | | | | | |
| Energy – Independent – 0.6% | | | | | |
| EP Energy LLC, 9.375%, 2020 | | $ | 7,070,000 | | | $ | 7,971,425 | |
| | | | | | | | |
| Utilities – Electric Power – 0.6% | | | | | |
| GenOn Energy, Inc., 9.875%, 2020 | | $ | 4,455,000 | | | $ | 5,145,525 | |
| Viridian Group FundCo II, Ltd., 11.125%, 2017 (z) | | | 2,195,000 | | | | 2,282,800 | |
| | | | | | | | |
| | | | | | $ | 7,428,325 | |
| | | | | | | | |
Total Bonds
(Identified Cost, $13,702,223) | | | | | | $ | 15,407,136 | |
| |
| CONVERTIBLE BONDS – 1.5% | | | | | |
| Cable TV – 0.8% | | | | | |
| Virgin Media, Inc., 6.5%, 2016 | | $ | 4,796,559 | | | $ | 9,871,918 | |
| | | | | | | | |
| Telecommunications – Wireless – 0.7% | | | | | |
| SBA Communications Corp., 4%, 2014 | | $ | 4,174,807 | | | $ | 9,870,809 | |
| | | | | | | | |
| Total Convertible Bonds (Identified Cost, $10,609,651) | | | | | | $ | 19,742,727 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 2.0% | | | | | |
| MFS Institutional Money Market Portfolio, 0.16%, at Cost and Net Asset Value (v) | | | 26,523,815 | | | $ | 26,523,815 | |
| | | | | | | | |
|
| COLLATERAL FOR SECURITIES LOANED – 0.6% | |
| Navigator Securities Lending Prime Portfolio, 0.28%, at Cost and Net Asset Value (j) | | | 7,326,970 | | | $ | 7,326,970 | |
| | | | | | | | |
Total Investments
(Identified Cost, $1,268,156,988) | | | | | | $ | 1,324,336,209 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.8)% | | | | (10,455,438 | ) |
| | | | | | | | |
| Net Assets – 100.0% | | | | | | $ | 1,313,880,771 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (i) | | Interest only security for which the fund receives interest on notional principal (Par amount). Par amount shown is the notional principal and does not reflect the cost of the security. |
| (j) | | The rate quoted is the annualized seven-day yield of the fund at period end. |
| (l) | | A portion of this security is on loan. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
8
MFS Utilities Series
Portfolio of Investments – continued
| (z) | | Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The fund holds the following restricted securities: |
| | | | | | | | | | |
| Restricted Securities | | Acquisition
Date | | Cost | | | Value | |
| Falcon Franchise Loan LLC, FRN, 6.014%, 2023 | | 1/18/02 | | | $2,858 | | | | $7,386 | |
| Viridian Group FundCo II, Ltd., 11.125%, 2017 | | 3/01/12 | | | 2,132,122 | | | | 2,282,800 | |
| Total Restricted Securities | | | | | | | | | $2,290,186 | |
| % of Net assets | | | | | | | | | 0.2% | |
The following abbreviations are used in this report and are defined:
| ADR | | American Depositary Receipt |
| FRN | | Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end. |
| IEU | | International Equity Unit |
| IPS | | International Preference Stock |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
Abbreviations indicate amounts shown in currencies other than the U.S. dollar. All amounts are stated in U.S. dollars unless otherwise indicated. A list of abbreviations is shown below:
Derivative Contracts at 12/31/12
Forward Foreign Currency Exchange Contracts at 12/31/12
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Type | | Currency | | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | | Contracts
at Value | | | Net Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives | | | | | | | | | | | | | | | | |
| | BUY | | | EUR | | | Credit Suisse Group | | 3,775,445 | | 1/11/13 | | $ | 4,909,890 | | | $ | 4,983,741 | | | $ | 73,851 | |
| | BUY | | | EUR | | | Deutsche Bank AG | | 3,128,103 | | 1/11/13 | | | 4,082,324 | | | | 4,129,224 | | | | 46,900 | |
| | BUY | | | EUR | | | JPMorgan Chase Bank N.A | | 869,959 | | 1/11/13 | | | 1,114,771 | | | | 1,148,381 | | | | 33,610 | |
| | BUY | | | EUR | | | Merrill Lynch International Bank | | 852,187 | | 1/11/13 | | | 1,107,929 | | | | 1,124,922 | | | | 16,993 | |
| | BUY | | | EUR | | | UBS AG | | 5,508,968 | | 1/11/13 | | | 7,154,202 | | | | 7,272,063 | | | | 117,861 | |
| | SELL | | | EUR | | | Credit Suisse Group | | 791,641 | | 1/11/13 | | | 1,047,610 | | | | 1,044,998 | | | | 2,612 | |
| | SELL | | | EUR | | | Deutsche Bank AG | | 187,873 | | 1/11/13 | | | 248,813 | | | | 248,001 | | | | 812 | |
| | SELL | | | EUR | | | JPMorgan Chase Bank N.A | | 37,464 | | 1/11/13 | | | 49,456 | | | | 49,455 | | | | 1 | |
| | SELL | | | EUR | | | UBS AG | | 186,110 | | 1/11/13 | | | 246,271 | | | | 245,673 | | | | 598 | |
| | BUY | | | GBP | | | Barclays Bank PLC | | 1,822,606 | | 1/11/13 | | | 2,929,700 | | | | 2,960,668 | | | | 30,968 | |
| | BUY | | | GBP | | | Credit Suisse Group | | 2,127,762 | | 1/11/13 | | | 3,393,205 | | | | 3,456,368 | | | | 63,163 | |
| | BUY | | | GBP | | | Deutsche Bank AG | | 1,996,958 | | 1/11/13 | | | 3,200,889 | | | | 3,243,888 | | | | 42,999 | |
| | BUY | | | GBP | | | Goldman Sachs International | | 446,437 | | 1/11/13 | | | 720,031 | | | | 725,198 | | | | 5,167 | |
| | BUY | | | GBP | | | JPMorgan Chase Bank N.A | | 505,298 | | 1/11/13 | | | 813,283 | | | | 820,814 | | | | 7,531 | |
| | BUY | | | GBP | | | UBS AG | | 317,859 | | 1/11/13 | | | 512,318 | | | | 516,335 | | | | 4,017 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | $ | 447,083 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Derivatives | | | | | | | | | | | | | | | | |
| | BUY | | | EUR | | | UBS AG | | 2,550,735 | | 1/11/13 | | $ | 3,377,222 | | | $ | 3,367,075 | | | $ | (10,147 | ) |
| | SELL | | | EUR | | | Credit Suisse Group | | 847,997 | | 1/11/13 | | | 1,101,202 | | | | 1,119,391 | | | | (18,189 | ) |
| | SELL | | | EUR | | | Deutsche Bank AG | | 3,877,397 | | 1/11/13 | | | 4,999,961 | | | | 5,118,322 | | | | (118,361 | ) |
| | SELL | | | EUR | | | JPMorgan Chase Bank N.A | | 3,737,239 | | 1/11/13 | | | 4,816,240 | | | | 4,933,308 | | | | (117,068 | ) |
| | SELL | | | EUR | | | Merrill Lynch International Bank | | 109,502 | | 1/11/13 | | | 141,741 | | | | 144,547 | | | | (2,806 | ) |
| | SELL | | | EUR | | | UBS AG | | 84,827,178 | | 1/11/13-3/18/13 | | | 111,000,963 | | | | 112,040,599 | | | | (1,039,636 | ) |
| | BUY | | | GBP | | | UBS AG | | 507,125 | | 1/11/13 | | | 824,853 | | | | 823,782 | | | | (1,071 | ) |
| | SELL | | | GBP | | | Barclays Bank PLC | | 20,548,583 | | 1/11/13 | | | 32,854,650 | | | | 33,379,425 | | | | (524,775 | ) |
| | SELL | | | GBP | | | Credit Suisse Group | | 512,140 | | 1/11/13 | | | 814,472 | | | | 831,929 | | | | (17,457 | ) |
| | SELL | | | GBP | | | Deutsche Bank AG | | 20,018,177 | | 1/11/13 | | | 31,997,254 | | | | 32,517,825 | | | | (520,571 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | $ | (2,370,081 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2012, the fund had cash collateral of $500,000 to cover any commitments for certain derivative contracts.
See Notes to Financial Statements
9
MFS Utilities Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | | | | |
At 12/31/12 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $1,241,633,173) | | | $1,297,812,394 | | | | | |
Underlying affiliated funds, at cost and value | | | 26,523,815 | | | | | |
Total investments, at value, including $7,091,654 of securities on loan (identified cost, $1,268,156,988) | | | $1,324,336,209 | | | | | |
Restricted cash | | | 500,000 | | | | | |
Receivables for | | | | | | | | |
Forward foreign currency exchange contracts | | | 447,083 | | | | | |
Investments sold | | | 5,105,170 | | | | | |
Fund shares sold | | | 348,505 | | | | | |
Interest and dividends | | | 5,098,273 | | | | | |
Other assets | | | 8,917 | | | | | |
Total assets | | | | | | | $1,335,844,157 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Forward foreign currency exchange contracts | | | $2,370,081 | | | | | |
Investments purchased | | | 8,395,554 | | | | | |
Fund shares reacquired | | | 2,565,111 | | | | | |
Collateral for securities loaned, at value | | | 7,326,970 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 107,472 | | | | | |
Shareholder servicing costs | | | 1,349 | | | | | |
Distribution and/or service fees | | | 22,772 | | | | | |
Payable for independent Trustees’ compensation | | | 902 | | | | | |
Accrued expenses and other liabilities | | | 1,173,175 | | | | | |
Total liabilities | | | | | | | $21,963,386 | |
Net assets | | | | | | | $1,313,880,771 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $1,204,340,635 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies (net of $402,502 deferred country tax) | | | 53,865,286 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | 20,899,438 | | | | | |
Undistributed net investment income | | | 34,775,412 | | | | | |
Net assets | | | | | | | $1,313,880,771 | |
Shares of beneficial interest outstanding | | | | | | | 47,963,322 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $476,684,876 | | | | 17,263,647 | | | | $27.61 | |
Service Class | | | 837,195,895 | | | | 30,699,675 | | | | 27.27 | |
See Notes to Financial Statements
10
MFS Utilities Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | | | | | | |
Year ended 12/31/12 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $54,125,952 | | | | | |
Interest | | | 1,983,434 | | | | | |
Dividends from underlying affiliated funds | | | 50,961 | | | | | |
Foreign taxes withheld | | | (3,196,315 | ) | | | | |
Total investment income | | | | | | | $52,964,032 | |
Expenses | | | | | | | | |
Management fee | | | $10,258,334 | | | | | |
Distribution and/or service fees | | | 2,252,074 | | | | | |
Shareholder servicing costs | | | 130,932 | | | | | |
Administrative services fee | | | 210,630 | | | | | |
Independent Trustees’ compensation | | | 39,046 | | | | | |
Custodian fee | | | 394,906 | | | | | |
Shareholder communications | | | 188,396 | | | | | |
Audit and tax fees | | | 55,527 | | | | | |
Legal fees | | | 15,493 | | | | | |
Miscellaneous | | | 96,832 | | | | | |
Total expenses | | | | | | | $13,642,170 | |
Fees paid indirectly | | | (535 | ) | | | | |
Reduction of expenses by investment adviser | | | (5,231 | ) | | | | |
Net expenses | | | | | | | $13,636,404 | |
Net investment income | | | | | | | $39,327,628 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments (net of $551,035 country tax) | | | $142,864,136 | | | | | |
Foreign currency | | | 1,471,239 | | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $144,335,375 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments (net of $402,502 increase in deferred country tax) | | | $16,689,864 | | | | | |
Translation of assets and liabilities in foreign currencies | | | (8,831,692 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $7,858,172 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $152,193,547 | |
Change in net assets from operations | | | | | | | $191,521,175 | |
See Notes to Financial Statements
11
MFS Utilities Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | | | |
For years ended 12/31 | | | 2012 | | | | 2011 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $39,327,628 | | | | $68,837,745 | |
Net realized gain (loss) on investments and foreign currency | | | 144,335,375 | | | | 131,137,099 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 7,858,172 | | | | (78,973,517 | ) |
Change in net assets from operations | | | $191,521,175 | | | | $121,001,327 | |
| Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(83,800,084 | ) | | | $(60,160,403 | ) |
Change in net assets from fund share transactions | | | $(784,544,229 | ) | | | $52,904,945 | |
Total change in net assets | | | $(676,823,138 | ) | | | $113,745,869 | |
| Net assets | | | | | | | | |
At beginning of period | | | 1,990,703,909 | | | | 1,876,958,040 | |
At end of period (including undistributed net investment income of $34,775,412 and
$77,201,799, respectively) | | | $1,313,880,771 | | | | $1,990,703,909 | |
See Notes to Financial Statements
12
MFS Utilities Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $26.08 | | | | $25.27 | | | | $22.92 | | | | $18.21 | | | | $34.48 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.84 | | | | $0.97 | | | | $0.79 | | | | $0.80 | | | | $0.73 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 2.57 | | | | 0.70 | | | | 2.29 | | | | 4.90 | | | | (11.97 | ) |
Total from investment operations | | | $3.41 | | | | $1.67 | | | | $3.08 | | | | $5.70 | | | | $(11.24 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(1.88 | ) | | | $(0.86 | ) | | | $(0.73 | ) | | | $(0.99 | ) | | | $(0.44 | ) |
From net realized gain on investments | | | — | | | | — | | | | — | | | | — | | | | (4.59 | ) |
Total distributions declared to shareholders | | | $(1.88 | ) | | | $(0.86 | ) | | | $(0.73 | ) | | | $(0.99 | ) | | | $(5.03 | ) |
Net asset value, end of period (x) | | | $27.61 | | | | $26.08 | | | | $25.27 | | | | $22.92 | | | | $18.21 | |
Total return (%) (k)(r)(s)(x) | | | 13.40 | | | | 6.78 | | | | 13.81 | | | | 33.44 | | | | (37.77 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.82 | | | | 0.80 | | | | 0.81 | | | | 0.83 | | | | 0.84 | |
Expenses after expense reductions (f) | | | 0.82 | | | | 0.80 | | | | 0.81 | | | | 0.83 | | | | 0.81 | |
Net investment income | | | 3.11 | | | | 3.71 | | | | 3.47 | | | | 4.11 | | | | 2.76 | |
Portfolio turnover | | | 51 | | | | 53 | | | | 56 | | | | 70 | | | | 68 | |
Net assets at end of period (000 omitted) | | | $476,685 | | | | $532,447 | | | | $541,653 | | | | $564,822 | | | | $495,297 | |
See Notes to Financial Statements
13
MFS Utilities Series
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $25.73 | | | | $24.95 | | | | $22.65 | | | | $17.98 | | | | $34.11 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.71 | | | | $0.89 | | | | $0.73 | | | | $0.73 | | | | $0.66 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 2.59 | | | | 0.70 | | | | 2.25 | | | | 4.86 | | | | (11.82 | ) |
Total from investment operations | | | $3.30 | | | | $1.59 | | | | $2.98 | | | | $5.59 | | | | $(11.16 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(1.76 | ) | | | $(0.81 | ) | | | $(0.68 | ) | | | $(0.92 | ) | | | $(0.38 | ) |
From net realized gain on investments | | | — | | | | — | | | | — | | | | — | | | | (4.59 | ) |
Total distributions declared to shareholders | | | $(1.76 | ) | | | $(0.81 | ) | | | $(0.68 | ) | | | $(0.92 | ) | | | $(4.97 | ) |
Net asset value, end of period (x) | | | $27.27 | | | | $25.73 | | | | $24.95 | | | | $22.65 | | | | $17.98 | |
Total return (%) (k)(r)(s)(x) | | | 13.13 | | | | 6.51 | | | | 13.51 | | | | 33.09 | | | | (37.91 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.07 | | | | 1.05 | | | | 1.06 | | | | 1.08 | | | | 1.09 | |
Expenses after expense reductions (f) | | | 1.07 | | | | 1.05 | | | | 1.06 | | | | 1.07 | | | | 1.06 | |
Net investment income | | | 2.66 | | | | 3.45 | | | | 3.23 | | | | 3.83 | | | | 2.54 | |
Portfolio turnover | | | 51 | | | | 53 | | | | 56 | | | | 70 | | | | 68 | |
Net assets at end of period (000 omitted) | | | $837,196 | | | | $1,458,257 | | | | $1,335,305 | | | | $1,209,765 | | | | $992,502 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (r) | Certain expenses have been reduced without which performance would have been lower. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (x) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
14
MFS Utilities Series
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Utilities Series (the fund) is a series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests primarily in securities of issuers in the utility industry. Issuers in a single industry can react similarly to market, economic, political and regulatory conditions and developments. The fund invests in foreign securities, including securities of emerging market issuers. Investments in foreign securities are vulnerable to the effects of changes in the relative values of the local currency and the U.S. dollar and to the effects of changes in each country’s legal, political, and economic environment. The markets of emerging markets countries are generally more volatile than the markets of developed countries with more mature economies. All of the risks of investing in foreign securities previously described are heightened when investing in emerging markets countries.
In this reporting period the fund adopted Financial Accounting Standards Board (FASB) Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 seeks to improve the comparability of fair value measurements as presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) by providing common requirements for fair value measurement and disclosure.
In December 2011, the FASB issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods, ASU 2011-11 is intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. Although still evaluating the potential impacts of ASU 2011-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Debt instruments and floating rate loans (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as provided by a third-party pricing service. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Forward foreign currency exchange contracts are generally valued at the mean of bid and asked prices for the time period interpolated from rates provided by a third-party pricing service for proximate time periods. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a
15
MFS Utilities Series
Notes to Financial Statements – continued
material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. Other financial instruments are derivative instruments not reflected in total investments, such as forward foreign currency exchange contracts. The following is a summary of the levels used as of December 31, 2012 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $854,814,882 | | | | $— | | | | $— | | | | $854,814,882 | |
Brazil | | | 35,194,059 | | | | 46,960,114 | | | | — | | | | 82,154,173 | |
Portugal | | | — | | | | 60,402,964 | | | | — | | | | 60,402,964 | |
Spain | | | — | | | | 44,901,994 | | | | — | | | | 44,901,994 | |
United Kingdom | | | — | | | | 33,298,543 | | | | — | | | | 33,298,543 | |
Germany | | | 3,334,284 | | | | 15,354,422 | | | | — | | | | 18,688,706 | |
France | | | 14,560,616 | | | | 3,142,972 | | | | — | | | | 17,703,588 | |
Netherlands | | | — | | | | 16,388,164 | | | | — | | | | 16,388,164 | |
Italy | | | — | | | | 16,381,486 | | | | — | | | | 16,381,486 | |
Other Countries | | | 69,626,462 | | | | 40,974,599 | | | | — | | | | 110,601,061 | |
| U.S. Corporate Bonds | | | — | | | | 32,859,677 | | | | — | | | | 32,859,677 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 7,386 | | | | — | | | | 7,386 | |
| Foreign Bonds | | | — | | | | 2,282,800 | | | | — | | | | 2,282,800 | |
| Mutual Funds | | | 33,850,785 | | | | — | | | | — | | | | 33,850,785 | |
| Total Investments | | | $1,011,381,088 | | | | $312,955,121 | | | | $— | | | | $1,324,336,209 | |
| | | | |
| Other Financial Instruments | | | | | | | | | | | | |
| Forward Foreign Currency Exchange Contracts | | | $— | | | | $(1,922,998 | ) | | | $— | | | | $(1,922,998 | ) |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $138,123,970 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $14,560,616 would have been considered level 2 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
16
MFS Utilities Series
Notes to Financial Statements – continued
Derivatives – The fund uses derivatives for different purposes, primarily to increase or decrease exposure to a particular market or segment of the market, or security, to increase or decrease interest rate or currency exposure, or as alternatives to direct investments. Derivatives are used for hedging or non-hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. When the fund uses derivatives as an investment to increase market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative’s original cost.
The derivative instruments used by the fund were forward foreign currency exchange contracts. The fund’s period end derivatives, as presented in the Portfolio of Investments and the associated Derivative Contract tables, generally are indicative of the volume of its derivative activity during the period.
The following table presents, by major type of derivative contract, the fair value, on a gross basis, of the asset and liability components of derivatives held by the fund at December 31, 2012 as reported in the Statement of Assets and Liabilities:
| | | | | | | | | | |
| | | | | Fair Value | |
| Risk | | Derivative Contracts | | Asset Derivatives | | | Liability Derivatives | |
| Foreign Exchange | | Forward Foreign Currency Exchange | | | $447,083 | | | | $(2,370,081 | ) |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2012 as reported in the Statement of Operations:
| | | | |
| Risk | | Foreign Currency | |
| Foreign Exchange | | | $1,737,417 | |
The following table presents, by major type of derivative contract, the change in unrealized appreciation (depreciation) on derivatives held by the fund for the year ended December 31, 2012 as reported in the Statement of Operations:
| | | | |
| Risk | | Translation of
Assets and
Liabilities in
Foreign Currencies | |
| Foreign Exchange | | | $(8,899,778 | ) |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an International Swaps and Derivatives Association (ISDA) Master Agreement on a bilateral basis with each of the counterparties with whom it undertakes a significant volume of transactions. The ISDA Master Agreement gives each party to the agreement the right to terminate all transactions traded under such agreement if there is a certain deterioration in the credit quality of the other party. The ISDA Master Agreement gives the fund the right, upon an event of default by the applicable counterparty or a termination of the agreement, to close out all transactions traded under such agreement and to net amounts owed under each transaction to one net amount payable by one party to the other. This right to close out and net payments across all transactions traded under the ISDA Master Agreement could result in a reduction of the fund’s credit risk to such counterparty equal to any amounts payable by the fund under the applicable transactions, if any. However, absent an event of default by the counterparty or a termination of the agreement, the ISDA Master Agreement does not result in an offset of reported amounts of assets and liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearing house for exchange traded derivatives (i.e., futures contracts and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forward foreign currency exchange contracts, swap agreements and over-the-counter options). For derivatives traded under an ISDA Master Agreement, the collateral requirements are netted across all transactions traded under such agreement and one amount is posted from one party to the other to collateralize such obligations. Cash collateral that has been pledged to cover obligations of the fund under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as “Restricted cash”. Securities collateral pledged for the same purpose, if any, is noted in the Portfolio of Investments.
Forward Foreign Currency Exchange Contracts – The fund entered into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. These contracts may be used to hedge the fund’s currency risk or for non-hedging purposes. For hedging purposes, the fund may enter into contracts to deliver or receive foreign currency that the fund will receive from or use in its normal investment activities. The fund may also use contracts to hedge against declines in the value of foreign currency denominated securities due to unfavorable exchange rate movements. For non-hedging purposes, the fund may enter into contracts with the intent of changing the relative exposure of the fund’s portfolio of securities to different currencies to take advantage of anticipated exchange rate changes.
17
MFS Utilities Series
Notes to Financial Statements – continued
Forward foreign currency exchange contracts are adjusted by the daily exchange rate of the underlying currency and any unrealized gains or losses are recorded as a receivable or payable for forward foreign currency exchange contracts until the contract settlement date. On contract settlement date, any gain or loss on the contract is recorded as realized gains or losses on foreign currency.
Risks may arise upon entering into these contracts from unanticipated movements in the value of the contract and from the potential inability of counterparties to meet the terms of their contracts. Generally, the fund’s maximum risk due to counterparty credit risk is the unrealized gain on the contract due to the use of Continuous Linked Settlement, an industry accepted settlement system. This risk is mitigated in cases where there is an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and for posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. Collateral for securities loaned is held at carrying value, which approximates fair value. If the collateral for securities loaned was carried at fair value, its fair value would be considered level 2 under the fair value hierarchy. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount, for the year ended December 31, 2012, is shown as a reduction of total expenses in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Foreign taxes have been accrued by the fund in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to amortization and accretion of debt securities, wash sale loss deferrals, derivative transactions, and partnership adjustments.
18
MFS Utilities Series
Notes to Financial Statements – continued
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/12 | | | 12/31/11 | |
| Ordinary income (including any short-term capital gains) | | | $83,800,084 | | | | $60,160,403 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/12 | | | | |
| Cost of investments | | | $1,274,330,808 | |
| Gross appreciation | | | 152,109,293 | |
| Gross depreciation | | | (102,103,892 | ) |
| Net unrealized appreciation (depreciation) | | | $ 50,005,401 | |
| Undistributed ordinary income | | | 32,856,673 | |
| Undistributed long-term capital gain | | | 27,624,293 | |
| Other temporary differences | | | (946,231 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/12 | | | Year ended
12/31/11 | |
| Initial Class | | | $32,043,181 | | | | $17,376,268 | |
| Service Class | | | 51,756,903 | | | | 42,784,135 | |
| Total | | | $83,800,084 | | | | $60,160,403 | |
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
| | | | |
| First $1 billion of average daily net assets | | | 0.75% | |
| Average daily net assets in excess of $1 billion | | | 0.70% | |
The management fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.74% of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2012, the fee was $128,612, which equated to 0.0092% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2012, these costs amounted to $2,320.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.0151% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly
19
MFS Utilities Series
Notes to Financial Statements – continued
to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended December 31, 2012, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $13,026 and are included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $5,231, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
Purchases and sales of investments, other than in-kind transactions and short-term obligations aggregated $701,338,598 and $757,317,800, respectively.
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 1,205,463 | | | | $32,393,893 | | | | 1,930,246 | | | | $51,018,561 | |
Service Class | | | 5,668,595 | | | | 150,451,311 | | | | 7,808,390 | | | | 201,808,348 | |
| | | 6,874,058 | | | | $182,845,204 | | | | 9,738,636 | | | | $252,826,909 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 1,213,297 | | | | $32,043,181 | | | | 697,562 | | | | $17,376,268 | |
Service Class | | | 1,982,264 | | | | 51,756,903 | | | | 1,739,192 | | | | 42,784,135 | |
| | | 3,195,561 | | | | $83,800,084 | | | | 2,436,754 | | | | $60,160,403 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (5,573,608 | ) | | | $(151,398,917 | ) | | | (3,642,984 | ) | | | $(95,642,985 | ) |
Service Class | | | (33,627,625 | ) | | | (899,790,600 | ) | | | (6,387,884 | ) | | | (164,439,382 | ) |
| | | (39,201,233 | ) | | | $(1,051,189,517 | ) | | | (10,030,868 | ) | | | $(260,082,367 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (3,154,848 | ) | | | $(86,961,843 | ) | | | (1,015,176 | ) | | | $(27,248,156 | ) |
Service Class | | | (25,976,766 | ) | | | (697,582,386 | ) | | | 3,159,698 | | | | 80,153,101 | |
| | | (29,131,614 | ) | | | $(784,544,229 | ) | | | 2,144,522 | | | | $52,904,945 | |
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2012, the fund’s commitment fee and interest expense were $8,981 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
20
MFS Utilities Series
Notes to Financial Statements – continued
| (7) | | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 60,086,370 | | | | 340,549,389 | | | | (374,111,944 | ) | | | 26,523,815 | |
| | | | |
| Underlying Affiliated Fund | | Realized Gain (Loss) | | | Capital Gain Distributions | | | Dividend Income | | | Ending Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $50,961 | | | | $26,523,815 | |
On February 17, 2012 and May 1, 2012, the fund recorded redemption proceeds for a distribution in-kind of portfolio securities that were valued at $759,585,448 and $34,871,450 respectively. The redeeming shareholder generally receives a pro rata share of the securities held by the fund. The distribution of such securities generated a realized gain of $115,210,080 and $4,716,697, respectively, for the fund on those dates.
21
MFS Utilities Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of
MFS Utilities Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Utilities Series (the “Fund”) (one of the series comprising MFS Variable Insurance Trust) as of December 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Utilities Series as of December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2013
22
MFS Utilities Series
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 1, 2013, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES | | | | | | | | |
Robert J. Manning (k) (age 49) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Chief Executive Officer and Director; President (until December 2009); Chief Investment Officer (until July 2010) | | N/A |
| | | | |
| INDEPENDENT TRUSTEES | | | | | | | | |
David H. Gunning (age 70) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman; Portman Limited (mining), Director (until 2008) |
| | | | |
Robert E. Butler (age 71) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 57) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 71) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 68) | | Trustee | | December 2004 | | Private investor; Rouse Properties Inc. (real estate), Director | | N/A |
| | | | |
John P. Kavanaugh (age 58) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
J. Dale Sherratt (age 74) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner | | N/A |
| | | | |
Laurie J. Thomsen
(age 55) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 71) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
John M. Corcoran (k) (age 47) | | President | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) | | N/A |
| | | | |
| Christopher R. Bohane (k) (age 39) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kino Clark (k) (age 44) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 53) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
| | | | |
Ethan D. Corey (k) (age 49) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
23
MFS Utilities Series
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
David L. DiLorenzo (k) (age 44) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Robyn L. Griffin (age 37) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 39) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 62) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 42) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 42) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 60) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Frank L. Tarantino (age 68) | | Independent
Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 52) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. For the period October 2008, until January 2012, Mr. Corcoran served as Treasurer of the Funds. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2013, the Trustees served as board members of 143 funds within the MFS Family of Funds.
24
MFS Utilities Series
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers Robert Persons Maura Shaughnessy | | |
25
MFS Utilities Series
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2012 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2011 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2011, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 3rd quintile for the one-year period and the 1st quintile for the five-year period ended December 31, 2011 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
26
MFS Utilities Series
Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to institutional accounts, if any. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund is likely to benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2012.
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of the MFS Web site (mfs.com).
27
MFS Utilities Series
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling
1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 40.22% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
28
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
29
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
30
ANNUAL REPORT
December 31, 2012
MFS® INVESTORS GROWTH STOCK SERIES
MFS® Variable Insurance Trust
VGS-ANN
MFS® INVESTORS GROWTH STOCK SERIES
CONTENTS
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ NO BANK OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Investors Growth Stock Series
LETTER FROM THE CHAIRMAN AND CEO
Dear Contract Owners:
The global market outlook for 2013 is one of cautious optimism. While we are seeing some positive economic trends in the United States, Europe and China, the overall environment remains challenging. In the United States, the recent fiscal cliff agreement was received positively by investors, even though it mostly addressed pressing taxation issues and did not resolve additional concerns, including the need for spending cuts and a large-scale reduction of the federal debt. These issues will be front and center again in the spring. Despite the ongoing uncertainty, economic tailwinds are gathering strength as the U.S. housing and job markets are improving and consumer confidence is rising.
Overseas, the debt crisis continues to weigh heavily on eurozone markets, with even Germany — long an economic stalwart — experiencing some contraction. These ongoing challenges could be a drag on global market performance this year. In Asia, manufacturing activity has accelerated in emerging markets such as China and India, and we are seeing signs of stabilized loan growth in China, a leading indicator of that country’s economic health. In contrast, Japan’s economy is contracting sharply under deflationary pressures. Nevertheless, Japanese markets have responded favorably to early actions by the new government, which appears determined to act aggressively, along with the Bank of Japan, to stimulate growth.
As always, managing risk in the face of uncertainty remains a top priority for investors. At MFS®, our uniquely collaborative investment process revolves around global research and our disciplined risk management approach. Our global team of investment professionals shares ideas and evaluates opportunities across continents, investment disciplines and asset classes — all with a goal of building better insights, and ultimately better results, for our clients.
We remain mindful of the many economic challenges investors face today, and believe it is more important than ever to maintain a long-term view, employ time-tested principles, such as asset allocation and diversification, and work closely with investment advisors to identify and pursue the most suitable opportunities.
Respectfully,
Robert J. Manning
Chairman and Chief Executive Officer
MFS Investment Management®
February 15, 2013
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
MFS Investors Growth Stock Series
PORTFOLIO COMPOSITION
Portfolio structure
| | | | |
| Top ten holdings | | | | |
| Google, Inc., “A” | | | 4.3% | |
| Danaher Corp. | | | 4.0% | |
| Apple, Inc. | | | 3.6% | |
| United Technologies Corp. | | | 3.6% | |
| Oracle Corp. | | | 3.6% | |
| Colgate-Palmolive Co. | | | 3.3% | |
| Accenture PLC, “A” | | | 3.3% | |
| Visa, Inc., “A” | | | 3.1% | |
| Procter & Gamble Co. | | | 2.7% | |
| Franklin Resources, Inc. | | | 2.6% | |
| | | | |
| Equity sectors | | | | |
| Technology | | | 21.7% | |
| Industrial Goods & Services | | | 15.4% | |
| Consumer Staples | | | 12.8% | |
| Health Care | | | 11.4% | |
| Financial Services | | | 8.3% | |
| Leisure | | | 6.2% | |
| Retailing | | | 5.9% | |
| Special Products & Services | | | 5.1% | |
| Energy | | | 3.9% | |
| Transportation | | | 3.1% | |
| Basic Materials | | | 2.7% | |
| Autos & Housing | | | 2.2% | |
Percentages are based on net assets as of 12/31/12.
The portfolio is actively managed and current holdings may be different.
2
MFS Investors Growth Stock Series
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2012, Initial Class shares of the MFS Investors Growth Stock Series (“fund”) provided a total return of 16.97%, while Service Class shares of the fund provided a total return of 16.68%. These compare with a return of 15.26% over the same period for the fund’s benchmark, the Russell 1000 Growth Index.
Market Environment
The beginning of the period was characterized by a risk-on sentiment as a result of additional liquidity measures by the Federal Reserve Bank (“Fed”) and the European Central Bank (“ECB”) as well as a commensurate improvement in macroeconomic conditions. During this time, global equity valuations rose, credit spreads contracted, and high-quality sovereign yields increased modestly.
During the middle of the period, however, conditions worsened, driven by broadly weaker global macroeconomic indicators, as well as renewed concerns over the eurozone’s capacity and determination to address its ongoing crisis. Despite this deterioration, broad market sentiment remained relatively resilient as equity markets generally maintained gains and credit spreads did not indicate deterioration.
However, this renewed weakness in the fundamentals precipitated a further round of monetary easing by both the Fed (through a third round of quantitative easing) and the ECB (through a new bond purchase facility) in the second half of the period, which soon instilled additional confidence in risk markets. Nonetheless, towards the end of the period, weaker equity earnings reports and declining forward guidance caused market sentiment to soften. In addition, as we moved toward year end, the fiscal cliff negotiations between the Republicans in the U.S. Congress and President Obama were a particular source of market attention, where uncertainty surrounding the fiscal negotiations continued right up to the end-of-year deadline.
Contributors to Performance
The combination of stock selection and an overweight position in the financial services sector contributed to the fund’s performance relative to the Russell 1000 Growth Index. The fund’s overweight positions in shares of global payments technology company Visa and investment management firm Franklin Resources bolstered relative performance. Shares of Visa appreciated throughout the reporting period primarily due to increased dividends, a new share buyback program, and management’s increased earnings guidance.
Security selection and underweight position in the technology sector also benefited relative results. The fund’s avoidance of poor-performing semiconductor company Intel helped results as the stock underperformed the benchmark during the reporting period. Shares of Intel depreciated as the company reported weak revenue due to competing iPads, soft demand for personal computers, and concerns over the macroeconomic environment. A significant reduction in its gross margin guidance late in the period, as a result of too much inventory and under-utilization charges, pressured earnings estimates and weighed on its share price. The fund’s overweight position in shares of strong-performing enterprise software products maker Oracle also supported positive performance.
Stock selection, and to a lesser extent, an overweight position in the industrial goods & services sector also strengthened relative returns. The fund’s holdings of electronics component manufacturer Amphenol contributed to relative performance. The stock appreciated due to increased demand, particularly in the automotive, industrial, commercial aerospace, and telecommunications markets. Increased inventories and the successful completion of the company’s acquisition of Holland Electronic further supported the stock.
Elsewhere, the fund’s position in shares of life science supply company Thermo Fisher Scientific (b) aided relative results. The timing of the fund’s ownership in shares of integrated oil and gas company Exxon Mobil (h) and fast-food company giant McDonald’s also supported relative performance. Additionally, holdings of stand-out performing Spanish fashion distributor Industria de Diseno Textil S.A. (b) and French luxury goods company LVMH Moët Hennessy Louis Vuitton (b) contributed to relative performance.
Detractors from Performance
Security selection in the health care sector detracted from relative returns during the reporting period. Not holding shares of strong-performing biotech firm Gilead Sciences held back relative performance. The stock spiked late in the reporting period as the firm announced the phase III testing of its GS-7977 drug which was created to cure the hepatitis C virus. The test, which involved 25 patients, showed a 100% cure rate after four weeks of administering the drug to patients.
Stock in other sectors that held back relative performance included the fund’s holdings of semiconductor company Microchip Technology, index data provider MSCI, oil and gas exploration and production company Occidental Petroleum, security software provider Check Point Software Technologies (b), discount department store Kohl’s, and household products maker Procter & Gamble. Shares of Kohl’s declined as sales suffered late in the reporting period as a result of superstorm Sandy which negatively affected the company’s stores located in the Northeast. In addition, sales were also negatively impacted by Black Friday weakness caused by the
3
MFS Investors Growth Stock Series
Management Review – continued
fact that Kohl’s did not open on Thanksgiving while several other retailers did. Not holding shares of strong-performing internet retailer Amazon.com and home improvement retailer Home Depot also held back relative performance. The fund’s underweight position in computer and personal electronics maker Apple was another top relative detractor as the stock outperformed the benchmark during the reporting period.
Respectfully,
Jeffrey Constantino
Portfolio Manager
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio manager only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
4
MFS Investors Growth Stock Series
PERFORMANCE SUMMARY THROUGH 12/31/12
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/12
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 5/03/99 | | 16.97% | | 3.11% | | 6.96% | | |
| | | Service Class | | 5/01/00 | | 16.68% | | 2.86% | | 6.69% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Russell 1000 Growth Index (f) | | 15.26% | | 3.12% | | 7.52% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Russell 1000 Growth Index – constructed to provide a comprehensive barometer for growth securities in the large-cap segment of the U.S. equity universe. Companies in this index generally have higher price-to-book ratios and higher forecasted growth values.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Investors Growth Stock Series
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2012 through December 31, 2012
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2012 through December 31, 2012.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | | Beginning
Account Value
7/01/12 | | | Ending Account Value
12/31/12 | | | Expenses Paid
During Period (p)
7/01/12-12/31/12 | |
| Initial Class | | Actual | | | 0.83% | | | | $1,000.00 | | | | $1,082.24 | | | | $4.34 | |
| | Hypothetical (h) | | | 0.83% | | | | $1,000.00 | | | | $1,020.96 | | | | $4.22 | |
| Service Class | | Actual | | | 1.08% | | | | $1,000.00 | | | | $1,081.47 | | | | $5.65 | |
| | Hypothetical (h) | | | 1.08% | | | | $1,000.00 | | | | $1,019.71 | | | | $5.48 | |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS Investors Growth Stock Series
PORTFOLIO OF INVESTMENTS – 12/31/12
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 98.7% | | | | | |
| Aerospace – 5.1% | | | | | | | | |
| Precision Castparts Corp. | | | 27,930 | | | $ | 5,290,502 | |
| United Technologies Corp. | | | 150,150 | | | | 12,313,802 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | $ | 17,604,304 | |
| | | | | | | | |
| Alcoholic Beverages – 0.9% | | | | | | | | |
| Diageo PLC | | | 108,579 | | | $ | 3,161,009 | |
| | | | | | | | |
| Apparel Manufacturers – 3.1% | | | | | | | | |
| LVMH Moet Hennessy Louis Vuitton S.A. | | | 33,452 | | | $ | 6,233,686 | |
| NIKE, Inc., “B” | | | 87,680 | | | | 4,524,288 | |
| | | | | | | | |
| | | | | | $ | 10,757,974 | |
| | | | | | | | |
| Automotive – 2.2% | | | | | | | | |
| Johnson Controls, Inc. | | | 252,580 | | | $ | 7,754,206 | |
| | | | | | | | |
| Broadcasting – 3.7% | | | | | | | | |
| Discovery Communications, Inc., “A” (a) | | | 45,310 | | | $ | 2,876,279 | |
| Omnicom Group, Inc. | | | 37,900 | | | | 1,893,484 | |
| Viacom, Inc., “B” | | | 77,400 | | | | 4,082,076 | |
| Walt Disney Co. | | | 81,660 | | | | 4,065,851 | |
| | | | | | | | |
| | | | | | $ | 12,917,690 | |
| | | | | | | | |
| Brokerage & Asset Managers – 3.9% | | | | | |
| Charles Schwab Corp. | | | 201,670 | | | $ | 2,895,981 | |
| CME Group, Inc. | | | 33,780 | | | | 1,712,984 | |
| Franklin Resources, Inc. | | | 70,270 | | | | 8,832,939 | |
| | | | | | | | |
| | | | | | $ | 13,441,904 | |
| | | | | | | | |
| Business Services – 5.1% | | | | | | | | |
| Accenture PLC, “A” | | | 169,740 | | | $ | 11,287,710 | |
| MSCI, Inc., “A” (a) | | | 99,440 | | | | 3,081,646 | |
| Verisk Analytics, Inc., “A” (a) | | | 62,290 | | | | 3,176,790 | |
| | | | | | | | |
| | | | | | $ | 17,546,146 | |
| | | | | | | | |
| Cable TV – 0.7% | | | | | | | | |
| DIRECTV, “A” (a) | | | 47,770 | | | $ | 2,396,143 | |
| | | | | | | | |
| Chemicals – 0.6% | | | | | | | | |
| Monsanto Co. | | | 22,210 | | | $ | 2,102,177 | |
| | | | | | | | |
| Computer Software – 5.8% | | | | | | | | |
| Autodesk, Inc. (a) | | | 95,920 | | | $ | 3,390,772 | |
| Check Point Software Technologies Ltd. (a) | | | 92,380 | | | | 4,400,983 | |
| Oracle Corp. | | | 368,600 | | | | 12,281,752 | |
| | | | | | | | |
| | | | | | $ | 20,073,507 | |
| | | | | | | | |
| Computer Software – Systems – 6.4% | |
| Apple, Inc. | | | 23,310 | | | $ | 12,424,929 | |
| EMC Corp. (a) | | | 181,530 | | | | 4,592,709 | |
| International Business Machines Corp. | | | 27,030 | | | | 5,177,597 | |
| | | | | | | | |
| | | | | | $ | 22,195,235 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Consumer Products – 6.7% | | | | | | | | |
| Church & Dwight Co., Inc. | | | 42,800 | | | $ | 2,292,796 | |
| Colgate-Palmolive Co. | | | 109,610 | | | | 11,458,629 | |
| Procter & Gamble Co. | | | 136,803 | | | | 9,287,556 | |
| | | | | | | | |
| | | | | | $ | 23,038,981 | |
| | | | | | | | |
| Electrical Equipment – 10.3% | | | | | | | | |
| Amphenol Corp., “A” | | | 64,360 | | | $ | 4,164,092 | |
| Danaher Corp. | | | 244,360 | | | | 13,659,724 | |
| Mettler-Toledo International, Inc. (a) | | | 27,730 | | | | 5,360,209 | |
| Sensata Technologies Holding B.V. (a) | | | 230,550 | | | | 7,488,264 | |
| W.W. Grainger, Inc. | | | 24,130 | | | | 4,883,188 | |
| | | | | | | | |
| | | | | | $ | 35,555,477 | |
| | | | | | | | |
| Electronics – 4.2% | | | | | | | | |
| ASML Holding N.V. (l) | | | 25,378 | | | $ | 1,634,597 | |
| Microchip Technology, Inc. | | | 245,260 | | | | 7,993,023 | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 279,966 | | | | 4,804,217 | |
| | | | | | | | |
| | | | | | $ | 14,431,837 | |
| | | | | | | | |
| Energy – Independent – 1.2% | | | | | | | | |
| Occidental Petroleum Corp. | | | 56,330 | | | $ | 4,315,441 | |
| | | | | | | | |
| Food & Beverages – 5.2% | | | | | | | | |
| Groupe Danone | | | 112,755 | | | $ | 7,449,681 | |
| Mead Johnson Nutrition Co., “A” | | | 75,750 | | | | 4,991,168 | |
| PepsiCo, Inc. | | | 79,970 | | | | 5,472,347 | |
| | | | | | | | |
| | | | | | $ | 17,913,196 | |
| | | | | | | | |
| Food & Drug Stores – 0.7% | | | | | | | | |
| CVS Caremark Corp. | | | 48,933 | | | $ | 2,365,910 | |
| | | | | | | | |
| General Merchandise – 1.3% | | | | | | | | |
| Kohl’s Corp. | | | 43,630 | | | $ | 1,875,217 | |
| Target Corp. | | | 43,540 | | | | 2,576,262 | |
| | | | | | | | |
| | | | | | $ | 4,451,479 | |
| | | | | | | | |
| Internet – 5.3% | | | | | | | | |
| eBay, Inc. (a) | | | 62,110 | | | $ | 3,168,852 | |
| Google, Inc., “A” (a) | | | 21,110 | | | | 14,974,801 | |
| | | | | | | | |
| | | | | | $ | 18,143,653 | |
| | | | | | | | |
| Medical & Health Technology & Services – 1.8% | | | | | |
| Express Scripts Holding Co. (a) | | | 84,676 | | | $ | 4,572,504 | |
| Patterson Cos., Inc. | | | 49,780 | | | | 1,703,969 | |
| | | | | | | | |
| | | | | | $ | 6,276,473 | |
| | | | | | | | |
| Medical Equipment – 7.1% | | | | | | | | |
| Becton, Dickinson & Co. | | | 28,510 | | | $ | 2,229,197 | |
| DENTSPLY International, Inc. | | | 192,950 | | | | 7,642,749 | |
| St. Jude Medical, Inc. | | | 52,690 | | | | 1,904,217 | |
| Thermo Fisher Scientific, Inc. | | | 133,460 | | | | 8,512,079 | |
| Waters Corp. (a) | | | 50,650 | | | | 4,412,628 | |
| | | | | | | | |
| | | | | | $ | 24,700,870 | |
| | | | | | | | |
7
MFS Investors Growth Stock Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Metals & Mining – 0.6% | | | | | | | | |
| Rio Tinto Ltd. | | | 37,020 | | | $ | 2,157,246 | |
| | | | | | | | |
| Oil Services – 2.7% | | | | | | | | |
| National Oilwell Varco, Inc. | | | 21,460 | | | $ | 1,466,791 | |
| Schlumberger Ltd. | | | 113,160 | | | | 7,840,856 | |
| | | | | | | | |
| | | | | | $ | 9,307,647 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 4.4% | |
| MasterCard, Inc., “A” | | | 9,140 | | | $ | 4,490,299 | |
| Visa, Inc., “A” | | | 70,540 | | | | 10,692,453 | |
| | | | | | | | |
| | | | | | $ | 15,182,752 | |
| | | | | | | | |
| Pharmaceuticals – 2.5% | | | | | | | | |
| Allergan, Inc. | | | 27,640 | | | $ | 2,535,417 | |
| Johnson & Johnson | | | 85,070 | | | | 5,963,407 | |
| | | | | | | | |
| | | | | | $ | 8,498,824 | |
| | | | | | | | |
| Railroad & Shipping – 0.8% | | | | | | | | |
| Kuehne & Nagel, Inc. AG | | | 22,350 | | | $ | 2,720,012 | |
| | | | | | | | |
| Restaurants – 1.8% | | | | | | | | |
| McDonald’s Corp. | | | 71,110 | | | $ | 6,272,613 | |
| | | | | | | | |
| Specialty Chemicals – 1.5% | | | | | | | | |
| Praxair, Inc. | | | 46,550 | | | $ | 5,094,898 | |
| | | | | | | | |
| Specialty Stores – 0.8% | | | | | | | | |
| Industria de Diseno Textil S.A. | | | 18,649 | | | $ | 2,612,685 | |
| | | | | | | | |
| Trucking – 2.3% | | | | | | | | |
| Expeditors International of Washington, Inc. | | | 197,460 | | | $ | 7,809,543 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $276,743,550) | | | | | | $ | 340,799,832 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| MONEY MARKET FUNDS – 1.3% | | | | | |
| MFS Institutional Money Market Portfolio, 0.16%, at Cost and Net Asset Value (v) | | | 4,494,232 | | | $ | 4,494,232 | |
| | | | | | | | |
|
| COLLATERAL FOR SECURITIES LOANED – 0.1% | |
| Navigator Securities Lending Prime Portfolio, 0.28%, at Cost and Net Asset Value (j) | | | 130,032 | | | $ | 130,032 | |
| | | | | | | | |
Total Investments
(Identified Cost, $281,367,814) | | | | | | $ | 345,424,096 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.1)% | | | | | | | (252,169 | ) |
| | | | | | | | |
| Net Assets – 100.0% | | | | | | $ | 345,171,927 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (j) | | The rate quoted is the annualized seven-day yield of the fund at period end. |
| (l) | | A portion of this security is on loan. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
The following abbreviations are used in this report and are defined:
| ADR | | American Depositary Receipt |
| PLC | | Public Limited Company |
See Notes to Financial Statements
8
MFS Investors Growth Stock Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | | | | |
At 12/31/12 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $276,873,582) | | | $340,929,864 | | | | | |
Underlying affiliated funds, at cost and value | | | 4,494,232 | | | | | |
Total investments, at value, including $129,810 of securities on loan (identified cost, $281,367,814) | | | $345,424,096 | | | | | |
Cash | | | 44,187 | | | | | |
Receivables for | | | | | | | | |
Fund shares sold | | | 71,425 | | | | | |
Interest and dividends | | | 159,874 | | | | | |
Other assets | | | 3,004 | | | | | |
Total assets | | | | | | | $345,702,586 | |
Liabilities | | | | | | | | |
Payable for fund shares reacquired | | | $300,558 | | | | | |
Collateral for securities loaned, at value | | | 130,032 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 28,699 | | | | | |
Shareholder servicing costs | | | 417 | | | | | |
Distribution and/or service fees | | | 7,429 | | | | | |
Payable for independent Trustees’ compensation | | | 221 | | | | | |
Accrued expenses and other liabilities | | | 63,303 | | | | | |
Total liabilities | | | | | | | $530,659 | |
Net assets | | | | | | | $345,171,927 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $267,576,494 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 64,056,441 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | 11,766,124 | | | | | |
Undistributed net investment income | | | 1,772,868 | | | | | |
Net assets | | | | | | | $345,171,927 | |
Shares of beneficial interest outstanding | | | | | | | 28,799,683 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $71,432,201 | | | | 5,851,997 | | | | $12.21 | |
Service Class | | | 273,739,726 | | | | 22,947,686 | | | | 11.93 | |
See Notes to Financial Statements
9
MFS Investors Growth Stock Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | | | | | | |
Year ended 12/31/12 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $5,399,993 | | | | | |
Interest | | | 16,236 | | | | | |
Dividends from underlying affiliated funds | | | 5,328 | | | | | |
Foreign taxes withheld | | | (99,992 | ) | | | | |
Total investment income | | | | | | | $5,321,565 | |
Expenses | | | | | | | | |
Management fee | | | $2,596,542 | | | | | |
Distribution and/or service fees | | | 673,582 | | | | | |
Shareholder servicing costs | | | 32,507 | | | | | |
Administrative services fee | | | 59,781 | | | | | |
Independent Trustees’ compensation | | | 11,019 | | | | | |
Custodian fee | | | 41,444 | | | | | |
Shareholder communications | | | 53,683 | | | | | |
Audit and tax fees | | | 52,952 | | | | | |
Legal fees | | | 4,262 | | | | | |
Miscellaneous | | | 22,461 | | | | | |
Total expenses | | | | | | | $3,548,233 | |
Reduction of expenses by investment adviser | | | (1,234 | ) | | | | |
Net expenses | | | | | | | $3,546,999 | |
Net investment income | | | | | | | $1,774,566 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $12,257,390 | | | | | |
Foreign currency | | | (389 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $12,257,001 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $39,358,213 | | | | | |
Translation of assets and liabilities in foreign currencies | | | 705 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $39,358,918 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $51,615,919 | |
Change in net assets from operations | | | | | | | $53,390,485 | |
See Notes to Financial Statements
10
MFS Investors Growth Stock Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | | | |
For years ended 12/31 | | | 2012 | | | | 2011 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $1,774,566 | | | | $934,593 | |
Net realized gain (loss) on investments and foreign currency | | | 12,257,001 | | | | 20,185,477 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 39,358,918 | | | | (19,025,996 | ) |
Change in net assets from operations | | | $53,390,485 | | | | $2,094,074 | |
| Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(942,129 | ) | | | $(1,103,339 | ) |
From net realized gain on investments | | | (16,768,960 | ) | | | — | |
Total distributions declared to shareholders | | | $(17,711,089 | ) | | | $(1,103,339 | ) |
Change in net assets from fund share transactions | | | $(19,701,316 | ) | | | $(31,928,730 | ) |
Total change in net assets | | | $15,978,080 | | | | $(30,937,995 | ) |
| Net assets | | | | | | | | |
At beginning of period | | | 329,193,847 | | | | 360,131,842 | |
At end of period (including undistributed net investment income of $1,772,868 and
$940,820, respectively) | | | $345,171,927 | | | | $329,193,847 | |
See Notes to Financial Statements
11
MFS Investors Growth Stock Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 fiscal years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $11.01 | | | | $11.01 | | | | $9.83 | | | | $7.10 | | | | $11.82 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.08 | | | | $0.05 | | | | $0.05 | | | | $0.05 | | | | $0.06 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 1.77 | | | | 0.01 | | | | 1.17 | | | | 2.74 | | | | (4.24 | ) |
Total from investment operations | | | $1.85 | | | | $0.06 | | | | $1.22 | | | | $2.79 | | | | $(4.18 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.06 | ) | | | $(0.06 | ) | | | $(0.04 | ) | | | $(0.06 | ) | | | $(0.06 | ) |
From net realized gain on investments | | | (0.59 | ) | | | — | | | | — | | | | — | | | | (0.48 | ) |
Total distributions declared to shareholders | | | $(0.65 | ) | | | $(0.06 | ) | | | $(0.04 | ) | | | $(0.06 | ) | | | $(0.54 | ) |
Net asset value, end of period (x) | | | $12.21 | | | | $11.01 | | | | $11.01 | | | | $9.83 | | | | $7.10 | |
Total return (%) (k)(r)(s)(x) | | | 16.97 | | | | 0.58 | | | | 12.47 | | | | 39.55 | | | | (36.87 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.83 | | | | 0.82 | | | | 0.88 | | | | 0.86 | | | | 0.85 | |
Expenses after expense reductions (f) | | | 0.83 | | | | 0.82 | | | | 0.88 | | | | 0.86 | | | | 0.85 | |
Net investment income | | | 0.70 | | | | 0.46 | | | | 0.49 | | | | 0.63 | | | | 0.60 | |
Portfolio turnover | | | 30 | | | | 28 | | | | 44 | | | | 50 | | | | 50 | |
Net assets at end of period (000 omitted) | | | $71,432 | | | | $77,136 | | | | $83,355 | | | | $93,011 | | | | $75,444 | |
See Notes to Financial Statements
12
MFS Investors Growth Stock Series
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $10.77 | | | | $10.76 | | | | $9.62 | | | | $6.95 | | | | $11.57 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.05 | | | | $0.02 | | | | $0.02 | | | | $0.03 | | | | $0.03 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 1.73 | | | | 0.02 | | | | 1.15 | | | | 2.68 | | | | (4.14 | ) |
Total from investment operations | | | $1.78 | | | | $0.04 | | | | $1.17 | | | | $2.71 | | | | $(4.11 | ) |
| Less distributions declared to shareholders | | | | | | | | | �� | | | | | | | | | | | |
From net investment income | | | $(0.03 | ) | | | $(0.03 | ) | | | $(0.03 | ) | | | $(0.04 | ) | | | $(0.03 | ) |
From net realized gain on investments | | | (0.59 | ) | | | — | | | | — | | | | — | | | | (0.48 | ) |
Total distributions declared to shareholders | | | $(0.62 | ) | | | $(0.03 | ) | | | $(0.03 | ) | | | $(0.04 | ) | | | $(0.51 | ) |
Net asset value, end of period (x) | | | $11.93 | | | | $10.77 | | | | $10.76 | | | | $9.62 | | | | $6.95 | |
Total return (%) (k)(r)(s)(x) | | | 16.68 | | | | 0.37 | | | | 12.15 | | | | 39.10 | | | | (36.98 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.08 | | | | 1.07 | | | | 1.12 | | | | 1.11 | | | | 1.10 | |
Expenses after expense reductions (f) | | | 1.08 | | | | 1.07 | | | | 1.12 | | | | 1.11 | | | | 1.10 | |
Net investment income | | | 0.46 | | | | 0.21 | | | | 0.23 | | | | 0.38 | | | | 0.35 | |
Portfolio turnover | | | 30 | | | | 28 | | | | 44 | | | | 50 | | | | 50 | |
Net assets at end of period (000 omitted) | | | $273,740 | | | | $252,058 | | | | $276,777 | | | | $406,039 | | | | $178,256 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (r) | Certain expenses have been reduced without which performance would have been lower. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (x) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
13
MFS Investors Growth Stock Series
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Investors Growth Stock Series (the fund) is a series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests in foreign securities. Investments in foreign securities are vulnerable to the effects of changes in the relative values of the local currency and the U.S. dollar and to the effects of changes in each country’s legal, political, and economic environment.
In this reporting period the fund adopted FASB Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 seeks to improve the comparability of fair value measurements as presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) by providing common requirements for fair value measurement and disclosure.
In December 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods, ASU 2011-11 is intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. Although still evaluating the potential impacts of ASU 2011-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
14
MFS Investors Growth Stock Series
Notes to Financial Statements – continued
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of December 31, 2012 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $305,625,716 | | | | $— | | | | $— | | | | $305,625,716 | |
France | | | — | | | | 13,683,367 | | | | — | | | | 13,683,367 | |
United Kingdom | | | — | | | | 5,318,255 | | | | — | | | | 5,318,255 | |
Taiwan | | | 4,804,217 | | | | — | | | | — | | | | 4,804,217 | |
Israel | | | 4,400,983 | | | | — | | | | — | | | | 4,400,983 | |
Switzerland | | | — | | | | 2,720,012 | | | | — | | | | 2,720,012 | |
Spain | | | — | | | | 2,612,685 | | | | — | | | | 2,612,685 | |
Netherlands | | | 1,634,597 | | | | — | | | | — | | | | 1,634,597 | |
| Mutual Funds | | | 4,624,264 | | | | — | | | | — | | | | 4,624,264 | |
| Total Investments | | | $321,089,777 | | | | $24,334,319 | | | | $— | | | | $345,424,096 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $10,610,690 would have been considered level 1 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. Collateral for securities loaned is held at carrying value, which approximates fair value. If the collateral for securities loaned was carried at fair value, its fair value would be considered level 2 under the fair value hierarchy. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be
15
MFS Investors Growth Stock Series
Notes to Financial Statements – continued
recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. For the year ended December 31, 2012, custody fees were not reduced.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Foreign taxes have been accrued by the fund in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/12 | | | 12/31/11 | |
| Ordinary income (including any short-term capital gains) | | | $3,580,811 | | | | $1,103,339 | |
| Long-term capital gains | | | 14,130,278 | | | | — | |
| Total distributions | | | $17,711,089 | | | | $1,103,339 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/12 | | | | |
| Cost of investments | | | $281,843,762 | |
| Gross appreciation | | | 67,954,184 | |
| Gross depreciation | | | (4,373,850 | ) |
| Net unrealized appreciation (depreciation) | | | $63,580,334 | |
| Undistributed ordinary income | | | 4,012,533 | |
| Undistributed long-term capital gain | | | 10,002,407 | |
| Other temporary differences | | | 159 | |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | | | | | | | | | |
| | | From net investment
income | | | From net realized gain on
investments | |
| | | Year ended
12/31/12 | | | Year ended
12/31/11 | | | Year ended
12/31/12 | | | Year ended
12/31/11 | |
| Initial Class | | | $343,877 | | | | $414,685 | | | | $3,585,439 | | | | $— | |
| Service Class | | | 598,252 | | | | 688,654 | | | | 13,183,521 | | | | — | |
| Total | | | $942,129 | | | | $1,103,339 | | | | $16,768,960 | | | | $— | |
16
MFS Investors Growth Stock Series
Notes to Financial Statements – continued
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
| | | | |
| First $1 billion of average daily net assets | | | 0.75% | |
| Average daily net assets in excess of $1 billion | | | 0.65% | |
The management fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.75% of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2012, the fee was $31,602, which equated to 0.0091% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2012, these costs amounted to $905.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.0173% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended December 31, 2012, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $2,912 and are included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $1,234, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
Purchases and sales of investments, other than short-term obligations, aggregated $103,354,476 and $138,369,064, respectively.
17
MFS Investors Growth Stock Series
Notes to Financial Statements – continued
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 828,069 | | | | $9,940,364 | | | | 1,666,762 | | | | $18,718,772 | |
Service Class | | | 1,972,214 | | | | 22,952,516 | | | | 2,190,395 | | | | 23,821,491 | |
| | | 2,800,283 | | | | $32,892,880 | | | | 3,857,157 | | | | $42,540,263 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 333,842 | | | | $3,929,316 | | | | 38,719 | | | | $414,685 | |
Service Class | | | 1,196,334 | | | | 13,781,773 | | | | 65,649 | | | | 688,654 | |
| | | 1,530,176 | | | | $17,711,089 | | | | 104,368 | | | | $1,103,339 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (2,315,460 | ) | | | $(27,950,049 | ) | | | (2,273,982 | ) | | | $(25,426,763 | ) |
Service Class | | | (3,617,367 | ) | | | (42,355,236 | ) | | | (4,575,756 | ) | | | (50,145,569 | ) |
| | | (5,932,827 | ) | | | $(70,305,285 | ) | | | (6,849,738 | ) | | | $(75,572,332 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (1,153,549 | ) | | | $(14,080,369 | ) | | | (568,501 | ) | | | $(6,293,306 | ) |
Service Class | | | (448,819 | ) | | | (5,620,947 | ) | | | (2,319,712 | ) | | | (25,635,424 | ) |
| | | (1,602,368 | ) | | | $(19,701,316 | ) | | | (2,888,213 | ) | | | $(31,928,730 | ) |
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2012, the fund’s commitment fee and interest expense were $2,259 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 3,594,998 | | | | 60,591,946 | | | | (59,692,712 | ) | | | 4,494,232 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $5,328 | | | | $4,494,232 | |
18
MFS Investors Growth Stock Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of
MFS Investors Growth Stock Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Investors Growth Stock Series (the “Fund”) (one of the series comprising MFS Variable Insurance Trust) as of December 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Investors Growth Stock Series as of December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2013
19
MFS Investors Growth Stock Series
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 1, 2013, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES | | | | | | | | |
Robert J. Manning (k) (age 49) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Chief Executive Officer and Director; President (until December 2009); Chief Investment Officer (until July 2010) | | N/A |
| | | | |
| INDEPENDENT TRUSTEES | | | | | | | | |
David H. Gunning (age 70) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman; Portman Limited (mining), Director (until 2008) |
| | | | |
Robert E. Butler (age 71) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 57) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 71) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 68) | | Trustee | | December 2004 | | Private investor; Rouse Properties Inc. (real estate), Director | | N/A |
| | | | |
John P. Kavanaugh (age 58) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
J. Dale Sherratt (age 74) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner | | N/A |
| | | | |
Laurie J. Thomsen
(age 55) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 71) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
John M. Corcoran (k) (age 47) | | President | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) | | N/A |
| | | | |
| Christopher R. Bohane (k) (age 39) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kino Clark (k) (age 44) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 53) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
| | | | |
Ethan D. Corey (k) (age 49) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
20
MFS Investors Growth Stock Series
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
David L. DiLorenzo (k) (age 44) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Robyn L. Griffin (age 37) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 39) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 62) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 42) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 42) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 60) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Frank L. Tarantino (age 68) | | Independent
Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 52) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. For the period October 2008, until January 2012, Mr. Corcoran served as Treasurer of the Funds. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2013, the Trustees served as board members of 143 funds within the MFS Family of Funds.
21
MFS Investors Growth Stock Series
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Manager Jeffrey Constantino | | |
22
MFS Investors Growth Stock Series
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2012 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2011 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2011, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 3rd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 1st quintile for the one-year period and the 2nd quintile for the five-year period ended December 31, 2011 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
23
MFS Investors Growth Stock Series
Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to institutional accounts, if any. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund is likely to benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research, and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2012.
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of the MFS Web site (mfs.com).
24
MFS Investors Growth Stock Series
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling
1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $15,544,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 94.95% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
25
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
26
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. • MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. • MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. • MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
27
ANNUAL REPORT
December 31, 2012
MFS® GLOBAL EQUITY SERIES
MFS® Variable Insurance Trust
VGE-ANN
MFS® GLOBAL EQUITY SERIES
CONTENTS
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ NO BANK OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Global Equity Series
LETTER FROM THE CHAIRMAN AND CEO
Dear Contract Owners:
The global market outlook for 2013 is one of cautious optimism. While we are seeing some positive economic trends in the United States, Europe and China, the overall environment remains challenging. In the United States, the recent fiscal cliff agreement was received positively by investors, even though it mostly addressed pressing taxation issues and did not resolve additional concerns, including the need for spending cuts and a large-scale reduction of the federal debt. These issues will be front and center again in the spring. Despite the ongoing uncertainty, economic tailwinds are gathering strength as the U.S. housing and job markets are improving and consumer confidence is rising.
Overseas, the debt crisis continues to weigh heavily on eurozone markets, with even Germany — long an economic stalwart — experiencing some contraction. These ongoing challenges could be a drag on global market performance this year. In Asia, manufacturing activity has accelerated in emerging markets such as China and India, and we are seeing signs of stabilized loan growth in China, a leading indicator of that country’s economic health. In contrast, Japan’s economy is contracting sharply under deflationary pressures. Nevertheless, Japanese markets have responded favorably to early actions by the new government, which appears determined to act aggressively, along with the Bank of Japan, to stimulate growth.
As always, managing risk in the face of uncertainty remains a top priority for investors. At MFS®, our uniquely collaborative investment process revolves around global research and our disciplined risk management approach. Our global team of investment professionals shares ideas and evaluates opportunities across continents, investment disciplines and asset classes — all with a goal of building better insights, and ultimately better results, for our clients.
We remain mindful of the many economic challenges investors face today, and believe it is more important than ever to maintain a long-term view, employ time-tested principles, such as asset allocation and diversification, and work closely with investment advisors to identify and pursue the most suitable opportunities.
Respectfully,
Robert J. Manning
Chairman and Chief Executive Officer
MFS Investment Management®
February 15, 2013
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
MFS Global Equity Series
PORTFOLIO COMPOSITION
Portfolio structure
| | | | |
| Top ten holdings | | | | |
| Linde AG | | | 3.1% | |
| Nestle S.A. | | | 3.0% | |
| Walt Disney Co. | | | 2.6% | |
| Heineken N.V. | | | 2.6% | |
| Diageo PLC | | | 2.6% | |
| Reckitt Benckiser Group PLC | | | 2.5% | |
| Honeywell International, Inc. | | | 2.1% | |
| Bayer AG | | | 2.1% | |
| Visa, Inc., “A” | | | 2.1% | |
| Oracle Corp. | | | 2.1% | |
| |
| Equity sectors | | | | |
| Consumer Staples | | | 20.1% | |
| Financial Services | | | 15.3% | |
| Health Care | | | 11.8% | |
| Basic Materials | | | 8.6% | |
| Technology | | | 8.1% | |
| Retailing | | | 8.0% | |
| Industrial Goods & Services | | | 8.0% | |
| Leisure | | | 7.2% | |
| Special Products & Services | | | 4.3% | |
| Transportation | | | 3.6% | |
| Energy | | | 2.9% | |
| Autos & Housing | | | 1.2% | |
| Utilities & Communications | | | 0.3% | |
| | | | |
| Issuer country weightings (x) | | | | |
| United States | | | 47.0% | |
| United Kingdom | | | 10.5% | |
| Switzerland | | | 9.0% | |
| France | | | 8.9% | |
| Germany | | | 7.9% | |
| Netherlands | | | 4.2% | |
| Japan | | | 3.5% | |
| Canada | | | 1.7% | |
| Sweden | | | 1.7% | |
| Other Countries | | | 5.6% | |
| |
| Currency exposure weightings (y) | | | | |
| United States Dollar | | | 49.8% | |
| Euro | | | 21.9% | |
| British Pound Sterling | | | 10.5% | |
| Swiss Franc | | | 9.0% | |
| Japanese Yen | | | 3.5% | |
| Swedish Krona | | | 1.7% | |
| South Korean Won | | | 1.0% | |
| Danish Krone | | | 0.8% | |
| Brazilian Real | | | 0.7% | |
| Other Currencies | | | 1.1% | |
| (x) | Represents the portfolio’s exposure to issuer countries as a percentage of a portfolio’s net assets. |
| (y) | Represents the portfolio’s exposure to a particular currency as a percentage of a portfolio’s net assets. |
Percentages are based on net assets as of 12/31/12.
The portfolio is actively managed and current holdings may be different.
2
MFS Global Equity Series
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2012, Initial Class shares of the MFS Global Equity Series (“fund”) provided a total return of 23.34%, while Service Class shares of the fund provided a total return of 22.98%. These compare with a return of 16.54% over the same period for the fund’s benchmark, the MSCI World Index.
Market Environment
The beginning of the period was characterized by a risk-on sentiment as a result of additional liquidity measures by the Federal Reserve Bank (“Fed”) and the European Central Bank (“ECB”) as well as a commensurate improvement in macroeconomic conditions. During this time, global equity valuations rose, credit spreads contracted, and high-quality sovereign yields increased modestly.
During the middle of the period, however, conditions worsened, driven by broadly weaker global macroeconomic indicators, as well as renewed concerns over the eurozone’s capacity and determination to address its ongoing crisis. Despite this deterioration, broad market sentiment remained relatively resilient as equity markets generally maintained gains and credit spreads did not indicate deterioration.
However, this renewed weakness in the fundamentals precipitated a further round of monetary easing by both the Fed (through a third round of quantitative easing) and the ECB (through a new bond purchase facility) in the second half of the period, which soon instilled additional confidence in risk markets. Nonetheless, towards the end of the period, weaker equity earnings reports and declining forward guidance caused market sentiment to soften. In addition, as we moved toward year end, the fiscal cliff negotiations between the Republicans in the U.S. Congress and President Obama were a particular source of market attention, where uncertainty surrounding the fiscal negotiations continued right up to the end-of-year deadline.
Contributors to Performance
Stock selection in the consumer staples sector contributed to performance relative to the MSCI World Index. The fund’s ownership in shares of strong-performing Dutch brewer Heineken bolstered relative performance. The stock appreciated throughout the latter half of the reporting period as the company benefited from volume growth, primarily in Russia and Mexico. Increased market share in emerging markets, primarily due to their acquisition of APB (Asia Pacific Breweries), further supported the stock. The fund’s overweight position in shares of alcoholic drink producer Diageo (United Kingdom) and pulp and paper manufacturer Svenska Cellulosa (Sweden) also supported positive performance.
Underweight positions in both the energy and utilities & communications sectors benefited relative results. There were no individual securities within either sector that were among the fund’s top relative contributors for the reporting period.
Elsewhere, the fund’s ownership in shares of German healthcare products maker Bayer, global payments technology company Visa, media conglomerate Walt Disney, and life sciences supply company Thermo Fisher Scientific contributed to positive results. Holdings of paints and coatings manufacturer Sherwin-Williams, South Korean microchip and electronics manufacturer Samsung Electronics (b), and luxury goods company Compagnie Financiere Richemont (Switzerland), also helped. Shares of Samsung Electronics appreciated during the period due to continued positive earnings within its smartphone business. The stock also benefited from a U.S. court order that requested Apple to disclose to Samsung details of a legal settlement the iPhone maker reached with Taiwan’s HTC Corp.
During the reporting period, the fund’s relative currency exposure, resulting primarily from differences between the fund’s and the benchmark’s exposures to holdings of securities denominated in foreign currencies, was another contributor to relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our portfolios to have different currency exposure than the benchmark.
Detractors from Performance
An underweight position in the financial services sector held back performance. Not holding shares of strong-performing financial services firm Bank of America and UK-based financial services firm HSBC weakened relative performance as both stocks outperformed the benchmark. Shares of HSBC appreciated late in the period due to increased market share in Asia and low interest rates. Management noted the company’s sector-leading liquidity position, increased brand value, and focus on customer service as additional positive factors for the stock. The fund’s ownership in shares of wealth management firm Julius Baer Group (Switzerland) also held back relative results.
Elsewhere, not holding shares of strong-performing computer and personal electronics maker Apple weakened relative performance as the stock posted strong returns for the period. Holdings of Japanese digital cameras and office equipment manufacturer Canon, oil and gas exploration company INPEX (Japan), ground delivery service company United Parcel Service, optical glasses and eyeglasses maker Hoya (Japan), and international foods producer Groupe Danone (France) also hindered relative results.
3
MFS Global Equity Series
Management Review – continued
The fund’s cash and/or cash equivalents position was another detractor from relative performance. The fund strives to be fully invested and generally holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Respectfully,
| | |
| David Mannheim | | Roger Morley |
| Portfolio Manager | | Portfolio Manager |
| (b) | Security is not a benchmark constituent. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
4
MFS Global Equity Series
PERFORMANCE SUMMARY THROUGH 12/31/12
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/12
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 5/03/99 | | 23.34% | | 2.99% | | 9.87% | | |
| | | Service Class | | 5/01/00 | | 22.98% | | 2.74% | | 9.57% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | MSCI World Index (f) | | 16.54% | | (0.60)% | | 8.08% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
MSCI World Index – a market capitalization-weighted index that is designed to measure equity market performance in the global developed markets.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Global Equity Series
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2012 through December 31, 2012
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2012 through December 31, 2012.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | | Beginning
Account Value
7/01/12 | | | Ending Account Value
12/31/12 | | | Expenses Paid
During Period (p)
7/01/12-12/31/12 | |
| Initial Class | | Actual | | | 1.15% | | | | $1,000.00 | | | | $1,137.62 | | | | $6.18 | |
| | Hypothetical (h) | | | 1.15% | | | | $1,000.00 | | | | $1,019.36 | | | | $5.84 | |
| Service Class | | Actual | | | 1.40% | | | | $1,000.00 | | | | $1,135.75 | | | | $7.52 | |
| | Hypothetical (h) | | | 1.40% | | | | $1,000.00 | | | | $1,018.10 | | | | $7.10 | |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS Global Equity Series
PORTFOLIO OF INVESTMENTS – 12/31/12
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 99.4% | | | | | |
| Aerospace – 4.0% | | | | | | | | |
| Honeywell International, Inc. | | | 15,250 | | | $ | 967,918 | |
| United Technologies Corp. | | | 10,070 | | | | 825,841 | |
| | | | | | | | |
| | | | | | $ | 1,793,759 | |
| | | | | | | | |
| Alcoholic Beverages – 7.3% | | | | | | | | |
| Carlsberg A.S., “B” | | | 3,882 | | | $ | 381,657 | |
| Diageo PLC | | | 39,859 | | | | 1,160,396 | |
| Heineken N.V. | | | 17,859 | | | | 1,191,247 | |
| Pernod Ricard S.A. | | | 4,937 | | | | 580,526 | |
| | | | | | | | |
| | | | | | $ | 3,313,826 | |
| | | | | | | | |
| Apparel Manufacturers – 4.2% | | | | | | | | |
| Burberry Group PLC | | | 12,025 | | | $ | 246,206 | |
| Compagnie Financiere Richemont S.A. | | | 7,183 | | | | 574,378 | |
| LVMH Moet Hennessy Louis Vuitton S.A. | | | 4,857 | | | | 905,088 | |
| NIKE, Inc., “B” | | | 3,820 | | | | 197,112 | |
| | | | | | | | |
| | | | | | $ | 1,922,784 | |
| | | | | | | | |
| Automotive – 1.0% | | | | | | | | |
| Delphi Automotive PLC (a) | | | 10,020 | | | $ | 383,265 | |
| Harley-Davidson, Inc. | | | 1,890 | | | | 92,308 | |
| | | | | | | | |
| | | | | | $ | 475,573 | |
| | | | | | | | |
| Broadcasting – 5.7% | | | | | | | | |
| Omnicom Group, Inc. | | | 11,480 | | | $ | 573,541 | |
| Viacom, Inc., “B” | | | 3,680 | | | | 194,083 | |
| Walt Disney Co. | | | 24,050 | | | | 1,197,450 | |
| WPP Group PLC | | | 42,910 | | | | 623,794 | |
| | | | | | | | |
| | | | | | $ | 2,588,868 | |
| | | | | | | | |
| Brokerage & Asset Managers – 0.6% | | | | | |
| Deutsche Boerse AG | | | 4,512 | | | $ | 275,394 | |
| | | | | | | | |
| Business Services – 4.3% | | | | | | | | |
| Accenture PLC, “A” | | | 13,500 | | | $ | 897,750 | |
| Adecco S.A. | | | 5,370 | | | | 284,641 | |
| Brenntag AG | | | 1,560 | | | | 204,949 | |
| Compass Group PLC | | | 46,390 | | | | 548,644 | |
| | | | | | | | |
| | | | | | $ | 1,935,984 | |
| | | | | | | | |
| Chemicals – 1.7% | | | | | | | | |
| 3M Co. | | | 8,210 | | | $ | 762,299 | |
| | | | | | | | |
| Computer Software – 3.3% | | | | | | | | |
| Autodesk, Inc. (a) | | | 6,840 | | | $ | 241,794 | |
| Check Point Software Technologies Ltd. (a) | | | 3,650 | | | | 173,886 | |
| Dassault Systems S.A. | | | 1,544 | | | | 172,843 | |
| Oracle Corp. | | | 27,950 | | | | 931,294 | |
| | | | | | | | |
| | | | | | $ | 1,519,817 | |
| | | | | | | | |
| Computer Software – Systems – 0.9% | | | | | |
| Canon, Inc. | | | 10,200 | | | $ | 400,066 | |
| | | | | | | | |
| Construction – 0.2% | | | | | | | | |
| Sherwin-Williams Co. | | | 550 | | | $ | 84,601 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Consumer Products – 6.9% | | | | | | | | |
| Beiersdorf AG | | | 1,870 | | | $ | 152,739 | |
| Colgate-Palmolive Co. | | | 6,170 | | | | 645,012 | |
| International Flavors & Fragrances, Inc. | | | 6,620 | | | | 440,495 | |
| Procter & Gamble Co. | | | 2,453 | | | | 166,534 | |
| Reckitt Benckiser Group PLC | | | 18,128 | | | | 1,135,605 | |
| Svenska Cellulosa Aktiebolaget | | | 27,414 | | | | 600,111 | |
| | | | | | | | |
| | | | | | $ | 3,140,496 | |
| | | | | | | | |
| Electrical Equipment – 4.0% | | | | | | | | |
| Amphenol Corp., “A” | | | 6,620 | | | $ | 428,314 | |
| Legrand S.A. | | | 13,872 | | | | 585,493 | |
| Rockwell Automation, Inc. | | | 1,320 | | | | 110,867 | |
| Schneider Electric S.A. | | | 9,303 | | | | 693,851 | |
| | | | | | | | |
| | | | | | $ | 1,818,525 | |
| | | | | | | | |
| Electronics – 3.1% | | | | | | | | |
| Altera Corp. | | | 7,870 | | | $ | 271,043 | |
| Hoya Corp. | | | 18,600 | | | | 366,214 | |
| Microchip Technology, Inc. | | | 8,880 | | | | 289,399 | |
| Samsung Electronics Co. Ltd. | | | 325 | | | | 465,148 | |
| | | | | | | | |
| | | | | | $ | 1,391,804 | |
| | | | | | | | |
| Energy – Independent – 0.6% | | | | | | | | |
| INPEX Corp. | | | 50 | | | $ | 266,843 | |
| | | | | | | | |
| Food & Beverages – 5.9% | | | | | | | | |
| Dr Pepper Snapple Group, Inc. | | | 7,190 | | | $ | 317,654 | |
| Groupe Danone | | | 12,469 | | | | 823,822 | |
| J.M. Smucker Co. | | | 2,155 | | | | 185,847 | |
| Nestle S.A. | | | 20,723 | | | | 1,350,343 | |
| | | | | | | | |
| | | | | | $ | 2,677,666 | |
| | | | | | | | |
| Food & Drug Stores – 1.7% | | | | | | | | |
| Lawson, Inc. | | | 2,400 | | | $ | 163,136 | |
| Tesco PLC | | | 16,706 | | | | 91,771 | |
| Walgreen Co. | | | 13,490 | | | | 499,265 | |
| | | | | | | | |
| | | | | | $ | 754,172 | |
| | | | | | | | |
| Gaming & Lodging – 0.6% | | | | | | | | |
| William Hill PLC | | | 49,291 | | | $ | 279,955 | |
| | | | | | | | |
| General Merchandise – 0.9% | | | | | | | | |
| Target Corp. | | | 7,190 | | | $ | 425,432 | |
| | | | | | | | |
| Insurance – 0.8% | | | | | | | | |
| Swiss Re Ltd. | | | 4,991 | | | $ | 364,264 | |
| | | | | | | | |
| Major Banks – 5.8% | | | | | | | | |
| Bank of New York Mellon Corp. | | | 27,430 | | | $ | 704,951 | |
| Goldman Sachs Group, Inc. | | | 3,670 | | | | 468,145 | |
| Standard Chartered PLC | | | 27,274 | | | | 691,360 | |
| State Street Corp. | | | 16,710 | | | | 785,537 | |
| | | | | | | | |
| | | | | | $ | 2,649,993 | |
| | | | | | | | |
7
MFS Global Equity Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Medical Equipment – 6.9% | | | | | | | | |
| DENTSPLY International, Inc. | | | 8,900 | | | $ | 352,529 | |
| Medtronic, Inc. | | | 12,090 | | | | 495,932 | |
| Sonova Holding AG | | | 2,488 | | | | 275,825 | |
| St. Jude Medical, Inc. | | | 18,110 | | | | 654,495 | |
| Thermo Fisher Scientific, Inc. | | | 13,710 | | | | 874,424 | |
| Waters Corp. (a) | | | 5,650 | | | | 492,228 | |
| | | | | | | | |
| | | | | | $ | 3,145,433 | |
| | | | | | | | |
| Network & Telecom – 0.8% | | | | | | | | |
| Cisco Systems, Inc. | | | 18,150 | | | $ | 356,648 | |
| | | | | | | | |
| Oil Services – 2.3% | | | | | | | | |
| National Oilwell Varco, Inc. | | | 6,610 | | | $ | 451,794 | |
| Schlumberger Ltd. | | | 8,480 | | | | 587,579 | |
| | | | | | | | |
| | | | | | $ | 1,039,373 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 8.1% | |
| Aeon Credit Service Co. Ltd. | | | 8,400 | | | $ | 169,593 | |
| American Express Co. | | | 7,660 | | | | 440,297 | |
| Banco Santander Brasil S.A., ADR | | | 15,820 | | | | 115,011 | |
| Credicorp Ltd. | | | 1,100 | | | | 161,216 | |
| Erste Group Bank AG (a) | | | 8,226 | | | | 263,031 | |
| ICICI Bank Ltd. | | | 13,193 | | | | 277,895 | |
| Itau Unibanco Holding S.A., ADR | | | 18,060 | | | | 297,268 | |
| Julius Baer Group Ltd. | | | 9,813 | | | | 353,058 | |
| Komercni Banka A.S. | | | 1,136 | | | | 239,651 | |
| UBS AG | | | 26,761 | | | | 420,848 | |
| Visa, Inc., “A” | | | 6,250 | | | | 947,375 | |
| | | | | | | | |
| | | | | | $ | 3,685,243 | |
| | | | | | | | |
| Pharmaceuticals – 4.9% | | | | | | | | |
| Bayer AG | | | 10,086 | | | $ | 957,792 | |
| Johnson & Johnson | | | 4,420 | | | | 309,842 | |
| Merck KGaA | | | 4,603 | | | | 607,310 | |
| Roche Holding AG | | | 1,745 | | | | 355,500 | |
| | | | | | | | |
| | | | | | $ | 2,230,444 | |
| | | | | | | | |
| Railroad & Shipping – 2.0% | | | | | | | | |
| Canadian National Railway Co. | | | 8,654 | | | $ | 787,601 | |
| Kuehne & Nagel, Inc. AG | | | 880 | | | | 107,097 | |
| | | | | | | | |
| | | | | | $ | 894,698 | |
| | | | | | | | |
| Restaurants – 0.9% | | | | | | | | |
| McDonald’s Corp. | | | 4,700 | | | $ | 414,587 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Specialty Chemicals – 6.9% | | | | | | | | |
| Akzo Nobel N.V. | | | 10,889 | | | $ | 718,533 | |
| L’Air Liquide S.A. | | | 2,195 | | | | 275,070 | |
| Linde AG | | | 8,059 | | | | 1,405,405 | |
| Praxair, Inc. | | | 4,930 | | | | 539,589 | |
| Shin-Etsu Chemical Co. Ltd. | | | 3,500 | | | | 213,778 | |
| | | | | | | | |
| | | | | | $ | 3,152,375 | |
| | | | | | | | |
| Specialty Stores – 1.2% | | | | | | | | |
| Hennes & Mauritz AB, “B” | | | 4,680 | | | $ | 162,627 | |
| Sally Beauty Holdings, Inc. (a) | | | 11,650 | | | | 274,591 | |
| Urban Outfitters, Inc. (a) | | | 2,430 | | | | 95,645 | |
| | | | | | | | |
| | | | | | $ | 532,863 | |
| | | | | | | | |
| Trucking – 1.6% | | | | | | | | |
| United Parcel Service, Inc., “B” | | | 9,850 | | | $ | 726,241 | |
| | | | | | | | |
| Utilities – Electric Power – 0.3% | | | | | | | | |
| Red Electrica de Espana | | | 2,844 | | | $ | 140,515 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $35,545,371) | | | | | | $ | 45,160,541 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 0.7% | | | | | |
| MFS Institutional Money Market Portfolio, 0.16%, at Cost and Net Asset Value (v) | | | 331,146 | | | $ | 331,146 | |
| | | | | | | | |
Total Investments
(Identified Cost, $35,876,517) | | | | | | $ | 45,491,687 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.1)% | | | | | | | (67,903 | ) |
| | | | | | | | |
| Net Assets – 100.0% | | | | | | $ | 45,423,784 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
The following abbreviations are used in this report and are defined:
| ADR | | American Depositary Receipt |
| PLC | | Public Limited Company |
See Notes to Financial Statements
8
MFS Global Equity Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | | | | |
At 12/31/12 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $35,545,371) | | | $45,160,541 | | | | | |
Underlying affiliated funds, at cost and value | | | 331,146 | | | | | |
Total investments, at value (identified cost, $35,876,517) | | | $45,491,687 | | | | | |
Cash | | | 2,711 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 8,604 | | | | | |
Fund shares sold | | | 15,450 | | | | | |
Interest and dividends | | | 51,327 | | | | | |
Other assets | | | 609 | | | | | |
Total assets | | | | | | | $45,570,388 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | $39,422 | | | | | |
Fund shares reacquired | | | 36,857 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 17,144 | | | | | |
Shareholder servicing costs | | | 85 | | | | | |
Distribution and/or service fees | | | 112 | | | | | |
Payable for independent Trustees’ compensation | | | 23 | | | | | |
Accrued expenses and other liabilities | | | 52,961 | | | | | |
Total liabilities | | | | | | | $146,604 | |
Net assets | | | | | | | $45,423,784 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $35,900,680 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in
foreign currencies (net of $5,467 deferred country tax) | | | 9,610,046 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (556,379 | ) | | | | |
Undistributed net investment income | | | 469,437 | | | | | |
Net assets | | | | | | | $45,423,784 | |
Shares of beneficial interest outstanding | | | | | | | 3,000,524 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $41,297,138 | | | | 2,727,138 | | | | $15.14 | |
Service Class | | | 4,126,646 | | | | 273,386 | | | | 15.09 | |
See Notes to Financial Statements
9
MFS Global Equity Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | | | | | | |
Year ended 12/31/12 | | | | | | | | |
| Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $1,019,067 | | | | | |
Interest | | | 14,478 | | | | | |
Dividends from underlying affiliated funds | | | 582 | | | | | |
Foreign taxes withheld | | | (62,602 | ) | | | | |
Total investment income | | | | | | | $971,525 | |
Expenses | | | | | | | | |
Management fee | | | $423,201 | | | | | |
Distribution and/or service fees | | | 8,520 | | | | | |
Shareholder servicing costs | | | 4,136 | | | | | |
Administrative services fee | | | 17,500 | | | | | |
Independent Trustees’ compensation | | | 1,443 | | | | | |
Custodian fee | | | 32,723 | | | | | |
Shareholder communications | | | 1,935 | | | | | |
Audit and tax fees | | | 55,310 | | | | | |
Legal fees | | | 695 | | | | | |
Miscellaneous | | | 12,738 | | | | | |
Total expenses | | | | | | | $558,201 | |
Fees paid indirectly | | | (2 | ) | | | | |
Reduction of expenses by investment adviser | | | (62,811 | ) | | | | |
Net expenses | | | | | | | $495,388 | |
Net investment income | | | | | | | $476,137 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $(415,921 | ) | | | | |
Foreign currency | | | (5,806 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $(421,727 | ) |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments (net of $5,467 increase in deferred country tax) | | | $8,637,859 | | | | | |
Translation of assets and liabilities in foreign currencies | | | 450 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $8,638,309 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $8,216,582 | |
Change in net assets from operations | | | | | | | $8,692,719 | |
See Notes to Financial Statements
10
MFS Global Equity Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | | | |
For years ended 12/31 | | | 2012 | | | | 2011 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $476,137 | | | | $444,222 | |
Net realized gain (loss) on investments and foreign currency | | | (421,727 | ) | | | 1,469,693 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 8,638,309 | | | | (3,784,970 | ) |
Change in net assets from operations | | | $8,692,719 | | | | $(1,871,055 | ) |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(445,012 | ) | | | $(340,420 | ) |
From net realized gain on investments | | | (927,407 | ) | | | — | |
Total distributions declared to shareholders | | | $(1,372,419 | ) | | | $(340,420 | ) |
Change in net assets from fund share transactions | | | $37,085 | | | | $(2,161,876 | ) |
Total change in net assets | | | $7,357,385 | | | | $(4,373,351 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 38,066,399 | | | | 42,439,750 | |
At end of period (including undistributed net investment income of $469,437 and
$443,906, respectively) | | | $45,423,784 | | | | $38,066,399 | |
See Notes to Financial Statements
11
MFS Global Equity Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $12.71 | | | | $13.40 | | | | $12.04 | | | | $9.36 | | | | $15.47 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.16 | | | | $0.14 | | | | $0.11 | | | | $0.12 | | | | $0.20 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 2.76 | | | | (0.72 | ) | | | 1.37 | | | | 2.78 | | | | (5.01 | ) |
Total from investment operations | | | $2.92 | | | | $(0.58 | ) | | | $1.48 | | | | $2.90 | | | | $(4.81 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.16 | ) | | | $(0.11 | ) | | | $(0.12 | ) | | | $(0.22 | ) | | | $(0.14 | ) |
From net realized gain on investments | | | (0.33 | ) | | | — | | | | — | | | | — | | | | (1.16 | ) |
Total distributions declared to shareholders | | | $(0.49 | ) | | | $(0.11 | ) | | | $(0.12 | ) | | | $(0.22 | ) | | | $(1.30 | ) |
Net asset value, end of period (x) | | | $15.14 | | | | $12.71 | | | | $13.40 | | | | $12.04 | | | | $9.36 | |
Total return (%) (k)(r)(s)(x) | | | 23.34 | | | | (4.32 | ) | | | 12.36 | | | | 31.98 | | | | (33.77 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.30 | | | | 1.40 | | | | 1.38 | | | | 1.52 | | | | 1.36 | |
Expenses after expense reductions (f) | | | 1.15 | | | | 1.15 | | | | 1.15 | | | | 1.15 | | | | 1.15 | |
Net investment income | | | 1.15 | | | | 1.08 | | | | 0.88 | | | | 1.18 | | | | 1.61 | |
Portfolio turnover | | | 21 | | | | 15 | | | | 18 | | | | 23 | | | | 28 | |
Net assets at end of period (000 omitted) | | | $41,297 | | | | $35,426 | | | | $39,966 | | | | $39,418 | | | | $33,523 | |
See Notes to Financial Statements
12
MFS Global Equity Series
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $12.68 | | | | $13.37 | | | | $12.03 | | | | $9.35 | | | | $15.47 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.12 | | | | $0.11 | | | | $0.08 | | | | $0.08 | | | | $0.16 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 2.75 | | | | (0.71 | ) | | | 1.36 | | | | 2.81 | | | | (5.01 | ) |
Total from investment operations | | | $2.87 | | | | $(0.60 | ) | | | $1.44 | | | | $2.89 | | | | $(4.85 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.13 | ) | | | $(0.09 | ) | | | $(0.10 | ) | | | $(0.21 | ) | | | $(0.11 | ) |
From net realized gain on investments | | | (0.33 | ) | | | — | | | | — | | | | — | | | | (1.16 | ) |
Total distributions declared to shareholders | | | $(0.46 | ) | | | $(0.09 | ) | | | $(0.10 | ) | | | $(0.21 | ) | | | $(1.27 | ) |
Net asset value, end of period (x) | | | $15.09 | | | | $12.68 | | | | $13.37 | | | | $12.03 | | | | $9.35 | |
Total return (%) (k)(r)(s)(x) | | | 22.98 | | | | (4.53 | ) | | | 12.05 | | | | 31.80 | | | | (33.97 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.54 | | | | 1.65 | | | | 1.63 | | | | 1.75 | | | | 1.60 | |
Expenses after expense reductions (f) | | | 1.40 | | | | 1.40 | | | | 1.40 | | | | 1.40 | | | | 1.40 | |
Net investment income | | | 0.87 | | | | 0.83 | | | | 0.64 | | | | 0.82 | | | | 1.32 | |
Portfolio turnover | | | 21 | | | | 15 | | | | 18 | | | | 23 | | | | 28 | |
Net assets at end of period (000 omitted) | | | $4,127 | | | | $2,640 | | | | $2,474 | | | | $2,248 | | | | $695 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (r) | Certain expenses have been reduced without which performance would have been lower. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (x) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
13
MFS Global Equity Series
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Global Equity Series (the fund) is a series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests in foreign securities. Investments in foreign securities are vulnerable to the effects of changes in the relative values of the local currency and the U.S. dollar and to the effects of changes in each country’s legal, political, and economic environment.
In this reporting period the fund adopted Financial Accounting Standards Board (FASB) Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 seeks to improve the comparability of fair value measurements as presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) by providing common requirements for fair value measurement and disclosure.
In December 2011, the FASB issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods, ASU 2011-11 is intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. Although still evaluating the potential impacts of ASU 2011-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to
14
MFS Global Equity Series
Notes to Financial Statements – continued
determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments The following is a summary of the levels used as of December 31, 2012 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $21,101,543 | | | | $— | | | | $— | | | | $21,101,543 | |
United Kingdom | | | — | | | | 4,777,731 | | | | — | | | | 4,777,731 | |
Switzerland | | | 1,626,167 | | | | 2,459,786 | | | | — | | | | 4,085,953 | |
France | | | — | | | | 4,036,693 | | | | — | | | | 4,036,693 | |
Germany | | | 152,739 | | | | 3,450,850 | | | | — | | | | 3,603,589 | |
Netherlands | | | — | | | | 1,909,780 | | | | — | | | | 1,909,780 | |
Japan | | | — | | | | 1,579,635 | | | | — | | | | 1,579,635 | |
Canada | | | 787,601 | | | | — | | | | — | | | | 787,601 | |
Sweden | | | — | | | | 762,737 | | | | — | | | | 762,737 | |
Other Countries | | | 987,032 | | | | 1,528,247 | | | | — | | | | 2,515,279 | |
| Mutual Funds | | | 331,146 | | | | — | | | | — | | | | 331,146 | |
| Total Investments | | | $24,986,228 | | | | $20,505,459 | | | | $— | | | | $45,491,687 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $9,583,968 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $1,350,343 would have been considered level 2 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2012, there were no securities on loan or collateral outstanding.
15
MFS Global Equity Series
Notes to Financial Statements – continued
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount, for the year ended December 31, 2012, is shown as a reduction of total expenses in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Foreign taxes have been accrued by the fund in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/12 | | | 12/31/11 | |
| Ordinary income (including any short-term capital gains) | | | $445,021 | | | | $340,420 | |
| Long-term capital gains | | | 927,398 | | | | — | |
| Total distributions | | | $1,372,419 | | | | $340,420 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/2012 | | | | |
| Cost of investments | | | $36,042,801 | |
| Gross appreciation | | | 10,875,876 | |
| Gross depreciation | | | (1,426,990 | ) |
| Net unrealized appreciation (depreciation) | | | $9,448,886 | |
| Undistributed ordinary income | | | 470,055 | |
| Capital loss carryforwards | | | (390,095 | ) |
| Other temporary differences | | | (5,742 | ) |
As of December 31, 2012, the fund had capital loss carryforwards available to offset future realized gains. Such losses are characterized as follows:
| | | | |
| Long-term losses | | | $(390,095 | ) |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), the above net capital losses may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for eight years and treated as short-term losses.
16
MFS Global Equity Series
Notes to Financial Statements – continued
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | | | | | | | | | |
| | | From net investment
income | | | From net realized gain on
investments | |
| | | Year ended
12/31/12 | | | Year ended
12/31/11 | | | Year ended
12/31/12 | | | Year ended
12/31/11 | |
| Initial Class | | | $413,927 | | | | $321,125 | | | | $849,441 | | | | $— | |
| Service Class | | | 31,085 | | | | 19,295 | | | | 77,966 | | | | — | |
| Total | | | $445,012 | | | | $340,420 | | | | $927,407 | | | | $— | |
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
| | | | |
| First $1 billion of average daily net assets | | | 1.00% | |
| Average daily net assets in excess of $1 billion | | | 0.90% | |
The investment adviser has agreed in writing to reduce its management fee to 0.90% of average daily net assets. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2014. This management fee reduction amounted to $42,436, which is shown as a reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.90% of the fund’s average daily net assets.
The investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses, such that total annual operating expenses do not exceed 1.15% of average daily net assets for the Initial Class shares and 1.40% of average daily net assets for the Service Class shares. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2014. For the year ended December 31, 2012, this reduction amounted to $20,225 and is reflected as a reduction of total expenses in the Statement of Operations.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2012, the fee was $3,859, which equated to 0.0091% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2012, these costs amounted to $277.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.0413% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
17
MFS Global Equity Series
Notes to Financial Statements – continued
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended December 31, 2012, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $348 and are included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $150, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
Purchases and sales of investments, other than short-term obligations, aggregated $8,961,420 and $9,626,402, respectively.
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 729,692 | | | | $10,142,333 | | | | 494,836 | | | | $6,720,060 | |
Service Class | | | 175,454 | | | | 2,470,998 | | | | 121,174 | | | | 1,633,337 | |
| | | 905,146 | | | | $12,613,331 | | | | 616,010 | | | | $8,353,397 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 91,482 | | | | $1,263,368 | | | | 24,951 | | | | $321,125 | |
Service Class | | | 7,914 | | | | 109,051 | | | | 1,503 | | | | 19,295 | |
| | | 99,396 | | | | $1,372,419 | | | | 26,454 | | | | $340,420 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (881,333 | ) | | | $(12,259,890 | ) | | | (715,295 | ) | | | $(9,536,607 | ) |
Service Class | | | (118,247 | ) | | | (1,688,775 | ) | | | (99,504 | ) | | | (1,319,086 | ) |
| | | (999,580 | ) | | | $(13,948,665 | ) | | | (814,799 | ) | | | $(10,855,693 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (60,159 | ) | | | $(854,189 | ) | | | (195,508 | ) | | | $(2,495,422 | ) |
Service Class | | | 65,121 | | | | 891,274 | | | | 23,173 | | | | 333,546 | |
| | | 4,962 | | | | $37,085 | | | | (172,335 | ) | | | $(2,161,876 | ) |
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2012, the fund’s commitment fee and interest expense were $272 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
18
MFS Global Equity Series
Notes to Financial Statements – continued
| (7) | | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 22 | | | | 12,599,200 | | | | (12,268,076 | ) | | | 331,146 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $582 | | | | $331,146 | |
19
MFS Global Equity Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of
MFS Global Equity Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Global Equity Series (the “Fund”) (one of the series comprising MFS Variable Insurance Trust) as of December 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Global Equity Series as of December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2013
20
MFS Global Equity Series
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 1, 2013, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES | | | | | | | | |
Robert J. Manning (k) (age 49) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Chief Executive Officer and Director; President (until December 2009); Chief Investment Officer (until July 2010) | | N/A |
| | | | |
| INDEPENDENT TRUSTEES | | | | | | | | |
David H. Gunning (age 70) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman; Portman Limited (mining), Director (until 2008) |
| | | | |
Robert E. Butler (age 71) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 57) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 71) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 68) | | Trustee | | December 2004 | | Private investor; Rouse Properties Inc. (real estate), Director | | N/A |
| | | | |
John P. Kavanaugh (age 58) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
J. Dale Sherratt (age 74) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner | | N/A |
| | | | |
Laurie J. Thomsen
(age 55) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 71) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
John M. Corcoran (k) (age 47) | | President | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) | | N/A |
| | | | |
| Christopher R. Bohane (k) (age 39) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kino Clark (k) (age 44) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 53) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
| | | | |
Ethan D. Corey (k) (age 49) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
21
MFS Global Equity Series
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
David L. DiLorenzo (k) (age 44) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Robyn L. Griffin (age 37) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 39) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 62) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 42) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 42) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 60) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Frank L. Tarantino (age 68) | | Independent
Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 52) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. For the period October 2008, until January 2012, Mr. Corcoran served as Treasurer of the Funds. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2013, the Trustees served as board members of 143 funds within the MFS Family of Funds.
22
MFS Global Equity Series
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers David Mannheim Roger Morley | | |
23
MFS Global Equity Series
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2012 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2011 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2011, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 3rd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 1st quintile for each of the one- and five-year periods ended December 31, 2011 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
24
MFS Global Equity Series
Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS has agreed in writing to reduce its advisory fee, and that MFS currently observes an expense limitation for the Fund, each of which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate was approximately at the Lipper expense group median, and the Fund’s total expense ratio was higher than the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to institutional accounts, if any. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund is likely to benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. However, such breakpoint is not applicable because the Fund is currently subject to the advisory fee reduction described above. Accordingly, the Trustees determined not to recommend any advisory fee breakpoint changes at this time. The Trustees concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2012.
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of the MFS Web site (mfs.com).
25
MFS Global Equity Series
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling
1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $1,021,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 66.01% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
Income derived from foreign sources was $534,679. The fund intends to pass through foreign tax credits of $41,977 for the fiscal year.
26
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
27
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
28
ANNUAL REPORT
December 31, 2012
MFS® INVESTORS TRUST SERIES
MFS® Variable Insurance Trust
VGI-ANN
MFS® INVESTORS TRUST SERIES
CONTENTS
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ NO BANK OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Investors Trust Series
LETTER FROM THE CHAIRMAN AND CEO
Dear Contract Owners:
The global market outlook for 2013 is one of cautious optimism. While we are seeing some positive economic trends in the United States, Europe and China, the overall environment remains challenging. In the United States, the recent fiscal cliff agreement was received positively by investors, even though it mostly addressed pressing taxation issues and did not resolve additional concerns, including the need for spending cuts and a large-scale reduction of the federal debt. These issues will be front and center again in the spring. Despite the ongoing uncertainty, economic tailwinds are gathering strength as the U.S. housing and job markets are improving and consumer confidence is rising.
Overseas, the debt crisis continues to weigh heavily on eurozone markets, with even Germany — long an economic stalwart — experiencing some contraction. These ongoing challenges could be a drag on global market performance this year. In Asia, manufacturing activity has accelerated in emerging markets such as China and India, and we are seeing signs of stabilized loan growth in China, a leading indicator of that country’s economic health. In contrast, Japan’s economy is contracting sharply under deflationary pressures. Nevertheless, Japanese markets have responded favorably to early actions by the new government, which appears determined to act aggressively, along with the Bank of Japan, to stimulate growth.
As always, managing risk in the face of uncertainty remains a top priority for investors. At MFS®, our uniquely collaborative investment process revolves around global research and our disciplined risk management approach. Our global team of investment professionals shares ideas and evaluates opportunities across continents, investment disciplines and asset classes — all with a goal of building better insights, and ultimately better results, for our clients.
We remain mindful of the many economic challenges investors face today, and believe it is more important than ever to maintain a long-term view, employ time-tested principles, such as asset allocation and diversification, and work closely with investment advisors to identify and pursue the most suitable opportunities.
Respectfully,
Robert J. Manning
Chairman and Chief Executive Officer
MFS Investment Management®
February 15, 2013
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
MFS Investors Trust Series
PORTFOLIO COMPOSITION
Portfolio structure
| | | | |
| Top ten holdings | | | | |
| Apple, Inc. | | | 3.8% | |
| Danaher Corp. | | | 2.6% | |
| JPMorgan Chase & Co. | | | 2.6% | |
| Pfizer, Inc. | | | 2.5% | |
| Exxon Mobil Corp. | | | 2.4% | |
| Johnson & Johnson | | | 2.3% | |
| Walt Disney Co. | | | 2.2% | |
| Google, Inc., “A” | | | 2.0% | |
| EMC Corp. | | | 2.0% | |
| ACE Ltd. | | | 1.8% | |
| | | | |
| Equity sectors | | | | |
| Financial Services | | | 17.4% | |
| Technology | | | 14.1% | |
| Health Care | | | 12.9% | |
| Energy | | | 10.4% | |
| Consumer Staples | | | 10.3% | |
| Industrial Goods & Services | | | 8.9% | |
| Retailing | | | 5.9% | |
| Utilities & Communications | | | 5.2% | |
| Leisure | | | 4.4% | |
| Basic Materials | | | 2.7% | |
| Autos & Housing | | | 2.5% | |
| Transportation | | | 2.2% | |
| Special Products & Services | | | 2.0% | |
Percentages are based on net assets as of 12/31/12.
The portfolio is actively managed and current holdings may be different.
2
MFS Investors Trust Series
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2012, Initial Class shares of the MFS Investors Trust Series (“fund”) provided a total return of 19.18%, while Service Class shares of the fund provided a total return of 18.83%. These compare with a return of 16.00% over the same period for the fund’s benchmark, the Standard & Poor’s 500 Stock Index (“S&P 500 Index”).
Market Environment
The beginning of the period was characterized by a risk-on sentiment as a result of additional liquidity measures by the Federal Reserve Bank (“Fed”) and the European Central Bank (“ECB”) as well as a commensurate improvement in macroeconomic conditions. During this time, global equity valuations rose, credit spreads contracted, and high-quality sovereign yields increased modestly.
During the middle of the period, however, conditions worsened, driven by broadly weaker global macroeconomic indicators, as well as renewed concerns over the eurozone’s capacity and determination to address its ongoing crisis. Despite this deterioration, broad market sentiment remained relatively resilient as equity markets generally maintained gains and credit spreads did not indicate deterioration.
However, this renewed weakness in the fundamentals precipitated a further round of monetary easing by both the Fed (through a third round of quantitative easing) and the ECB (through a new bond purchase facility) in the second half of the period, which soon instilled additional confidence in risk markets. Nonetheless, towards the end of the period, weaker equity earnings reports and declining forward guidance caused market sentiment to soften. In addition, as we moved toward year end, the fiscal cliff negotiations between the Republicans in the U.S. Congress and President Obama were a particular source of market attention, where uncertainty surrounding the fiscal negotiations continued right up to the end-of-year deadline.
Contributors to Performance
The combination of strong stock selection and an overweight position in the financial services sector was a positive factor for relative returns. The fund’s overweight positions in investment banking firm Goldman Sachs Group, global payments technology company Visa, Inc., and global financial services firm JPMorgan Chase aided relative results. Shares of Visa appreciated steadily throughout the reporting period due to increased payment volume, an expanded share repurchase program, and increased market share in the Asia-Pacific and Latin America regions.
Security selection in both the health care and consumer staples sectors contributed to relative results. Within health care, the fund’s holdings of biotech firm Gilead Sciences and life sciences supply company Thermo Fisher Scientific bolstered relative returns. Shares of Gilead Sciences significantly appreciated during the year after the firm reported robust financial results led by strong sales of HIV-treatment products. Within consumer staples, the fund’s position in Dutch brewer Heineken (b) benefited relative performance. Shares of Heineken rose as the firm reached an agreement to purchase Fraser & Neave’s stake in their joint venture, Asia Pacific Breweries, effectively consolidating ownership under Heineken. Adding Singapore-based Asia Pacific Breweries, whose flagship brand is Tiger Beer, to its portfolio is a key element in Heineken’s growth strategy in the Asia region.
The combination of strong stock selection and an overweight position in the autos & housing sector supported relative results. The fund’s overweight position in paint and coatings manufacturer Sherwin-Williams strengthened relative performance.
Elsewhere, holding shares of media conglomerate Walt Disney, and the fund’s avoidance of poor-performing semiconductor company Intel and computer products and services provider Hewlett-Packard Co., contributed to relative performance.
Detractors from Performance
Weak stock selection in the retailing sector negatively impacted relative results. The fund’s overweight position in shares of discount department store Kohl’s, and not holding shares of strong-performing home improvement chain Home Depot and internet retailer Amazon.com, hurt relative returns. During the reporting period, shares of Home Depot benefited from increased growth in existing home sales and continued momentum in the company’s home maintenance and repair divisions.
Stocks in other sectors that held back relative returns included semiconductor manufacturer Microchip Technology, oil and gas exploration and production company Occidental Petroleum, and Israeli-headquartered security software provider Check Point Software Technologies (b). Not owning shares of financial services firm Citigroup and online auctioneer eBay, and the timing of ownership in shares of pharmaceutical and medical products maker Abbott Laboratories (h), also weakened relative results.
3
MFS Investors Trust Series
Management Review – continued
The fund’s cash and/or cash equivalents position was another detractor from relative performance. The fund strives to be fully invested and generally holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Respectfully,
| | |
| T. Kevin Beatty | | Ted Maloney |
| Portfolio Manager | | Portfolio Manager |
Note to Contract Owners: Effective April 1, 2012, Ted Maloney replaced Nicole Zatlyn as a co-manager of the fund.
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
4
MFS Investors Trust Series
PERFORMANCE SUMMARY THROUGH 12/31/12
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/12
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 10/09/95 | | 19.18% | | 1.92% | | 7.18% | | |
| | | Service Class | | 5/01/00 | | 18.83% | | 1.67% | | 6.91% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Standard & Poor’s 500 Stock Index (f) | | 16.00% | | 1.66% | | 7.10% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Standard & Poor’s 500 Stock Index – a market capitalization-weighted index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Investors Trust Series
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2012 through December 31, 2012
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2012 through December 31, 2012.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | | Beginning
Account Value
7/01/12 | | | Ending Account Value
12/31/12 | | | Expenses Paid
During Period (p)
7/01/12-12/31/12 | |
| Initial Class | | Actual | | | 0.82% | | | | $1,000.00 | | | | $1,094.80 | | | | $4.32 | |
| | Hypothetical (h) | | | 0.82% | | | | $1,000.00 | | | | $1,021.01 | | | | $4.17 | |
| Service Class | | Actual | | | 1.07% | | | | $1,000.00 | | | | $1,093.21 | | | | $5.63 | |
| | Hypothetical (h) | | | 1.07% | | | | $1,000.00 | | | | $1,019.76 | | | | $5.43 | |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS Investors Trust Series
PORTFOLIO OF INVESTMENTS – 12/31/12
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 98.9% | | | | | |
| Aerospace – 4.7% | | | | | | | | |
| Honeywell International, Inc. | | | 154,280 | | | $ | 9,792,152 | |
| Precision Castparts Corp. | | | 43,460 | | | | 8,232,193 | |
| United Technologies Corp. | | | 124,750 | | | | 10,230,748 | |
| | | | | | | | |
| | | | | | $ | 28,255,093 | |
| | | | | | | | |
| Alcoholic Beverages – 2.2% | | | | | | | | |
| Diageo PLC | | | 235,223 | | | $ | 6,847,935 | |
| Heineken N.V. | | | 92,733 | | | | 6,185,562 | |
| | | | | | | | |
| | | | | | $ | 13,033,497 | |
| | | | | | | | |
| Apparel Manufacturers – 2.9% | | | | | | | | |
| LVMH Moet Hennessy Louis Vuitton S.A. | | | 34,223 | | | $ | 6,377,359 | |
| NIKE, Inc., “B” | | | 105,400 | | | | 5,438,640 | |
| VF Corp. | | | 35,910 | | | | 5,421,333 | |
| | | | | | | | |
| | | | | | $ | 17,237,332 | |
| | | | | | | | |
| Automotive – 1.1% | | | | | | | | |
| Bayerische Motoren Werke AG | | | 37,835 | | | $ | 3,648,883 | |
| Delphi Automotive PLC (a) | | | 77,720 | | | | 2,972,790 | |
| | | | | | | | |
| | | | | | $ | 6,621,673 | |
| | | | | | | | |
| Biotechnology – 1.6% | | | | | | | | |
| Celgene Corp. (a) | | | 58,230 | | | $ | 4,583,866 | |
| Gilead Sciences, Inc. (a) | | | 66,570 | | | | 4,889,567 | |
| | | | | | | | |
| | | | | | $ | 9,473,433 | |
| | | | | | | | |
| Broadcasting – 2.2% | | | | | | | | |
| Walt Disney Co. | | | 259,560 | | | $ | 12,923,492 | |
| | | | | | | | |
| Brokerage & Asset Managers – 2.9% | | | | | |
| BlackRock, Inc. | | | 49,258 | | | $ | 10,182,121 | |
| Franklin Resources, Inc. | | | 56,030 | | | | 7,042,971 | |
| | | | | | | | |
| | | | | | $ | 17,225,092 | |
| | | | | | | | |
| Business Services – 2.0% | | | | | | | | |
| Accenture PLC, “A” | | | 101,650 | | | $ | 6,759,725 | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 69,460 | | | | 5,143,513 | |
| | | | | | | | |
| | | | | | $ | 11,903,238 | |
| | | | | | | | |
| Cable TV – 1.2% | | | | | | | | |
| Comcast Corp., “A” | | | 187,600 | | | $ | 7,012,488 | |
| | | | | | | | |
| Chemicals – 0.7% | | | | | | | | |
| Celanese Corp. | | | 96,930 | | | $ | 4,316,293 | |
| | | | | | | | |
| Computer Software – 3.1% | | | | | | | | |
| Check Point Software Technologies Ltd. (a) | | | 105,160 | | | $ | 5,009,822 | |
| Citrix Systems, Inc. (a) | | | 40,980 | | | | 2,694,435 | |
| Oracle Corp. | | | 323,380 | | | | 10,775,022 | |
| | | | | | | | |
| | | | | | $ | 18,479,279 | |
| | | | | | | | |
| Computer Software – Systems – 5.8% | |
| Apple, Inc. | | | 42,270 | | | $ | 22,531,178 | |
| EMC Corp. (a) | | | 468,000 | | | | 11,840,400 | |
| | | | | | | | |
| | | | | | $ | 34,371,578 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Construction – 1.4% | | | | | | | | |
| Sherwin-Williams Co. | | | 17,810 | | | $ | 2,739,534 | |
| Stanley Black & Decker, Inc. | | | 74,300 | | | | 5,495,971 | |
| | | | | | | | |
| | | | | | $ | 8,235,505 | |
| | | | | | | | |
| Consumer Products – 3.7% | | | | | | | | |
| Colgate-Palmolive Co. | | | 58,370 | | | $ | 6,102,000 | |
| Procter & Gamble Co. | | | 153,790 | | | | 10,440,803 | |
| Reckitt Benckiser Group PLC | | | 88,784 | | | | 5,561,761 | |
| | | | | | | | |
| | | | | | $ | 22,104,564 | |
| | | | | | | | |
| Electrical Equipment – 3.3% | | | | | | | | |
| Danaher Corp. | | | 282,590 | | | $ | 15,796,781 | |
| W.W. Grainger, Inc. | | | 19,860 | | | | 4,019,068 | |
| | | | | | | | |
| | | | | | $ | 19,815,849 | |
| | | | | | | | |
| Electronics – 3.0% | | | | | | | | |
| Altera Corp. | | | 207,760 | | | $ | 7,155,254 | |
| ASML Holding N.V. | | | 30,695 | | | | 1,977,065 | |
| Microchip Technology, Inc. | | | 276,950 | | | | 9,025,801 | |
| | | | | | | | |
| | | | | | $ | 18,158,120 | |
| | | | | | | | |
| Energy – Independent – 2.6% | | | | | | | | |
| EOG Resources, Inc. | | | 67,050 | | | $ | 8,098,969 | |
| Occidental Petroleum Corp. | | | 98,920 | | | | 7,578,261 | |
| | | | | | | | |
| | | | | | $ | 15,677,230 | |
| | | | | | | | |
| Energy – Integrated – 4.1% | | | | | | | | |
| Chevron Corp. | | | 91,320 | | | $ | 9,875,345 | |
| Exxon Mobil Corp. | | | 167,590 | | | | 14,504,915 | |
| | | | | | | | |
| | | | | | $ | 24,380,260 | |
| | | | | | | | |
| Engineering – Construction – 0.9% | | | | | |
| Fluor Corp. | | | 92,510 | | | $ | 5,434,037 | |
| | | | | | | | |
| Food & Beverages – 2.9% | | | | | | | | |
| General Mills, Inc. | | | 99,010 | | | $ | 4,000,994 | |
| Groupe Danone | | | 130,753 | | | | 8,638,802 | |
| Mondelez International, Inc. | | | 179,210 | | | | 4,564,479 | |
| | | | | | | | |
| | | | | | $ | 17,204,275 | |
| | | | | | | | |
| General Merchandise – 2.4% | | | | | | | | |
| Kohl’s Corp. | | | 133,980 | | | $ | 5,758,460 | |
| Target Corp. | | | 144,700 | | | | 8,561,899 | |
| | | | | | | | |
| | | | | | $ | 14,320,359 | |
| | | | | | | | |
| Insurance – 1.8% | | | | | | | | |
| ACE Ltd. | | | 135,540 | | | $ | 10,816,092 | |
| | | | | | | | |
| Internet – 2.2% | | | | | | | | |
| Facebook, Inc., “A“ (a) | | | 39,990 | | | $ | 1,064,934 | |
| Google, Inc., “A” (a) | | | 17,240 | | | | 12,229,539 | |
| | | | | | | | |
| | | | | | $ | 13,294,473 | |
| | | | | | | | |
7
MFS Investors Trust Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Major Banks – 8.1% | | | | | | | | |
| Bank of America Corp. | | | 509,270 | | | $ | 5,907,532 | |
| Bank of New York Mellon Corp. | | | 121,823 | | | | 3,130,851 | |
| Goldman Sachs Group, Inc. | | | 82,440 | | | | 10,516,046 | |
| JPMorgan Chase & Co. | | | 356,190 | | | | 15,661,674 | |
| State Street Corp. | | | 58,760 | | | | 2,762,308 | |
| Wells Fargo & Co. | | | 306,240 | | | | 10,467,283 | |
| | | | | | | | |
| | | | | | $ | 48,445,694 | |
| | | | | | | | |
| Medical Equipment – 5.9% | | | | | | | | |
| Baxter International, Inc. | | | 67,570 | | | $ | 4,504,216 | |
| Covidien PLC | | | 171,440 | | | | 9,898,946 | |
| Medtronic, Inc. | | | 103,990 | | | | 4,265,670 | |
| St. Jude Medical, Inc. | | | 218,290 | | | | 7,889,001 | |
| Thermo Fisher Scientific, Inc. | | | 137,300 | | | | 8,756,994 | |
| | | | | | | | |
| | | | | | $ | 35,314,827 | |
| | | | | | | | |
| Oil Services – 3.7% | | | | | | | | |
| Cameron International Corp. (a) | | | 98,020 | | | $ | 5,534,209 | |
| Dresser-Rand Group, Inc. (a) | | | 120,830 | | | | 6,783,396 | |
| National Oilwell Varco, Inc. | | | 77,400 | | | | 5,290,290 | |
| Schlumberger Ltd. | | | 64,660 | | | | 4,480,291 | |
| | | | | | | | |
| | | | | | $ | 22,088,186 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 4.6% | |
| American Express Co. | | | 161,940 | | | $ | 9,308,311 | |
| MasterCard, Inc., “A” | | | 15,490 | | | | 7,609,927 | |
| Visa, Inc., “A” | | | 67,860 | | | | 10,286,219 | |
| | | | | | | | |
| | | | | | $ | 27,204,457 | |
| | | | | | | | |
| Pharmaceuticals – 5.4% | | | | | | | | |
| Johnson & Johnson | | | 191,696 | | | $ | 13,437,890 | |
| Pfizer, Inc. | | | 585,840 | | | | 14,692,867 | |
| Valeant Pharmaceuticals International, Inc. (a) | | | 67,880 | | | | 4,057,188 | |
| | | | | | | | |
| | | | | | $ | 32,187,945 | |
| | | | | | | | |
| Railroad & Shipping – 1.2% | | | | | | | | |
| Canadian National Railway Co. | | | 79,910 | | | $ | 7,272,609 | |
| | | | | | | | |
| Restaurants – 1.0% | | | | | | | | |
| McDonald’s Corp. | | | 69,040 | | | $ | 6,090,018 | |
| | | | | | | | |
| Specialty Chemicals – 2.0% | | | | | | | | |
| Linde AG | | | 34,033 | | | $ | 5,934,996 | |
| Praxair, Inc. | | | 54,440 | | | | 5,958,458 | |
| | | | | | | | |
| | | | | | $ | 11,893,454 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Specialty Stores – 0.6% | | | | | | | | |
| Hennes & Mauritz AB, “B” | | | 104,240 | | | $ | 3,622,271 | |
| | | | | | | | |
| Telecommunications – Wireless – 1.3% | | | | | |
| American Tower Corp., REIT | | | 98,260 | | | $ | 7,592,550 | |
| | | | | | | | |
| Telephone Services – 0.8% | | | | | | | | |
| AT&T, Inc. | | | 136,780 | | | $ | 4,610,854 | |
| | | | | | | | |
| Tobacco – 1.5% | | | | | | | | |
| Philip Morris International, Inc. | | | 110,920 | | | $ | 9,277,349 | |
| | | | | | | | |
| Trucking – 1.0% | | | | | | | | |
| United Parcel Service, Inc., “B” | | | 81,570 | | | $ | 6,014,156 | |
| | | | | | | | |
| Utilities – Electric Power – 3.1% | | | | | | | | |
| Alliant Energy Corp. | | | 93,950 | | | $ | 4,125,344 | |
| American Electric Power Co., Inc. | | | 139,150 | | | | 5,938,922 | |
| CMS Energy Corp. | | | 169,220 | | | | 4,125,584 | |
| Wisconsin Energy Corp. | | | 116,520 | | | | 4,293,762 | |
| | | | | | | | |
| | | | | | $ | 18,483,612 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $488,361,533) | | | | | | $ | 590,391,234 | |
| | | | | | | | |
|
| MONEY MARKET FUNDS – 0.9% | |
| MFS Institutional Money Market Portfolio, 0.16%, at Cost and Net Asset Value (v) | | | 5,740,723 | | | $ | 5,740,723 | |
| | | | | | | | |
Total Investments
(Identified Cost, $494,102,256) | | | | | | $ | 596,131,957 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.2% | | | | 969,199 | |
| | | | | | | | |
| Net Assets – 100.0% | | | | | | $ | 597,101,156 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
The following abbreviations are used in this report and are defined:
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
See Notes to Financial Statements
8
MFS Investors Trust Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | | | | |
At 12/31/12 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $488,361,533) | | | $590,391,234 | | | | | |
Underlying affiliated funds, at cost and value | | | 5,740,723 | | | | | |
Total investments, at value (identified cost, $494,102,256) | | | $596,131,957 | | | | | |
Cash | | | 3,683 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 6,199,735 | | | | | |
Fund shares sold | | | 705,544 | | | | | |
Interest and dividends | | | 289,036 | | | | | |
Other assets | | | 4,927 | | | | | |
Total assets | | | | | | | $603,334,882 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | $5,058,162 | | | | | |
Fund shares reacquired | | | 1,028,270 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 49,546 | | | | | |
Shareholder servicing costs | | | 618 | | | | | |
Distribution and/or service fees | | | 3,834 | | | | | |
Payable for independent Trustees’ compensation | | | 470 | | | | | |
Accrued expenses and other liabilities | | | 92,826 | | | | | |
Total liabilities | | | | | | | $6,233,726 | |
Net assets | | | | | | | $597,101,156 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $493,791,899 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 102,031,142 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (5,225,998 | ) | | | | |
Undistributed net investment income | | | 6,504,113 | | | | | |
Net assets | | | | | | | $597,101,156 | |
Shares of beneficial interest outstanding | | | | | | | 26,084,127 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $455,295,096 | | | | 19,858,130 | | | | $22.93 | |
Service Class | | | 141,806,060 | | | | 6,225,997 | | | | 22.78 | |
See Notes to Financial Statements
9
MFS Investors Trust Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | | | | | | |
| Year ended 12/31/12 | | | | | | | | |
| Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $11,677,666 | | | | | |
Interest | | | 73,992 | | | | | |
Dividends from underlying affiliated funds | | | 7,203 | | | | | |
Foreign taxes withheld | | | (184,071 | ) | | | | |
Total investment income | | | | | | | $11,574,790 | |
Expenses | | | | | | | | |
Management fee | | | $4,382,985 | | | | | |
Distribution and/or service fees | | | 265,267 | | | | | |
Shareholder servicing costs | | | 54,289 | | | | | |
Administrative services fee | | | 93,709 | | | | | |
Independent Trustees’ compensation | | | 18,634 | | | | | |
Custodian fee | | | 64,492 | | | | | |
Shareholder communications | | | 99,271 | | | | | |
Audit and tax fees | | | 51,401 | | | | | |
Legal fees | | | 6,924 | | | | | |
Miscellaneous | | | 31,237 | | | | | |
Total expenses | | | | | | | $5,068,209 | |
Reduction of expenses by investment adviser | | | (2,060 | ) | | | | |
Net expenses | | | | | | | $5,066,149 | |
Net investment income | | | | | | | $6,508,641 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $40,702,558 | | | | | |
Foreign currency | | | (3,545 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $40,699,013 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $54,987,685 | | | | | |
Translation of assets and liabilities in foreign currencies | | | 2,876 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $54,990,561 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $95,689,574 | |
Change in net assets from operations | | | | | | | $102,198,215 | |
See Notes to Financial Statements
10
MFS Investors Trust Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | | | |
For years ended 12/31 | | | 2012 | | | | 2011 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $6,508,641 | | | | $5,031,290 | |
Net realized gain (loss) on investments and foreign currency | | | 40,699,013 | | | | 23,627,753 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 54,990,561 | | | | (39,378,834 | ) |
Change in net assets from operations | | | $102,198,215 | | | | $(10,719,791 | ) |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(5,015,022 | ) | | | $(5,466,481 | ) |
Change in net assets from fund share transactions | | | $(64,974,502 | ) | | | $(84,509,302 | ) |
Total change in net assets | | | $32,208,691 | | | | $(100,695,574 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 564,892,465 | | | | 665,588,039 | |
At end of period (including undistributed net investment income of $6,504,113 and
$5,014,039, respectively) | | | $597,101,156 | | | | $564,892,465 | |
See Notes to Financial Statements
11
MFS Investors Trust Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $19.41 | | | | $20.04 | | | | $18.24 | | | | $14.64 | | | | $23.52 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.25 | | | | $0.17 | | | | $0.16 | | | | $0.19 | | | | $0.24 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 3.46 | | | | (0.61 | ) | | | 1.86 | | | | 3.67 | | | | (7.54 | ) |
Total from investment operations | | | $3.71 | | | | $(0.44 | ) | | | $2.02 | | | | $3.86 | | | | $(7.30 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.19 | ) | | | $(0.19 | ) | | | $(0.22 | ) | | | $(0.26 | ) | | | $(0.17 | ) |
From net realized gain on investments | | | — | | | | — | | | | — | | | | — | | | | (1.41 | ) |
Total distributions declared to shareholders | | | $(0.19 | ) | | | $(0.19 | ) | | | $(0.22 | ) | | | $(0.26 | ) | | | $(1.58 | ) |
Net asset value, end of period (x) | | | $22.93 | | | | $19.41 | | | | $20.04 | | | | $18.24 | | | | $14.64 | |
Total return (%) (k)(r)(s)(x) | | | 19.18 | | | | (2.18 | ) | | | 11.10 | | | | 26.90 | | | | (33.08 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.82 | | | | 0.82 | | | | 0.83 | | | | 0.86 | | | | 0.84 | |
Expenses after expense reductions (f) | | | 0.82 | | | | 0.82 | | | | 0.83 | | | | 0.86 | | | | 0.84 | |
Net investment income | | | 1.15 | | | | 0.84 | | | | 0.87 | | | | 1.25 | | | | 1.25 | |
Portfolio turnover | | | 28 | | | | 22 | | | | 22 | | | | 34 | | | | 29 | |
Net assets at end of period (000 omitted) | | | $455,295 | | | | $486,500 | | | | $603,279 | | | | $636,809 | | | | $560,356 | |
See Notes to Financial Statements
12
MFS Investors Trust Series
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $19.31 | | | | $19.95 | | | | $18.16 | | | | $14.56 | | | | $23.39 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.20 | | | | $0.12 | | | | $0.11 | | | | $0.15 | | | | $0.19 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 3.43 | | | | (0.61 | ) | | | 1.86 | | | | 3.65 | | | | (7.51 | ) |
Total from investment operations | | | $3.63 | | | | $(0.49 | ) | | | $1.97 | | | | $3.80 | | | | $(7.32 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.16 | ) | | | $(0.15 | ) | | | $(0.18 | ) | | | $(0.20 | ) | | | $(0.10 | ) |
From net realized gain on investments | | | — | | | | — | | | | — | | | | — | | | | (1.41 | ) |
Total distributions declared to shareholders | | | $(0.16 | ) | | | $(0.15 | ) | | | $(0.18 | ) | | | $(0.20 | ) | | | $(1.51 | ) |
Net asset value, end of period (x) | | | $22.78 | | | | $19.31 | | | | $19.95 | | | | $18.16 | | | | $14.56 | |
Total return (%) (k)(r)(s)(x) | | | 18.83 | | | | (2.42 | ) | | | 10.88 | | | | 26.56 | | | | (33.25 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.07 | | | | 1.07 | | | | 1.08 | | | | 1.11 | | | | 1.09 | |
Expenses after expense reductions (f) | | | 1.07 | | | | 1.07 | | | | 1.08 | | | | 1.11 | | | | 1.09 | |
Net investment income | | | 0.93 | | | | 0.60 | | | | 0.63 | | | | 0.99 | | | | 1.00 | |
Portfolio turnover | | | 28 | | | | 22 | | | | 22 | | | | 34 | | | | 29 | |
Net assets at end of period (000 omitted) | | | $141,806 | | | | $78,392 | | | | $62,309 | | | | $46,267 | | | | $38,259 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (r) | Certain expenses have been reduced without which performance would have been lower. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (x) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
13
MFS Investors Trust Series
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Investors Trust Series (the fund) is a series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests in foreign securities. Investments in foreign securities are vulnerable to the effects of changes in the relative values of the local currency and the U.S. dollar and to the effects of changes in each country’s legal, political, and economic environment.
In this reporting period the fund adopted Financial Accounting Standards Board (FASB) Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 seeks to improve the comparability of fair value measurements as presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) by providing common requirements for fair value measurement and disclosure.
In December 2011, the FASB issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods, ASU 2011-11 is intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. Although still evaluating the potential impacts of ASU 2011-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to
14
MFS Investors Trust Series
Notes to Financial Statements – continued
determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of December 31, 2012 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $525,256,980 | | | | $— | | | | $— | | | | $525,256,980 | |
France | | | — | | | | 15,016,162 | | | | — | | | | 15,016,162 | |
United Kingdom | | | — | | | | 12,409,696 | | | | — | | | | 12,409,696 | |
Canada | | | 11,329,797 | | | | — | | | | — | | | | 11,329,797 | |
Germany | | | — | | | | 9,583,879 | | | | — | | | | 9,583,879 | |
Netherlands | | | 1,977,065 | | | | 6,185,562 | | | | — | | | | 8,162,627 | |
Israel | | | 5,009,822 | | | | — | | | | — | | | | 5,009,822 | |
Sweden | | | — | | | | 3,622,271 | | | | — | | | | 3,622,271 | |
| Mutual Funds | | | 5,740,723 | | | | — | | | | — | | | | 5,740,723 | |
| Total Investments | | | $549,314,387 | | | | $46,817,570 | | | | $— | | | | $596,131,957 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $21,421,733 would have been considered level 1 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2012, there were no securities on loan or collateral outstanding.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
15
MFS Investors Trust Series
Notes to Financial Statements – continued
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. For the year ended December 31, 2012, custody fees were not reduced.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Foreign taxes have been accrued by the fund in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/12 | | | 12/31/11 | |
| Ordinary income (including any short-term capital gains) | | | $5,015,022 | | | | $5,466,481 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/12 | | | | |
| Cost of investments | | | $494,806,947 | |
| Gross appreciation | | | 114,636,831 | |
| Gross depreciation | | | (13,311,821 | ) |
| Net unrealized appreciation (depreciation) | | | 101,325,010 | |
| Undistributed ordinary income | | | 6,504,113 | |
| Capital loss carryforwards | | | (4,521,307 | ) |
| Other temporary differences | | | 1,441 | |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized after December 31, 2010 may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
As of December 31, 2012, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | | |
| Pre-enactment losses: | | | | |
| 12/31/17 | | | $(4,521,307 | ) |
16
MFS Investors Trust Series
Notes to Financial Statements – continued
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/12 | | | Year ended
12/31/11 | |
| Initial Class | | | $4,202,375 | | | | $4,901,513 | |
| Service Class | | | 812,647 | | | | 564,968 | |
| Total | | | $5,015,022 | | | | $5,466,481 | |
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
| | | | |
| First $1 billion of average daily net assets | | | 0.75% | |
| Average daily net assets in excess of $1 billion | | | 0.65% | |
The investment adviser has agreed in writing to reduce its management fee to 0.60% of average daily net assets in excess of $2.5 billion. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2014. For the year ended December 31, 2012, the fund’s average daily net assets did not exceed $2.5 billion and therefore, the management fee was not reduced.
The management fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.75% of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2012, the fee was $53,230, which equated to 0.0091% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2012, these costs amounted to $1,059.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.0160% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended December 31, 2012, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $4,918 and are
17
MFS Investors Trust Series
Notes to Financial Statements – continued
included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $2,060, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
Purchases and sales of investments, other than short-term obligations, aggregated $161,583,276 and $226,972,293, respectively.
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 1,072,356 | | | | $23,443,603 | | | | 956,445 | | | | $17,827,008 | |
Service Class | | | 3,048,806 | | | | 66,280,256 | | | | 1,634,433 | | | | 32,550,264 | |
| | | 4,121,162 | | | | $89,723,859 | | | | 2,590,878 | | | | $50,377,272 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 191,452 | | | | $4,202,375 | | | | 258,655 | | | | $4,901,513 | |
Service Class | | | 37,226 | | | | 812,647 | | | | 29,956 | | | | 564,968 | |
| | | 228,678 | | | | $5,015,022 | | | | 288,611 | | | | $5,466,481 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (6,464,022 | ) | | | $(139,811,290 | ) | | | (6,254,861 | ) | | | $(125,918,742 | ) |
Service Class | | | (920,519 | ) | | | (19,902,093 | ) | | | (727,691 | ) | | | (14,434,313 | ) |
| | | (7,384,541 | ) | | | $(159,713,383 | ) | | | (6,982,552 | ) | | | $(140,353,055 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (5,200,214 | ) | | | $(112,165,312 | ) | | | (5,039,761 | ) | | | $(103,190,221 | ) |
Service Class | | | 2,165,513 | | | | 47,190,810 | | | | 936,698 | | | | 18,680,919 | |
| | | (3,034,701 | ) | | | $(64,974,502 | ) | | | (4,103,063 | ) | | | $(84,509,302 | ) |
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2012, the fund’s commitment fee and interest expense were $3,765 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated Funds-Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 3,692,509 | | | | 105,367,748 | | | | (103,319,534 | ) | | | 5,740,723 | |
| | | | |
| Underlying Affiliated Fund | | Realized Gain (Loss) | | | Capital Gain Distributions | | | Dividend Income | | | Ending Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $7,203 | | | | $5,740,723 | |
18
MFS Investors Trust Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of
MFS Investors Trust Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Investors Trust Series (the “Fund”) (one of the series comprising MFS Variable Insurance Trust) as of December 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Investors Trust Series as of December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2013
19
MFS Investors Trust Series
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 1, 2013, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES | | | | | | | | |
Robert J. Manning (k) (age 49) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Chief Executive Officer and Director; President (until December 2009); Chief Investment Officer (until July 2010) | | N/A |
| | | | |
| INDEPENDENT TRUSTEES | | | | | | | | |
David H. Gunning (age 70) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman; Portman Limited (mining), Director (until 2008) |
| | | | |
Robert E. Butler (age 71) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 57) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 71) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 68) | | Trustee | | December 2004 | | Private investor; Rouse Properties Inc. (real estate), Director | | N/A |
| | | | |
John P. Kavanaugh (age 58) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
J. Dale Sherratt (age 74) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner | | N/A |
| | | | |
Laurie J. Thomsen
(age 55) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 71) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
John M. Corcoran (k) (age 47) | | President | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) | | N/A |
| | | | |
| Christopher R. Bohane (k) (age 39) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kino Clark (k) (age 44) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 53) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
| | | | |
Ethan D. Corey (k) (age 49) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
20
MFS Investors Trust Series
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
David L. DiLorenzo (k) (age 44) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Robyn L. Griffin (age 37) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 39) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 62) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 42) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 42) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 60) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Frank L. Tarantino (age 68) | | Independent
Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 52) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. For the period October 2008, until January 2012, Mr. Corcoran served as Treasurer of the Funds. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2013, the Trustees served as board members of 143 funds within the MFS Family of Funds.
21
MFS Investors Trust Series
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers T. Kevin Beatty Edward Maloney | | |
22
MFS Investors Trust Series
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2012 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2011 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2011, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 4th quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 3rd quintile for the one-year period and the 1st quintile for the five-year period ended December 31, 2011 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
The Trustees expressed concern to MFS about the substandard investment performance of the Fund. In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year, as to MFS’ efforts to improve the Fund’s performance, including assigning a new portfolio manager for the Fund in 2012. In addition, the Trustees requested that they receive a separate update on the Fund’s performance at each of their regular meetings. After reviewing
23
MFS Investors Trust Series
Board Review of Investment Advisory Agreement – continued
these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that MFS’ responses and efforts and plans to improve investment performance were sufficient to support approval of the continuance of the investment advisory agreement for an additional one-year period, but that they would continue to closely monitor the performance of the Fund.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each higher than the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to institutional accounts, if any. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund is likely to benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion, and that MFS has agreed in writing to reduce its advisory fee on average daily net assets over $2.5 billion, which may not be changed without the Trustees’ approval. The Trustees concluded that the existing breakpoints were sufficient to allow the Fund to benefit from economies of scale as its assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2012.
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of the MFS Web site (mfs.com).
24
MFS Investors Trust Series
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling
1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 100% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
25
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
26
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
27
ANNUAL REPORT
December 31, 2012
MFS® TOTAL RETURN SERIES
MFS® Variable Insurance Trust
VTR-ANN
MFS® TOTAL RETURN SERIES
CONTENTS
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ NO BANK OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Total Return Series
LETTER FROM THE CHAIRMAN AND CEO
Dear Contract Owners:
The global market outlook for 2013 is one of cautious optimism. While we are seeing some positive economic trends in the United States, Europe and China, the overall environment remains challenging. In the United States, the recent fiscal cliff agreement was received positively by investors, even though it mostly addressed pressing taxation issues and did not resolve additional concerns, including the need for spending cuts and a large-scale reduction of the federal debt. These issues will be front and center again in the spring. Despite the ongoing uncertainty, economic tailwinds are gathering strength as the U.S. housing and job markets are improving and consumer confidence is rising.
Overseas, the debt crisis continues to weigh heavily on eurozone markets, with even Germany — long an economic stalwart — experiencing some contraction. These ongoing challenges could be a drag on global market performance this year. In Asia, manufacturing activity has accelerated in emerging markets such as China and India, and we are seeing signs of stabilized loan growth in China, a leading indicator of that country’s economic health. In contrast, Japan’s economy is contracting sharply under deflationary pressures. Nevertheless, Japanese markets have responded favorably to early actions by the new government, which appears determined to act aggressively, along with the Bank of Japan, to stimulate growth.
As always, managing risk in the face of uncertainty remains a top priority for investors. At MFS®, our uniquely collaborative investment process revolves around global research and our disciplined risk management approach. Our global team of investment professionals shares ideas and evaluates opportunities across continents, investment disciplines and asset classes — all with a goal of building better insights, and ultimately better results, for our clients.
We remain mindful of the many economic challenges investors face today, and believe it is more important than ever to maintain a long-term view, employ time-tested principles, such as asset allocation and diversification, and work closely with investment advisors to identify and pursue the most suitable opportunities.
Respectfully,
Robert J. Manning
Chairman and Chief Executive Officer
MFS Investment Management®
February 15, 2013
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
MFS Total Return Series
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | | | |
| Top ten holdings (i) | | | | |
| U.S. Treasury Bonds, 4.5%, 2039 | | | 2.3% | |
| JPMorgan Chase & Co. | | | 2.2% | |
| Philip Morris International, Inc. | | | 2.0% | |
| Fannie Mae, 5.5%, 30 Years | | | 1.9% | |
| U.S. Treasury Notes, 2.125%, 2015 | | | 1.8% | |
| Pfizer, Inc. | | | 1.7% | |
| Exxon Mobil Corp. | | | 1.7% | |
| U.S. Treasury Notes, 0.875%, 2016 | | | 1.6% | |
| Johnson & Johnson | | | 1.6% | |
| Lockheed Martin Corp. | | | 1.5% | |
| |
| Equity sectors | | | | |
| Financial Services | | | 13.4% | |
| Health Care | | | 7.4% | |
| Consumer Staples | | | 7.3% | |
| Industrial Goods & Services | | | 6.9% | |
| Energy | | | 5.9% | |
| Leisure | | | 4.1% | |
| Utilities & Communications | | | 3.5% | |
| Basic Materials | | | 3.0% | |
| Retailing | | | 2.8% | |
| Technology | | | 2.4% | |
| Autos & Housing | | | 1.9% | |
| Special Products & Services | | | 1.1% | |
| Transportation | | | 1.0% | |
| | | | |
| Fixed income sectors (i) | | | | |
| U.S. Treasury Securities | | | 12.5% | |
| Mortgage-Backed Securities | | | 12.2% | |
| High Grade Corporates | | | 9.0% | |
| Commercial Mortgage-Backed Securities | | | 1.8% | |
| Emerging Markets Bonds | | | 1.0% | |
| Non-U.S. Government Bonds | | | 0.9% | |
| U.S. Government Agencies | | | 0.3% | |
| High Yield Corporates | | | 0.2% | |
| Asset-Backed Securities | | | 0.2% | |
| Collateralized Debt Obligations (o) | | | 0.0% | |
|
| Composition including fixed income credit quality (a)(i) | |
| AAA | | | 1.5% | |
| AA | | | 1.6% | |
| A | | | 3.7% | |
| BBB | | | 5.6% | |
| BB | | | 0.4% | |
| CCC (o) | | | 0.0% | |
| CC | | | 0.1% | |
| C | | | 0.1% | |
| U.S. Government | | | 12.5% | |
| Federal Agencies | | | 12.5% | |
| Not Rated | | | 0.1% | |
| Non-Fixed Income | | | 60.7% | |
| Cash & Other | | | 1.2% | |
| (a) | For all securities other than those specifically described below, ratings are assigned to underlying securities utilizing ratings from Moody’s, Fitch, and Standard & Poor’s rating agencies and applying the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). Securities rated BBB or higher are considered investment grade. All ratings are subject to change. U.S. Government includes securities issued by the U.S. Department of the Treasury. Federal Agencies includes rated and unrated U.S. Agency fixed-income securities, U.S. Agency mortgage-backed securities, and collateralized mortgage obligations of U.S. Agency mortgage-backed securities. Not Rated includes fixed income securities, including fixed income futures contracts, which have not been rated by any rating agency. Non-Fixed Income includes equity securities (including convertible bonds and equity derivatives) and commodities. Cash & Other includes cash, other assets less liabilities, offsets to derivative positions, and short-term securities. The fund may not hold all of these instruments. The fund is not rated by these agencies. |
2
MFS Total Return Series
Portfolio Composition – continued
| (i) | For purposes of this presentation, the components include the market value of securities, and reflect the impact of the equivalent exposure of derivative positions, if any. These amounts may be negative from time to time. The bond component will include any accrued interest amounts. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than market value. Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio. |
Percentages are based on net assets as of 12/31/12.
The portfolio is actively managed and current holdings may be different.
3
MFS Total Return Series
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2012, Initial Class shares of the MFS Total Return Series (“fund”) provided a total return of 11.26%, while Service Class shares of the fund provided a total return of 10.93%. These compare with returns of 16.00% and 4.21% over the same period for the fund’s benchmarks, the Standard & Poor’s 500 Stock Index (“S&P 500 Index”) and the Barclays U.S. Aggregate Bond Index (“Barclays Index”), respectively. The fund’s other benchmark, the MFS Total Return Blended Index (“Blended Index”), generated a return of 11.31%. The Blended Index reflects the blended returns of the equity and fixed income market indices, with percentage allocations to each index designed to resemble the equity and fixed income allocations of the fund. The market indices and related percentage allocations used to compile the Blended Index are set forth in the Performance Summary.
Market Environment
The beginning of the period was characterized by a risk-on sentiment as a result of additional liquidity measures by the Federal Reserve Bank (“Fed”) and the European Central Bank (“ECB”) as well as a commensurate improvement in macroeconomic conditions. During this time, global equity valuations rose, credit spreads contracted, and high-quality sovereign yields increased modestly.
During the middle of the period, however, conditions worsened, driven by broadly weaker global macroeconomic indicators, as well as renewed concerns over the eurozone’s capacity and determination to address its ongoing crisis. Despite this deterioration, broad market sentiment remained relatively resilient as equity markets generally maintained gains and credit spreads did not indicate deterioration.
However, this renewed weakness in the fundamentals precipitated a further round of monetary easing by both the Fed (through a third round of quantitative easing) and the ECB (through a new bond purchase facility) in the second half of the period, which soon instilled additional confidence in risk markets. Nonetheless, towards the end of the period, weaker equity earnings reports and declining forward guidance caused market sentiment to soften. In addition, as we moved toward year end, the fiscal cliff negotiations between the Republicans in the U.S. Congress and President Obama were a particular source of market attention, where uncertainty surrounding the fiscal negotiations continued right up to the end-of-year deadline.
Detractors from Performance
Within the equity portion of the fund, stock selection in the retailing sector was a primary detractor from performance relative to the S&P 500 Index. Within this sector, holdings of discount department store Kohl’s, and not holding shares of strong-performing home improvement retailer Home Depot, held back relative results. During the reporting period, shares of Home Depot benefited from increased growth in existing home sales and continued momentum in the company’s home maintenance and repair divisions.
Stocks in other sectors that held back relative performance included voice and data communications services company Vodafone Group (b) (United Kingdom), oil and gas exploration and production company Occidental Petroleum, oil and gas exploration and production company Apache, and payment service provider Western Union as all four stocks lagged the benchmark. Not holding shares of strong-performing computer and personal electronics maker Apple, financial services firm Citigroup, biotech firm Gilead Sciences, and online auctioneer Ebay also weakened relative results. Shares of Gilead Sciences spiked late in the reporting period as the firm announced the phase III testing of its GS-7977 drug which was created to cure the hepatitis C virus. The test, which involved 25 patients, showed a 100% cure rate after four weeks of administering the drug to patients.
Contributors to Performance
Within the equity portion of the fund, an overweight allocation to the financial services sector contributed to performance relative to the S&P 500 Index. Within this sector, holdings of global financial services firm JPMorgan Chase, investment banking firm Goldman Sachs Group, and global financial services provider Bank of New York Mellon benefited relative results as all three stocks turned in strong performance for the period.
Stock selection in both the industrial goods & services and leisure sectors also benefited relative performance. Within the leisure sector, holdings of media conglomerate Walt Disney and cable and internet provider Comcast positively impacted relative results. The fund’s timing of ownership in fast-food giant McDonald’s also aided relative performance. There were no stocks within the industrial goods & services sector that were among the fund’s top relative contributors.
Elsewhere, holdings of protective and decorative coatings manufacturer PPG Industries, alcoholic beverage producer Diageo (b) (United Kingdom), and life sciences supply company Thermo Fisher Scientific strengthened relative returns as all three stocks outperformed the benchmark over the reporting period. An underweight allocation to weak-performing semiconductor company Intel was another factor that positively affected relative performance. Shares of Intel depreciated as the company reported weak revenue due to competing tablets, soft demand for personal computers, and concerns over the macroeconomic environment. A significant reduction in its gross margin guidance late in the period, as a result of too much inventory and under-utilization charges, pressured earnings estimates and weighed on its share price.
4
MFS Total Return Series
Management Review – continued
Within the fixed income segment, the fund’s greater exposure to the banking and financial sectors, and to BBB (r) rated corporate debt, aided performance relative to the Barclays Index. The portion of the fund’s return derived from yield, which was greater than that of the index, was another positive factor for relative results.
Respectfully,
| | | | | | | | |
| Nevin Chitkara | | William Douglas | | Steven Gorham | | Richard Hawkins | | Joshua Marston |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| | | | |
| Brooks Taylor | | | | | | | | |
| Portfolio Manager | | | | | | | | |
| (b) | Security is not a benchmark constituent. |
| (r) | Bonds rated “BBB”, “Baa”, or higher are considered investment grade; bonds rated “BB”, “Ba”, or below are considered non-investment grade. The source for bond quality ratings is Moody’s Investors Service, Standard & Poor’s and Fitch, Inc. and are applied using the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). For securities which are not rated by any of the three agencies, the security is considered Not Rated. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
5
MFS Total Return Series
PERFORMANCE SUMMARY THROUGH 12/31/12
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/12
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 1/03/95 | | 11.26% | | 2.73% | | 5.91% | | |
| | | Service Class | | 5/01/00 | | 10.93% | | 2.47% | | 5.65% | | |
| | | | |
| Comparative benchmarks | | | | | | | | |
| | | Standard & Poor’s 500 Stock Index (f) | | 16.00% | | 1.66% | | 7.10% | | |
| | | Barclays U.S. Aggregate Bond Index (f) | | 4.21% | | 5.95% | | 5.18% | | |
| | | MFS Total Return Blended Index (x) | | 11.31% | | 3.81% | | 6.62% | | |
| (f) | Source: FactSet Research Systems Inc. |
| (x) | MFS Total Return Blended Index consists of 60% Standard & Poor’s 500 Stock Index and 40% Barclays U.S. Aggregate Bond Index. |
Benchmark Definitions
Barclays U.S. Aggregate Bond Index – a market capitalization-weighted index that measures the performance of the U.S. investment-grade, fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities with at least one year to final maturity.
Standard & Poor’s 500 Stock Index – a market capitalization-weighted index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
6
MFS Total Return Series
Performance Summary – continued
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
7
MFS Total Return Series
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2012 through December 31, 2012
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2012 through December 31, 2012.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | | Beginning
Account Value
7/01/12 | | | Ending Account Value
12/31/12 | | | Expenses Paid
During Period (p)
7/01/12-12/31/12 | |
| Initial Class | | Actual | | | 0.77% | | | | $1,000.00 | | | | $1,056.68 | | | | $3.98 | |
| | Hypothetical (h) | | | 0.77% | | | | $1,000.00 | | | | $1,021.27 | | | | $3.91 | |
| Service Class | | Actual | | | 1.02% | | | | $1,000.00 | | | | $1,055.17 | | | | $5.27 | |
| | Hypothetical (h) | | | 1.02% | | | | $1,000.00 | | | | $1,020.01 | | | | $5.18 | |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
8
MFS Total Return Series
PORTFOLIO OF INVESTMENTS – 12/31/12
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 60.4% | | | | | | | | |
| Aerospace – 4.4% | | | | | | | | |
| Honeywell International, Inc. | | | 387,400 | | | $ | 24,588,273 | |
| Lockheed Martin Corp. | | | 384,063 | | | | 35,445,174 | |
| Northrop Grumman Corp. | | | 110,647 | | | | 7,477,524 | |
| Precision Castparts Corp. | | | 26,600 | | | | 5,038,572 | |
| United Technologies Corp. | | | 348,020 | | | | 28,541,120 | |
| | | | | | | | |
| | | | | | $ | 101,090,663 | |
| | | | | | | | |
| Alcoholic Beverages – 0.9% | | | | | | | | |
| Diageo PLC | | | 718,588 | | | $ | 20,919,910 | |
| | | | | | | | |
| Automotive – 1.2% | | | | | | | | |
| Delphi Automotive PLC (a) | | | 246,990 | | | $ | 9,447,368 | |
| General Motors Co. (a) | | | 113,570 | | | | 3,274,223 | |
| Johnson Controls, Inc. | | | 490,050 | | | | 15,044,535 | |
| | | | | | | | |
| | | | | | $ | 27,766,126 | |
| | | | | | | | |
| Broadcasting – 2.3% | | | | | | | | |
| Omnicom Group, Inc. | | | 279,160 | | | $ | 13,946,834 | |
| Viacom, Inc., “B” | | | 294,340 | | | | 15,523,492 | |
| Walt Disney Co. | | | 466,720 | | | | 23,237,989 | |
| | | | | | | | |
| | | | | | $ | 52,708,315 | |
| | | | | | | | |
| Brokerage & Asset Managers – 1.1% | |
| BlackRock, Inc. | | | 70,834 | | | $ | 14,642,096 | |
| Franklin Resources, Inc. | | | 85,805 | | | | 10,785,689 | |
| | | | | | | | |
| | | | | | $ | 25,427,785 | |
| | | | | | | | |
| Business Services – 1.1% | | | | | | | | |
| Accenture PLC, “A” | | | 285,080 | | | $ | 18,957,820 | |
| Dun & Bradstreet Corp. | | | 42,950 | | | | 3,378,018 | |
| Fiserv, Inc. (a) | | | 47,050 | | | | 3,718,362 | |
| | | | | | | | |
| | | | | | $ | 26,054,200 | |
| | | | | | | | |
| Cable TV – 0.8% | | | | | | | | |
| Comcast Corp., “Special A” | | | 531,600 | | | $ | 19,111,020 | |
| | | | | | | | |
| Chemicals – 2.3% | | | | | | | | |
| 3M Co. | | | 250,830 | | | $ | 23,289,566 | |
| Celanese Corp. | | | 103,000 | | | | 4,586,590 | |
| E.I. du Pont de Nemours & Co. | | | 69,650 | | | | 3,132,161 | |
| PPG Industries, Inc. | | | 159,410 | | | | 21,576,144 | |
| | | | | | | | |
| | | | | | $ | 52,584,461 | |
| | | | | | | | |
| Computer Software – 1.0% | | | | | | | | |
| Check Point Software Technologies Ltd. (a) | | | 76,690 | | | $ | 3,653,512 | |
| Oracle Corp. | | | 597,622 | | | | 19,912,765 | |
| | | | | | | | |
| | | | | | $ | 23,566,277 | |
| | | | | | | | |
| Computer Software – Systems – 1.0% | |
| Hewlett-Packard Co. | | | 436,271 | | | $ | 6,216,862 | |
| International Business Machines Corp. | | | 92,090 | | | | 17,639,840 | |
| | | | | | | | |
| | | | | | $ | 23,856,702 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Construction – 0.5% | | | | | | | | |
| Stanley Black & Decker, Inc. | | | 144,969 | | | $ | 10,723,357 | |
| | | | | | | | |
| Consumer Products – 0.6% | | | | | | | | |
| Procter & Gamble Co. | | | 154,361 | | | $ | 10,479,568 | |
| Reckitt Benckiser Group PLC | | | 66,761 | | | | 4,182,158 | |
| | | | | | | | |
| | | | | | $ | 14,661,726 | |
| | | | | | | | |
| Electrical Equipment – 1.8% | | | | | | | | |
| Danaher Corp. | | | 473,880 | | | $ | 26,489,892 | |
| Pentair Ltd. | | | 76,049 | | | | 3,737,808 | |
| Tyco International Ltd. | | | 390,640 | | | | 11,426,220 | |
| | | | | | | | |
| | | | | | $ | 41,653,920 | |
| | | | | | | | |
| Electronics – 0.4% | | | | | | | | |
| Intel Corp. | | | 243,838 | | | $ | 5,030,378 | |
| Microchip Technology, Inc. | | | 102,690 | | | | 3,346,667 | |
| | | | | | | | |
| | | | | | $ | 8,377,045 | |
| | | | | | | | |
| Energy – Independent – 2.7% | | | | | | | | |
| Anadarko Petroleum Corp. | | | 134,410 | | | $ | 9,988,007 | |
| Apache Corp. | | | 174,230 | | | | 13,677,055 | |
| EOG Resources, Inc. | | | 40,830 | | | | 4,931,856 | |
| EQT Corp. | | | 78,960 | | | | 4,657,061 | |
| Noble Energy, Inc. | | | 108,360 | | | | 11,024,546 | |
| Occidental Petroleum Corp. | | | 230,490 | | | | 17,657,839 | |
| | | | | | | | |
| | | | | | $ | 61,936,364 | |
| | | | | | | | |
| Energy – Integrated – 2.8% | | | | | | | | |
| Chevron Corp. | | | 245,452 | | | $ | 26,543,179 | |
| Exxon Mobil Corp. | | | 447,722 | | | | 38,750,339 | |
| | | | | | | | |
| | | | | | $ | 65,293,518 | |
| | | | | | | | |
| Engineering – Construction – 0.2% | | | | | |
| Fluor Corp. | | | 76,810 | | | $ | 4,511,819 | |
| | | | | | | | |
| Food & Beverages – 3.1% | | | | | | | | |
| Coca-Cola Enterprises, Inc. | | | 61,950 | | | $ | 1,965,674 | |
| Dr Pepper Snapple Group, Inc. | | | 68,340 | | | | 3,019,261 | |
| General Mills, Inc. | | | 392,790 | | | | 15,872,644 | |
| Groupe Danone | | | 188,490 | | | | 12,453,464 | |
| J.M. Smucker Co. | | | 22,970 | | | | 1,980,933 | |
| Kellogg Co. | | | 46,897 | | | | 2,619,197 | |
| Kraft Foods Group, Inc. | | | 29,183 | | | | 1,326,951 | |
| Mondelez International, Inc. | | | 159,330 | | | | 4,058,135 | |
| Nestle S.A. | | | 302,068 | | | | 19,683,215 | |
| PepsiCo, Inc. | | | 132,080 | | | | 9,038,234 | |
| | | | | | | | |
| | | | | | $ | 72,017,708 | |
| | | | | | | | |
| Food & Drug Stores – 1.2% | | | | | | | | |
| CVS Caremark Corp. | | | 398,160 | | | $ | 19,251,036 | |
| Kroger Co. | | | 155,830 | | | | 4,054,697 | |
| Walgreen Co. | | | 95,640 | | | | 3,539,636 | |
| | | | | | | | |
| | | | | | $ | 26,845,369 | |
| | | | | | | | |
9
MFS Total Return Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| General Merchandise – 1.1% | | | | | | | | |
| Kohl’s Corp. | | | 179,610 | | | $ | 7,719,638 | |
| Target Corp. | | | 306,630 | | | | 18,143,297 | |
| | | | | | | | |
| | | | | | $ | 25,862,935 | |
| | | | | | | | |
| Insurance – 3.9% | | | | | | | | |
| ACE Ltd. | | | 269,300 | | | $ | 21,490,140 | |
| Aon PLC | | | 222,880 | | | | 12,392,128 | |
| Chubb Corp. | | | 71,200 | | | | 5,362,784 | |
| MetLife, Inc. | | | 534,770 | | | | 17,615,324 | |
| Prudential Financial, Inc. | | | 334,880 | | | | 17,859,150 | |
| Travelers Cos., Inc. | | | 230,600 | | | | 16,561,692 | |
| | | | | | | | |
| | | | | | $ | 91,281,218 | |
| | | | | | | | |
| Leisure & Toys – 0.4% | | | | | | | | |
| Hasbro, Inc. | | | 239,150 | | | $ | 8,585,485 | |
| | | | | | | | |
| Machinery & Tools – 0.5% | | | | | | | | |
| Eaton Corp. PLC | | | 223,480 | | | $ | 12,112,616 | |
| | | | | | | | |
| Major Banks – 7.2% | | | | | | | | |
| Bank of America Corp. | | | 781,420 | | | $ | 9,064,472 | |
| Bank of New York Mellon Corp. | | | 898,462 | | | | 23,090,473 | |
| Goldman Sachs Group, Inc. | | | 225,820 | | | | 28,805,599 | |
| JPMorgan Chase & Co. | | | 1,176,424 | | | | 51,727,363 | |
| Morgan Stanley | | | 198,700 | | | | 3,799,144 | |
| PNC Financial Services Group, Inc. | | | 146,440 | | | | 8,538,916 | |
| State Street Corp. | | | 310,900 | | | | 14,615,409 | |
| Wells Fargo & Co. | | | 770,410 | | | | 26,332,614 | |
| | | | | | | | |
| | | | | | $ | 165,973,990 | |
| | | | | | | | |
| Medical & Health Technology & Services – 0.5% | |
| AmerisourceBergen Corp. | | | 101,640 | | | $ | 4,388,815 | |
| Express Scripts Holding Co. (a) | | | 63,490 | | | | 3,428,460 | |
| Quest Diagnostics, Inc. | | | 62,960 | | | | 3,668,679 | |
| | | | | | | | |
| | | | | | $ | 11,485,954 | |
| | | | | | | | |
| Medical Equipment – 2.1% | | | | | | | | |
| Becton, Dickinson & Co. | | | 46,830 | | | $ | 3,661,638 | |
| Covidien PLC | | | 175,910 | | | | 10,157,043 | |
| Medtronic, Inc. | | | 189,790 | | | | 7,785,186 | |
| St. Jude Medical, Inc. | | | 300,860 | | | | 10,873,080 | |
| Thermo Fisher Scientific, Inc. | | | 245,930 | | | | 15,685,415 | |
| | | | | | | | |
| | | | | | $ | 48,162,362 | |
| | | | | | | | |
| Metals & Mining – 0.1% | | | | | | | | |
| Cliffs Natural Resources, Inc. | | | 35,640 | | | $ | 1,374,278 | |
| | | | | | | | |
| Natural Gas – Pipeline – 0.3% | | | | | | | | |
| Williams Cos., Inc. | | | 233,698 | | | $ | 7,651,273 | |
| | | | | | | | |
| Oil Services – 0.4% | | | | | | | | |
| Schlumberger Ltd. | | | 50,430 | | | $ | 3,494,295 | |
| Transocean, Inc. | | | 142,860 | | | | 6,378,699 | |
| | | | | | | | |
| | | | | | $ | 9,872,994 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 1.2% | |
| American Express Co. | | | 63,960 | | | $ | 3,676,421 | |
| MasterCard, Inc., “A” | | | 6,762 | | | | 3,322,035 | |
| SunTrust Banks, Inc. | | | 111,840 | | | | 3,170,664 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Other Banks & Diversified Financials – continued | |
| Visa, Inc., “A” | | | 62,000 | | | $ | 9,397,960 | |
| Western Union Co. | | | 364,010 | | | | 4,954,176 | |
| Zions Bancorporation | | | 162,010 | | | | 3,467,014 | |
| | | | | | | | |
| | | | | | $ | 27,988,270 | |
| | | | | | | | |
| Pharmaceuticals – 4.8% | | | | | | | | |
| Abbott Laboratories | | | 293,090 | | | $ | 19,197,395 | |
| Bayer AG | | | 46,329 | | | | 4,399,519 | |
| Johnson & Johnson | | | 525,850 | | | | 36,862,085 | |
| Merck & Co., Inc. | | | 158,500 | | | | 6,488,990 | |
| Pfizer, Inc. | | | 1,581,106 | | | | 39,654,138 | |
| Roche Holding AG | | | 19,797 | | | | 4,033,142 | |
| | | | | | | | |
| | | | | | $ | 110,635,269 | |
| | | | | | | | |
| Printing & Publishing – 0.3% | | | | | | | | |
| McGraw-Hill Cos., Inc. | | | 67,350 | | | $ | 3,682,025 | |
| Moody’s Corp. | | | 88,790 | | | | 4,467,913 | |
| | | | | | | | |
| | | | | | $ | 8,149,938 | |
| | | | | | | | |
| Railroad & Shipping – 0.3% | | | | | | | | |
| Canadian National Railway Co. | | | 38,060 | | | $ | 3,463,841 | |
| Union Pacific Corp. | | | 25,870 | | | | 3,252,376 | |
| | | | | | | | |
| | | | | | $ | 6,716,217 | |
| | | | | | | | |
| Restaurants – 0.3% | | | | | | | | |
| McDonald’s Corp. | | | 80,050 | | | $ | 7,061,211 | |
| | | | | | | | |
| Specialty Chemicals – 0.6% | | | | | | | | |
| Air Products & Chemicals, Inc. | | | 156,560 | | | $ | 13,154,171 | |
| | | | | | | | |
| Specialty Stores – 0.5% | | | | | | | | |
| Advance Auto Parts, Inc. | | | 100,320 | | | $ | 7,258,152 | |
| Staples, Inc. | | | 421,470 | | | | 4,804,758 | |
| | | | | | | | |
| | | | | | $ | 12,062,910 | |
| | | | | | | | |
| Telecommunications – Wireless – 0.8% | |
| Vodafone Group PLC | | | 7,594,982 | | | $ | 19,100,363 | |
| | | | | | | | |
| Telephone Services – 1.2% | | | | | | | | |
| AT&T, Inc. | | | 752,494 | | | $ | 25,366,573 | |
| CenturyLink, Inc. | | | 86,081 | | | | 3,367,489 | |
| | | | | | | | |
| | | | | | $ | 28,734,062 | |
| | | | | | | | |
| Tobacco – 2.7% | | | | | | | | |
| Altria Group, Inc. | | | 118,503 | | | $ | 3,723,364 | |
| Lorillard, Inc. | | | 105,120 | | | | 12,264,350 | |
| Philip Morris International, Inc. | | | 549,970 | | | | 45,999,491 | |
| | | | | | | | |
| | | | | | $ | 61,987,205 | |
| | | | | | | | |
| Trucking – 0.7% | | | | | | | | |
| United Parcel Service, Inc., “B” | | | 218,300 | | | $ | 16,095,259 | |
| | | | | | | | |
| Utilities – Electric Power – 1.1% | | | | | | | | |
| Duke Energy Corp. | | | 56,920 | | | $ | 3,631,496 | |
| NRG Energy, Inc. | | | 143,330 | | | | 3,295,157 | |
| PG&E Corp. | | | 118,190 | | | | 4,748,874 | |
| PPL Corp. | | | 266,970 | | | | 7,643,351 | |
10
MFS Total Return Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Utilities – Electric Power – continued | |
| Public Service Enterprise Group, Inc. | | | 187,930 | | | $ | 5,750,658 | |
| | | | | | | | |
| | | | | | $ | 25,069,536 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $1,264,956,366) | | | | | | $ | 1,398,223,801 | |
| | | | | | | | |
| | |
| BONDS – 37.9% | | | | | | | | |
| Agency – Other – 0.0% | | | | | | | | |
| Financing Corp., 9.65%, 2018 | | $ | 740,000 | | | $ | 1,081,526 | |
| | | | | | | | |
| Asset-Backed & Securitized – 2.0% | | | | | |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.809%, 2040 (z) | | $ | 1,962,844 | | | $ | 1,240,777 | |
| Capital Trust Realty Ltd., CDO, 5.16%, 2035 (n) | | | 1,092,759 | | | | 1,103,249 | |
| Citigroup/Deutsche Bank Commercial Mortgage Trust, 5.322%, 2049 | | | 4,124,280 | | | | 4,731,003 | |
| Credit Suisse Mortgage Capital Certificate, FRN, 5.695%, 2040 | | | 3,818,128 | | | | 4,424,470 | |
| GMAC Mortgage Corp. Loan Trust, FRN, 5.805%, 2036 | | | 1,126,976 | | | | 1,000,576 | |
| Greenwich Capital Commercial Funding Corp., 5.475%, 2039 | | | 5,978,000 | | | | 6,507,944 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., 4.78%, 2042 | | | 2,485,000 | | | | 2,683,353 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., “A3”, FRN, 5.929%, 2051 | | | 5,259,422 | | | | 5,594,957 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 4.948%, 2037 | | | 2,548,000 | | | | 2,724,110 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.213%, 2041 | | | 2,550,000 | | | | 2,678,183 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.475%, 2043 | | | 3,100,123 | | | | 3,501,266 | |
| Merrill Lynch Mortgage Trust, “A3”, FRN, 5.849%, 2050 | | | 808,563 | | | | 859,810 | |
| Merrill Lynch/Countrywide Commercial Mortgage Trust, FRN, 5.736%, 2050 | | | 4,602,142 | | | | 5,272,232 | |
| Morgan Stanley Capital I, Inc., FRN, 0.978%, 2030 (i)(n) | | | 2,437,549 | | | | 51,627 | |
| Residential Asset Mortgage Products, Inc., FRN, 4.97%, 2034 | | | 155,902 | | | | 156,071 | |
| Residential Funding Mortgage Securities, Inc., FRN, 5.32%, 2035 | | | 2,130,088 | | | | 1,280,102 | |
| Spirit Master Funding LLC, 5.05%, 2023 (z) | | | 1,676,854 | | | | 1,585,717 | |
| | | | | | | | |
| | | | | | $ | 45,395,447 | |
| | | | | | | | |
| Automotive – 0.3% | | | | | | | | |
| Hyundai Capital America, 2.125%, 2017 (n) | | $ | 533,000 | | | $ | 536,816 | |
| Toyota Motor Credit Corp., 3.2%, 2015 | | | 1,430,000 | | | | 1,516,383 | |
| Toyota Motor Credit Corp., 3.4%, 2021 | | | 2,050,000 | | | | 2,232,579 | |
| Volkswagen International Finance N.V., 2.375%, 2017 (n) | | | 1,948,000 | | | | 2,006,401 | |
| | | | | | | | |
| | | | | | $ | 6,292,179 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Broadcasting – 0.2% | | | | | | | | |
| Hearst-Argyle Television, Inc., 7.5%, 2027 | | $ | 1,871,000 | | | $ | 1,496,800 | |
| News America, Inc., 8.5%, 2025 | | | 1,586,000 | | | | 2,153,449 | |
| | | | | | | | |
| | | | | | $ | 3,650,249 | |
| | | | | | | | |
| Cable TV – 0.5% | | | | | | | | |
| Cox Communications, Inc., 4.625%, 2013 | | $ | 2,949,000 | | | $ | 2,999,773 | |
| DIRECTV Holdings LLC, 4.6%, 2021 | | | 2,930,000 | | | | 3,171,845 | |
| Time Warner Entertainment Co. LP, 8.375%, 2033 | | | 3,421,000 | | | | 4,992,847 | |
| | | | | | | | |
| | | | | | $ | 11,164,465 | |
| | | | | | | | |
| Conglomerates – 0.1% | | | | | | | | |
| ABB Finance (USA), Inc., 2.875%, 2022 | | $ | 703,000 | | | $ | 719,760 | |
| General Electric Co., 2.7%, 2022 | | | 1,450,000 | | | | 1,477,995 | |
| United Technologies Corp., 3.1%, 2022 | | | 970,000 | | | | 1,027,218 | |
| | | | | | | | |
| | | | | | $ | 3,224,973 | |
| | | | | | | | |
| Consumer Services – 0.0% | | | | | | | | |
| eBay, Inc., 1.35%, 2017 | | $ | 657,000 | | | $ | 664,651 | |
| | | | | | | | |
| Defense Electronics – 0.1% | | | | | | | | |
| BAE Systems Holdings, Inc., 5.2%, 2015 (n) | | $ | 1,074,000 | | | $ | 1,176,127 | |
| | | | | | | | |
| Emerging Market Quasi-Sovereign – 0.4% | |
| CNOOC Finance (2012) Ltd., 3.875%, 2022 (n) | | $ | 2,350,000 | | | $ | 2,497,293 | |
| Corporacion Nacional del Cobre de Chile, 3.75%, 2020 (n) | | | 746,000 | | | | 806,667 | |
| Petrobras International Finance Co., 5.375%, 2021 | | | 882,000 | | | | 992,973 | |
| Petrobras International Finance Co., 6.75%, 2041 | | | 637,000 | | | | 807,134 | |
| Petroleos Mexicanos, 8%, 2019 | | | 1,753,000 | | | | 2,292,048 | |
| Ras Laffan Liquefied Natural Gas Co. Ltd., 5.832%, 2016 (n) | | | 1,754,976 | | | | 1,933,106 | |
| | | | | | | | |
| | | | | | $ | 9,329,221 | |
| | | | | | | | |
| Emerging Market Sovereign – 0.4% | | | | | |
| Republic of Peru, 7.35%, 2025 | | $ | 184,000 | | | $ | 266,616 | |
| Russian Federation, 3.625%, 2015 (z) | | | 5,000,000 | | | | 5,282,500 | |
| United Mexican States, 4.75%, 2044 | | | 3,200,000 | | | | 3,616,000 | |
| | | | | | | | |
| | | | | | $ | 9,165,116 | |
| | | | | | | | |
| Energy – Independent – 0.1% | | | | | | | | |
| Apache Corp., 3.25%, 2022 | | $ | 959,000 | | | $ | 1,016,354 | |
| Apache Corp., 4.75%, 2043 | | | 734,000 | | | | 799,038 | |
| EOG Resources, Inc., 2.625%, 2023 | | | 687,000 | | | | 691,834 | |
| Hess Corp., 8.125%, 2019 | | | 700,000 | | | | 921,275 | |
| | | | | | | | |
| | | | | | $ | 3,428,501 | |
| | | | | | | | |
| Energy – Integrated – 0.6% | | | | | | | | |
| BP Capital Markets PLC, 4.5%, 2020 | | $ | 683,000 | | | $ | 787,131 | |
| BP Capital Markets PLC, 4.742%, 2021 | | | 1,966,000 | | | | 2,302,253 | |
| Husky Energy, Inc., 5.9%, 2014 | | | 1,758,000 | | | | 1,884,307 | |
| Husky Energy, Inc., 7.25%, 2019 | | | 1,793,000 | | | | 2,328,438 | |
| Petro-Canada, 6.05%, 2018 | | | 3,647,000 | | | | 4,435,179 | |
11
MFS Total Return Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Energy – Integrated – continued | | | | | |
| Total Capital International S.A., 1.55%, 2017 | | $ | 2,841,000 | | | $ | 2,884,800 | |
| | | | | | | | |
| | | | | | $ | 14,622,108 | |
| | | | | | | | |
| Financial Institutions – 0.1% | | | | | | | | |
| General Electric Capital Corp., 5.45%, 2013 | | $ | 1,963,000 | | | $ | 1,966,378 | |
| | | | | | | | |
| Food & Beverages – 0.2% | | | | | | | | |
| Anheuser-Busch InBev S.A., 8%, 2039 | | $ | 2,330,000 | | | $ | 3,772,272 | |
| Kraft Foods Group, Inc., 3.5%, 2022 (n) | | | 938,000 | | | | 1,001,190 | |
| Molson Coors Brewing Co., 5%, 2042 | | | 801,000 | | | | 897,650 | |
| | | | | | | | |
| | | | | | $ | 5,671,112 | |
| | | | | | | | |
| Gaming & Lodging – 0.0% | | | | | | | | |
| Wyndham Worldwide Corp., 6%, 2016 | | $ | 15,000 | | | $ | 16,965 | |
| | | | | | | | |
| Insurance – 0.1% | | | | | | | | |
| Metropolitan Life Global Funding I, 5.125%, 2013 (n) | | $ | 1,200,000 | | | $ | 1,215,028 | |
| Metropolitan Life Global Funding I, 5.125%, 2014 (n) | | | 1,060,000 | | | | 1,126,886 | |
| | | | | | | | |
| | | | | | $ | 2,341,914 | |
| | | | | | | | |
| Insurance – Health – 0.1% | | | | | | | | |
| WellPoint, Inc., 3.3%, 2023 | | $ | 1,363,000 | | | $ | 1,398,445 | |
| | | | | | | | |
| Insurance – Property & Casualty – 0.3% | | | | | |
| Chubb Corp., 6.375% to 2017, FRN to 2067 | | $ | 3,516,000 | | | $ | 3,832,440 | |
| Marsh & McLennan Cos., Inc., 4.8%, 2021 | | | 2,110,000 | | | | 2,374,265 | |
| ZFS Finance USA Trust V, 6.5% to 2017, FRN to 2067 (n) | | | 990,000 | | | | 1,055,588 | |
| | | | | | | | |
| | | | | | $ | 7,262,293 | |
| | | | | | | | |
| International Market Quasi-Sovereign – 0.7% | | | | | |
| Achmea Hypotheekbank N.V., 3.2%, 2014 (n) | | $ | 163,000 | | | $ | 170,871 | |
| ING Bank N.V., 3.9%, 2014 (n) | | | 2,900,000 | | | | 3,014,843 | |
| Irish Life & Permanent PLC, 3.6%, 2013 (e)(n) | | | 3,600,000 | | | | 3,600,025 | |
| KFW International Finance, Inc., 4.875%, 2019 | | | 2,980,000 | | | | 3,627,554 | |
| Societe Financement de l’ Economie Francaise, 3.375%, 2014 (n) | | | 1,664,000 | | | | 1,728,871 | |
| Temasek Financial I Ltd., 2.375%, 2023 (n) | | | 4,130,000 | | | | 4,067,662 | |
| | | | | | | | |
| | | | | | $ | 16,209,826 | |
| | | | | | | | |
| Local Authorities – 0.1% | | | | | | | | |
| New Jersey Turnpike Authority Rev. (Build America Bonds), “F”, 7.414%, 2040 | | $ | 2,405,000 | | | $ | 3,549,636 | |
| | | | | | | | |
| Machinery & Tools – 0.2% | | | | | | | | |
| Atlas Copco AB, 5.6%, 2017 (n) | | $ | 3,117,000 | | | $ | 3,634,958 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Major Banks – 1.6% | | | | | | | | |
| ABN AMRO Bank N.V., FRN, 2.083%, 2014 (n) | | $ | 2,400,000 | | | $ | 2,427,816 | |
| Banco Santander U.S. Debt S.A.U., 3.781%, 2015 (n) | | | 1,100,000 | | | | 1,106,259 | |
| Bank of America Corp., 7.375%, 2014 | | | 1,160,000 | | | | 1,256,103 | |
| Bank of America Corp., 5.49%, 2019 | | | 2,160,000 | | | | 2,399,367 | |
| Bank of America Corp., 7.625%, 2019 | | | 1,640,000 | | | | 2,098,496 | |
| BNP Paribas, 7.195% to 2037, FRN to 2049 (n) | | | 1,042,000 | | | | 1,068,050 | |
| Commonwealth Bank of Australia, 5%, 2019 (n) | | | 1,620,000 | | | | 1,882,604 | |
| Credit Suisse New York, 5.5%, 2014 | | | 2,200,000 | | | | 2,340,785 | |
| Goldman Sachs Group, Inc., 5.625%, 2017 | | | 2,680,000 | | | | 2,940,434 | |
| HSBC Holdings PLC, 5.1%, 2021 | | | 1,568,000 | | | | 1,851,621 | |
| ING Bank N.V., 3.75%, 2017 (n) | | | 1,918,000 | | | | 2,038,393 | |
| JPMorgan Chase & Co., 6.3%, 2019 | | | 2,760,000 | | | | 3,405,183 | |
| JPMorgan Chase & Co., 3.25%, 2022 | | | 694,000 | | | | 714,668 | |
| Merrill Lynch & Co., Inc., 6.15%, 2013 | | | 2,480,000 | | | | 2,519,811 | |
| Morgan Stanley, 6.625%, 2018 | | | 1,980,000 | | | | 2,333,579 | |
| PNC Funding Corp., 5.625%, 2017 | | | 2,078,000 | | | | 2,399,221 | |
| Royal Bank of Scotland PLC, 2.55%, 2015 | | | 563,000 | | | | 576,180 | |
| Wachovia Corp., 5.25%, 2014 | | | 2,143,000 | | | | 2,285,167 | |
| Wells Fargo & Co., 2.1%, 2017 | | | 2,290,000 | | | | 2,367,567 | |
| | | | | | | | |
| | | | | | $ | 38,011,304 | |
| | | | | | | | |
| Medical & Health Technology & Services – 0.3% | | | | | |
| Aristotle Holding, Inc., 2.65%, 2017 (n) | | $ | 2,980,000 | | | $ | 3,097,379 | |
| CareFusion Corp., 6.375%, 2019 | | | 2,550,000 | | | | 3,040,742 | |
| | | | | | | | |
| | | | | | $ | 6,138,121 | |
| | | | | | | | |
| Metals & Mining – 0.1% | | | | | | | | |
| Vale Overseas Ltd., 4.625%, 2020 | | $ | 669,000 | | | $ | 722,855 | |
| Vale Overseas Ltd., 6.875%, 2039 | | | 525,000 | | | | 658,248 | |
| | | | | | | | |
| | | | | | $ | 1,381,103 | |
| | | | | | | | |
| Mortgage-Backed – 12.2% | | | | | | | | |
| Fannie Mae, 4.01%, 2013 | | $ | 219,629 | | | $ | 220,843 | |
| Fannie Mae, 4.021%, 2013 | | | 974,226 | | | | 979,541 | |
| Fannie Mae, 4.743%, 2013 | | | 69,555 | | | | 69,616 | |
| Fannie Mae, 4.561%, 2014 | | | 873,578 | | | | 903,935 | |
| Fannie Mae, 4.825%, 2014 | | | 1,577,073 | | | | 1,645,012 | |
| Fannie Mae, 4.858%, 2014 | | | 792,815 | | | | 800,821 | |
| Fannie Mae, 4.94%, 2015 | | | 379,000 | | | | 408,900 | |
| Fannie Mae, 5.19%, 2015 | | | 401,375 | | | | 436,817 | |
| Fannie Mae, 5.27%, 2016 | | | 1,096,505 | | | | 1,268,697 | |
| Fannie Mae, 5.662%, 2016 | | | 307,104 | | | | 344,034 | |
| Fannie Mae, 5.725%, 2016 | | | 689,700 | | | | 781,456 | |
| Fannie Mae, 5.45%, 2017 | | | 768,594 | | | | 862,268 | |
| Fannie Mae, 5.5%, 2017 - 2038 | | | 43,452,657 | | | | 47,672,790 | |
| Fannie Mae, 6%, 2017 - 2037 | | | 20,314,382 | | | | 22,506,413 | |
| Fannie Mae, 2.578%, 2018 | | | 1,545,000 | | | | 1,654,315 | |
| Fannie Mae, 3.8%, 2018 | | | 327,670 | | | | 365,343 | |
| Fannie Mae, 3.849%, 2018 | | | 388,393 | | | | 436,514 | |
| Fannie Mae, 3.91%, 2018 | | | 478,513 | | | | 534,831 | |
12
MFS Total Return Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Mortgage-Backed – continued | | | | | |
| Fannie Mae, 4.5%, 2018 - 2041 | | $ | 8,426,877 | | | $ | 9,195,832 | |
| Fannie Mae, 5%, 2018 - 2041 | | | 21,796,551 | | | | 23,703,541 | |
| Fannie Mae, 5.37%, 2018 | | | 1,740,000 | | | | 1,984,041 | |
| Fannie Mae, 4.6%, 2019 | | | 315,054 | | | | 367,057 | |
| Fannie Mae, 4.88%, 2020 | | | 837,726 | | | | 938,579 | |
| Fannie Mae, 3%, 2027 | | | 3,029,527 | | | | 3,201,927 | |
| Fannie Mae, 7.5%, 2030 - 2032 | | | 200,894 | | | | 246,312 | |
| Fannie Mae, 6.5%, 2031 - 2037 | | | 5,560,670 | | | | 6,276,041 | |
| Fannie Mae, 4%, 2040 | | | 821,655 | | | | 891,267 | |
| Fannie Mae, 3.5%, 2041 - 2042 | | | 5,649,660 | | | | 6,079,312 | |
| Fannie Mae, TBA, 3%, 2013 | | | 3,060,000 | | | | 3,199,613 | |
| Fannie Mae, TBA, 3.5%, 2013 | | | 11,739,000 | | | | 12,515,333 | |
| Freddie Mac, 6%, 2016 - 2037 | | | 10,136,214 | | | | 11,164,701 | |
| Freddie Mac, 3.882%, 2017 | | | 839,798 | | | | 943,772 | |
| Freddie Mac, 5%, 2017 - 2039 | | | 13,120,061 | | | | 14,296,796 | |
| Freddie Mac, 2.303%, 2018 | | | 401,707 | | | | 422,828 | |
| Freddie Mac, 2.412%, 2018 | | | 1,226,000 | | | | 1,297,037 | |
| Freddie Mac, 3.154%, 2018 | | | 274,000 | | | | 299,724 | |
| Freddie Mac, 4.5%, 2018 - 2035 | | | 5,669,253 | | | | 6,041,806 | |
| Freddie Mac, 5.085%, 2019 | | | 2,793,000 | | | | 3,311,037 | |
| Freddie Mac, 5.5%, 2019 - 2037 | | | 6,723,625 | | | | 7,347,919 | |
| Freddie Mac, 3.808%, 2020 | | | 2,402,000 | | | | 2,714,210 | |
| Freddie Mac, 6.5%, 2034 - 2038 | | | 3,462,157 | | | | 3,933,503 | |
| Freddie Mac, 4%, 2040 - 2041 | | | 11,086,128 | | | | 11,845,464 | |
| Freddie Mac, 3%, 2042 | | | 2,349,000 | | | | 2,458,165 | |
| Freddie Mac, 3.5%, 2042 | | | 4,748,199 | | | | 5,084,679 | |
| Freddie Mac, TBA, 2.5%, 2013 | | | 3,044,000 | | | | 3,176,700 | |
| Freddie Mac, TBA, 3%, 2013 | | | 2,940,000 | | | | 3,073,678 | |
| Ginnie Mae, 6%, 2032 - 2038 | | | 4,533,909 | | | | 5,122,995 | |
| Ginnie Mae, 4.5%, 2033 - 2041 | | | 12,873,228 | | | | 14,190,581 | |
| Ginnie Mae, 5.5%, 2033 - 2035 | | | 4,951,729 | | | | 5,471,526 | |
| Ginnie Mae, 5%, 2034 - 2041 | | | 8,960,714 | | | | 9,856,846 | |
| Ginnie Mae, 3.5%, 2041 - 2042 | | | 4,137,179 | | | | 4,513,097 | |
| Ginnie Mae, 4%, 2041 | | | 6,297,925 | | | | 6,918,415 | |
| Ginnie Mae, TBA, 3%, 2013 | | | 7,530,000 | | | | 7,993,563 | |
| | | | | | | | |
| | | | | | $ | 281,970,043 | |
| | | | | | | | |
| Natural Gas – Pipeline – 0.3% | | | | | | | | |
| Enterprise Products Operating LLC, 6.5%, 2019 | | $ | 1,953,000 | | | $ | 2,447,509 | |
| Kinder Morgan Energy Partners LP, 7.4%, 2031 | | | 219,000 | | | | 285,230 | |
| Kinder Morgan Energy Partners LP, 7.75%, 2032 | | | 1,000,000 | | | | 1,345,230 | |
| Spectra Energy Capital LLC, 8%, 2019 | | | 1,694,000 | | | | 2,237,230 | |
| | | | | | | | |
| | | | | | $ | 6,315,199 | |
| | | | | | | | |
| Network & Telecom – 0.3% | | | | | | | | |
| AT&T, Inc., 5.55%, 2041 | | $ | 992,000 | | | $ | 1,190,523 | |
| AT&T, Inc., 4.35%, 2045 (z) | | | 2,898,000 | | | | 2,911,029 | |
| Telecom Italia Capital, 5.25%, 2013 | | | 2,176,000 | | | | 2,235,840 | |
| | | | | | | | |
| | | | | | $ | 6,337,392 | |
| | | | | | | | |
| Oil Services – 0.1% | | | | | | | | |
| Transocean, Inc., 3.8%, 2022 | | $ | 1,147,000 | | | $ | 1,175,597 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Other Banks & Diversified Financials – 0.8% | | | | | |
| American Express Co., 5.5%, 2016 | | $ | 2,287,000 | | | $ | 2,614,640 | |
| Banco Bradesco S.A., 6.75%, 2019 (n) | | | 1,391,000 | | | | 1,575,308 | |
| Capital One Financial Corp., 6.15%, 2016 | | | 2,872,000 | | | | 3,285,625 | |
| Citigroup, Inc., 5%, 2014 | | | 2,679,000 | | | | 2,818,544 | |
| Groupe BPCE S.A., 12.5% to 2019, FRN to 2049 (n) | | | 2,025,000 | | | | 2,346,833 | |
| Nordea Bank AB, 4.875%, 2021 (z) | | | 1,880,000 | | | | 2,181,007 | |
| Svenska Handelsbanken AB, 4.875%, 2014 (n) | | | 2,240,000 | | | | 2,367,142 | |
| Swedbank AB, 2.125%, 2017 (n) | | | 527,000 | | | | 538,457 | |
| | | | | | | | |
| | | | | | $ | 17,727,556 | |
| | | | | | | | |
| Pharmaceuticals – 0.6% | | | | | | | | |
| AbbVie, Inc., 1.2%, 2015 (n) | | $ | 4,250,000 | | | $ | 4,278,394 | |
| Hospira, Inc., 6.05%, 2017 | | | 1,927,000 | | | | 2,237,174 | |
| Roche Holdings, Inc., 6%, 2019 (n) | | | 3,007,000 | | | | 3,743,093 | |
| Teva Pharmaceutical Finance IV LLC, 3.65%, 2021 | | | 2,950,000 | | | | 3,157,184 | |
| | | | | | | | |
| | | | | | $ | 13,415,845 | |
| | | | | | | | |
| Real Estate – 0.8% | | | | | | | | |
| Boston Properties, Inc., REIT, 5%, 2015 | | $ | 1,871,000 | | | $ | 2,043,952 | |
| ERP Operating LP, REIT, 5.375%, 2016 | | | 590,000 | | | | 671,644 | |
| ERP Operating LP, REIT, 4.625%, 2021 | | | 2,097,000 | | | | 2,362,088 | |
| HCP, Inc., REIT, 5.375%, 2021 | | | 1,703,000 | | | | 1,939,301 | |
| HRPT Properties Trust, REIT, 6.25%, 2016 | | | 3,320,000 | | | | 3,642,163 | |
| HRPT Properties Trust, REIT, 6.65%, 2018 | | | 1,620,000 | | | | 1,815,688 | |
| Simon Property Group, Inc., REIT, 5.875%, 2017 | | | 1,880,000 | | | | 2,225,911 | |
| WEA Finance LLC, REIT, 6.75%, 2019 (n) | | | 837,000 | | | | 1,036,902 | |
WEA Finance LLC, REIT,
4.625%, 2021 (n) | | | 2,300,000 | | | | 2,575,338 | |
| | | | | | | | |
| | | | | | $ | 18,312,987 | |
| | | | | | | | |
| Retailers – 0.4% | | | | | | | | |
| Home Depot, Inc., 5.95%, 2041 | | $ | 643,000 | | | $ | 868,224 | |
| Limited Brands, Inc., 5.25%, 2014 | | | 779,000 | | | | 817,950 | |
| Target Corp., 4%, 2042 | | | 2,356,000 | | | | 2,420,505 | |
| Wal-Mart Stores, Inc., 5.25%, 2035 | | | 5,106,000 | | | | 6,202,753 | |
| | | | | | | | |
| | | | | | $ | 10,309,432 | |
| | | | | | | | |
| Supermarkets – 0.0% | | | | | | | | |
| Kroger Co., 5%, 2013 | | $ | 1,045,000 | | | $ | 1,058,347 | |
| | | | | | | | |
| Supranational – 0.2% | | | | | | | | |
| Asian Development Bank, 2.75%, 2014 | | $ | 2,220,000 | | | $ | 2,294,414 | |
| Asian Development Bank, 1.125%, 2017 | | | 1,340,000 | | | | 1,364,333 | |
| | | | | | | | |
| | | | | | $ | 3,658,747 | |
| | | | | | | | |
| Telecommunications – Wireless – 0.3% | |
| Crown Castle Towers LLC, 6.113%, 2040 (n) | | $ | 1,605,000 | | | $ | 1,933,195 | |
| Crown Castle Towers LLC, 4.883%, 2040 (n) | | | 830,000 | | | | 936,541 | |
| Rogers Communications, Inc., 6.8%, 2018 | | | 3,340,000 | | | | 4,224,976 | |
| | | | | | | | |
| | | | | | $ | 7,094,712 | |
| | | | | | | | |
13
MFS Total Return Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Tobacco – 0.1% | | | | | | | | |
| B.A.T. International Finance PLC, 3.25%, 2022 (n) | | $ | 2,334,000 | | | $ | 2,432,822 | |
| | | | | | | | |
| Transportation – Services – 0.1% | |
| ERAC USA Finance Co., 7%, 2037 (n) | | $ | 2,572,000 | | | $ | 3,266,000 | |
| | | | | | | | |
| U.S. Government Agencies and Equivalents – 0.2% | |
| Small Business Administration, 4.77%, 2024 | | $ | 446,877 | | | $ | 498,939 | |
| Small Business Administration, 5.18%, 2024 | | | 775,084 | | | | 868,092 | |
| Small Business Administration, 4.99%, 2024 | | | 793,019 | | | | 894,934 | |
| Small Business Administration, 5.11%, 2025 | | | 3,270,216 | | | | 3,667,183 | |
| | | | | | | | |
| | | | | | $ | 5,929,148 | |
| | | | | | | | |
| U.S. Treasury Obligations – 12.5% | |
| U.S. Treasury Bonds, 8.5%, 2020 | | $ | 3,204,000 | | | $ | 4,823,020 | |
| U.S. Treasury Bonds, 8%, 2021 | | | 366,000 | | | | 565,156 | |
| U.S. Treasury Bonds, 6%, 2026 | | | 278,000 | | | | 402,275 | |
| U.S. Treasury Bonds, 6.75%, 2026 | | | 2,129,000 | | | | 3,289,305 | |
| U.S. Treasury Bonds, 5.375%, 2031 | | | 495,000 | | | | 706,613 | |
| U.S. Treasury Bonds, 4.5%, 2036 | | | 1,109,000 | | | | 1,459,548 | |
| U.S. Treasury Bonds, 5%, 2037 | | | 252,000 | | | | 355,556 | |
| U.S. Treasury Bonds, 4.5%, 2039 | | | 38,795,400 | | | | 51,409,957 | |
| U.S. Treasury Notes, 3.5%, 2013 | | | 8,400,000 | | | | 8,516,810 | |
| U.S. Treasury Notes, 3.125%, 2013 | | | 8,504,000 | | | | 8,689,693 | |
| U.S. Treasury Notes, 2%, 2013 | | | 4,762,000 | | | | 4,840,497 | |
| U.S. Treasury Notes, 1.5%, 2013 | | | 6,564,000 | | | | 6,649,385 | |
| U.S. Treasury Notes, 1.875%, 2014 | | | 26,428,000 | | | | 26,936,950 | |
| U.S. Treasury Notes, 1.875%, 2014 | | | 1,365,000 | | | | 1,394,913 | |
| U.S. Treasury Notes, 0.5%, 2014 | | | 8,728,000 | | | | 8,766,185 | |
| U.S. Treasury Notes, 4.125%, 2015 | | | 6,910,000 | | | | 7,531,361 | |
| U.S. Treasury Notes, 2.125%, 2015 | | | 40,303,000 | | | | 42,050,498 | |
| U.S. Treasury Notes, 9.875%, 2015 | | | 2,793,000 | | | | 3,549,509 | |
| U.S. Treasury Notes, 2.625%, 2016 | | | 1,737,000 | | | | 1,858,725 | |
| U.S. Treasury Notes, 4.875%, 2016 | | | 6,300,000 | | | | 7,292,250 | |
| U.S. Treasury Notes, 0.875%, 2016 | | | 37,227,000 | | | | 37,738,871 | |
| U.S. Treasury Notes, 3.75%, 2018 | | | 15,935,000 | | | | 18,555,559 | |
| U.S. Treasury Notes, 2.75%, 2019 | | | 6,001,500 | | | | 6,645,257 | |
| U.S. Treasury Notes, 3.125%, 2019 | | | 514,000 | | | | 582,105 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| U.S. Treasury Obligations – continued | |
| U.S. Treasury Notes, 3.5%, 2020 | | $ | 18,971,000 | | | $ | 22,025,635 | |
| U.S. Treasury Notes, 3.125%, 2021 | | | 10,702,000 | | | | 12,135,897 | |
| | | | | | | | |
| | | | | | $ | 288,771,530 | |
| | | | | | | | |
| Utilities – Electric Power – 0.5% | | | | | | | | |
| Bruce Mansfield Unit, 6.85%, 2034 | | $ | 1,728,821 | | | $ | 1,801,431 | |
| MidAmerican Funding LLC, 6.927%, 2029 | | | 387,000 | | | | 514,016 | |
| Oncor Electric Delivery Co., 7%, 2022 | | | 3,162,000 | | | | 4,018,870 | |
| Progress Energy, Inc., 3.15%, 2022 | | | 2,519,000 | | | | 2,550,049 | |
| PSEG Power LLC, 5.32%, 2016 | | | 1,603,000 | | | | 1,812,291 | |
| System Energy Resources, Inc., 5.129%, 2014 (z) | | | 379,130 | | | | 384,115 | |
| Waterford 3 Funding Corp., 8.09%, 2017 | | | 124,471 | | | | 128,542 | |
| | | | | | | | |
| | | | | | $ | 11,209,314 | |
| | | | | | | | |
Total Bonds
(Identified Cost, $815,532,190) | | | | | | $ | 875,761,289 | |
| | | | | | | | |
|
| CONVERTIBLE PREFERRED STOCKS – 0.3% | |
| Aerospace – 0.0% | | | | | | | | |
| United Technologies Corp., 7.5% | | | 17,600 | | | $ | 980,496 | |
| | | | | | | | |
| Automotive – 0.2% | | | | | | | | |
| General Motors Co., 4.75% | | | 83,720 | | | $ | 3,694,564 | |
| | | | | | | | |
| Utilities – Electric Power – 0.1% | | | | | | | | |
| PPL Corp., 9.5% | | | 24,560 | | | $ | 1,284,734 | |
| | | | | | | | |
Total Convertible Preferred Stocks
(Identified Cost, $6,298,147) | | | $ | 5,959,794 | |
| | | | | | | | |
|
| MONEY MARKET FUNDS – 2.6% | |
| MFS Institutional Money Market Portfolio, 0.16%, at Cost and Net Asset Value (v) | | | 61,232,279 | | | $ | 61,232,279 | |
| | | | | | | | |
Total Investments
(Identified Cost, $2,148,018,982) | | | | | | $ | 2,341,177,163 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (1.2)% | | | | | | | (27,913,079 | ) |
| | | | | | | | |
| Net Assets – 100.0% | | | | | | $ | 2,313,264,084 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (e) | | Guaranteed by Minister for Finance of Ireland. |
| (i) | | Interest only security for which the fund receives interest on notional principal (Par amount). Par amount shown is the notional principal and does not reflect the cost of the security. |
| (n) | | Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. At period end, the aggregate value of these securities was $69,377,734, representing 3.0% of net assets. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
14
MFS Total Return Series
Portfolio of Investments – continued
| (z) | | Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The fund holds the following restricted securities: |
| | | | | | | | | | |
| Restricted Securities | | Acquisition
Date | | Cost | | | Value | |
| AT&T, Inc., 4.35%, 2045 | | 12/13/12 | | | $2,966,222 | | | | $2,911,029 | |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.809%, 2040 | | 3/01/06 | | | 1,962,844 | | | | 1,240,777 | |
| Nordea Bank AB, 4.875%, 2021 | | 1/11/11 | | | 1,872,467 | | | | 2,181,007 | |
| Russian Federation, 3.625%, 2015 | | 4/22/10 | | | 4,987,198 | | | | 5,282,500 | |
| Spirit Master Funding LLC, 5.05%, 2023 | | 10/04/05 | | | 1,663,074 | | | | 1,585,717 | |
| System Energy Resources, Inc., 5.129%, 2014 | | 4/16/04-11/22/04 | | | 379,448 | | | | 384,115 | |
| Total Restricted Securities | | | | | | | | | $13,585,145 | |
| % of Net assets | | | | | | | | | 0.6% | |
The following abbreviations are used in this report and are defined:
| CDO | | Collateralized Debt Obligation |
| FRN | | Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end. |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
See Notes to Financial Statements
15
MFS Total Return Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | | | | |
At 12/31/12 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $2,086,786,703) | | | $2,279,944,884 | | | | | |
Underlying affiliated funds, at cost and value | | | 61,232,279 | | | | | |
Total investments, at value (identified cost, $2,148,018,982) | | | $2,341,177,163 | | | | | |
Receivables for | | | | | | | | |
Fund shares sold | | | 508,459 | | | | | |
Interest and dividends | | | 7,922,430 | | | | | |
Other assets | | | 17,538 | | | | | |
Total assets | | | | | | | $2,349,625,590 | |
Liabilities | | | | | | | | |
Payable to custodian | | | $1,533 | | | | | |
| Payables for | | | | | | | | |
Investments purchased | | | 102,867 | | | | | |
TBA purchase commitments | | | 32,406,577 | | | | | |
Fund shares reacquired | | | 3,423,334 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 185,338 | | | | | |
Shareholder servicing costs | | | 2,132 | | | | | |
Distribution and/or service fees | | | 23,788 | | | | | |
| Payable for independent Trustees’ compensation | | | 180 | | | | | |
Accrued expenses and other liabilities | | | 215,757 | | | | | |
Total liabilities | | | | | | | $36,361,506 | |
Net assets | | | | | | | $2,313,264,084 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $2,288,043,851 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 193,165,979 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (223,693,347 | ) | | | | |
Undistributed net investment income | | | 55,747,601 | | | | | |
Net assets | | | | | | | $2,313,264,084 | |
Shares of beneficial interest outstanding | | | | | | | 115,921,673 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $1,440,525,117 | | | | 71,848,357 | | | | $20.05 | |
Service Class | | | 872,738,967 | | | | 44,073,316 | | | | 19.80 | |
See Notes to Financial Statements
16
MFS Total Return Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | | | | | | |
Year ended 12/31/12 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $38,788,964 | | | | | |
Interest | | | 34,104,496 | | | | | |
Dividends from underlying affiliated funds | | | 46,470 | | | | | |
Foreign taxes withheld | | | (238,151 | ) | | | | |
Total investment income | | | | | | | $72,701,779 | |
Expenses | | | | | | | | |
Management fee | | | $17,946,112 | | | | | |
Distribution and/or service fees | | | 2,166,402 | | | | | |
Shareholder servicing costs | | | 221,380 | | | | | |
Administrative services fee | | | 352,156 | | | | | |
Independent Trustees’ compensation | | | 50,285 | | | | | |
Custodian fee | | | 161,923 | | | | | |
Shareholder communications | | | 263,605 | | | | | |
Audit and tax fees | | | 66,409 | | | | | |
Legal fees | | | 28,235 | | | | | |
Miscellaneous | | | 97,989 | | | | | |
Total expenses | | | | | | | $21,354,496 | |
Fees paid indirectly | | | (159 | ) | | | | |
Reduction of expenses by investment adviser | | | (707,547 | ) | | | | |
Net expenses | | | | | | | $20,646,790 | |
Net investment income | | | | | | | $52,054,989 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $91,128,037 | | | | | |
Foreign currency | | | (11,923 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $91,116,114 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $111,015,023 | | | | | |
Translation of assets and liabilities in foreign currencies | | | 31,847 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $111,046,870 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $202,162,984 | |
Change in net assets from operations | | | | | | | $254,217,973 | |
See Notes to Financial Statements
17
MFS Total Return Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | | | |
For years ended 12/31 | | | 2012 | | | | 2011 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $52,054,989 | | | | $59,820,148 | |
Net realized gain (loss) on investments and foreign currency | | | 91,116,114 | | | | 87,425,419 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 111,046,870 | | | | (100,406,972 | ) |
Change in net assets from operations | | | $254,217,973 | | | | $46,838,595 | |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(62,960,127 | ) | | | $(65,256,874 | ) |
Change in net assets from fund share transactions | | | $(311,739,490 | ) | | | $(333,095,963 | ) |
Total change in net assets | | | $(120,481,644 | ) | | | $(351,514,242 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 2,433,745,728 | | | | 2,785,259,970 | |
At end of period (including undistributed net investment income of $55,747,601 and
$62,958,681, respectively) | | | $2,313,264,084 | | | | $2,433,745,728 | |
See Notes to Financial Statements
18
MFS Total Return Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $18.53 | | | | $18.71 | | | | $17.48 | | | | $15.42 | | | | $21.68 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.44 | | | | $0.44 | | | | $0.41 | | | | $0.44 | | | | $0.52 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 1.63 | | | | (0.12 | ) | | | 1.31 | | | | 2.20 | | | | (4.97 | ) |
Total from investment operations | | | $2.07 | | | | $0.32 | | | | $1.72 | | | | $2.64 | | | | $(4.45 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.55 | ) | | | $(0.50 | ) | | | $(0.49 | ) | | | $(0.58 | ) | | | $(0.61 | ) |
From net realized gain on investments | | | — | | | | — | | | | — | | | | — | | | | (1.20 | ) |
Total distributions declared to shareholders | | | $(0.55 | ) | | | $(0.50 | ) | | | $(0.49 | ) | | | $(0.58 | ) | | | $(1.81 | ) |
Net asset value, end of period (x) | | | $20.05 | | | | $18.53 | | | | $18.71 | | | | $17.48 | | | | $15.42 | |
Total return (%) (k)(r)(s)(x) | | | 11.26 | | | | 1.77 | | | | 9.93 | | | | 18.03 | | | | (22.13 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.80 | | | | 0.81 | | | | 0.81 | | | | 0.82 | | | | 0.82 | |
Expenses after expense reductions (f) | | | 0.77 | | | | 0.78 | | | | 0.81 | | | | 0.82 | | | | 0.80 | |
Net investment income | | | 2.26 | | | | 2.36 | | | | 2.30 | | | | 2.80 | | | | 2.80 | |
Portfolio turnover | | | 22 | | | | 19 | | | | 30 | | | | 43 | | | | 55 | |
Net assets at end of period (000 omitted) | | | $1,440,525 | | | | $1,574,503 | | | | $1,860,233 | | | | $1,967,226 | | | | $1,901,307 | |
See Notes to Financial Statements
19
MFS Total Return Series
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $18.31 | | | | $18.48 | | | | $17.28 | | | | $15.24 | | | | $21.44 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.39 | | | | $0.39 | | | | $0.36 | | | | $0.39 | | | | $0.46 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 1.60 | | | | (0.11 | ) | | | 1.29 | | | | 2.18 | | | | (4.91 | ) |
Total from investment operations | | | $1.99 | | | | $0.28 | | | | $1.65 | | | | $2.57 | | | | $(4.45 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.50 | ) | | | $(0.45 | ) | | | $(0.45 | ) | | | $(0.53 | ) | | | $(0.55 | ) |
From net realized gain on investments | | | — | | | | — | | | | — | | | | — | | | | (1.20 | ) |
Total distributions declared to shareholders | | | $(0.50 | ) | | | $(0.45 | ) | | | $(0.45 | ) | | | $(0.53 | ) | | | $(1.75 | ) |
Net asset value, end of period (x) | | | $19.80 | | | | $18.31 | | | | $18.48 | | | | $17.28 | | | | $15.24 | |
Total return (%) (k)(r)(s)(x) | | | 10.93 | | | | 1.58 | | | | 9.63 | | | | 17.72 | | | | (22.32 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.05 | | | | 1.06 | | | | 1.06 | | | | 1.07 | | | | 1.07 | |
Expenses after expense reductions (f) | | | 1.02 | | | | 1.03 | | | | 1.06 | | | | 1.07 | | | | 1.05 | |
Net investment income | | | 2.02 | | | | 2.11 | | | | 2.05 | | | | 2.54 | | | | 2.55 | |
Portfolio turnover | | | 22 | | | | 19 | | | | 30 | | | | 43 | | | | 55 | |
Net assets at end of period (000 omitted) | | | $872,739 | | | | $859,243 | | | | $925,027 | | | | $872,466 | | | | $804,493 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (r) | Certain expenses have been reduced without which performance would have been lower. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (x) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
20
MFS Total Return Series
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Total Return Series (the fund) is a series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests a significant portion of its assets in asset-backed and/or mortgage-backed securities. The value of these securities may depend, in part, on the issuer’s or borrower’s credit quality or ability to pay principal and interest when due and may fall if an issuer or borrower defaults on its obligation to pay principal or interest or if the instrument’s credit rating is downgraded by a credit rating agency. U.S. Government securities not supported as to the payment of principal or interest by the U.S. Treasury, such as those issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, are subject to greater credit risk than are U.S. Government securities supported by the U.S. Treasury, such as those issued by Ginnie Mae.
In this reporting period the fund adopted Financial Accounting Standards Board (FASB) Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 seeks to improve the comparability of fair value measurements as presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) by providing common requirements for fair value measurement and disclosure.
In December 2011, the FASB issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods, ASU 2011-11 is intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. Although still evaluating the potential impacts of ASU 2011-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Debt instruments and floating rate loans (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as provided by a third-party pricing service. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be
21
MFS Total Return Series
Notes to Financial Statements – continued
valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of December 31, 2012 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $1,312,294,471 | | | | $— | | | | $— | | | | $1,312,294,471 | |
United Kingdom | | | — | | | | 44,202,431 | | | | — | | | | 44,202,431 | |
Switzerland | | | 19,683,215 | | | | 4,033,142 | | | | — | | | | 23,716,357 | |
France | | | — | | | | 12,453,464 | | | | — | | | | 12,453,464 | |
Germany | | | — | | | | 4,399,519 | | | | — | | | | 4,399,519 | |
Israel | | | 3,653,512 | | | | — | | | | — | | | | 3,653,512 | |
Canada | | | 3,463,841 | | | | — | | | | — | | | | 3,463,841 | |
| U.S. Treasury Bonds & U.S. Government Agency & Equivalents | | | — | | | | 295,782,204 | | | | — | | | | 295,782,204 | |
| Non-U.S. Sovereign Debt | | | — | | | | 38,362,910 | | | | — | | | | 38,362,910 | |
| U.S. Corporate Bonds | | | — | | | | 148,581,472 | | | | — | | | | 148,581,472 | |
| Residential Mortgage-Backed Securities | | | — | | | | 284,406,792 | | | | — | | | | 284,406,792 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 40,614,672 | | | | — | | | | 40,614,672 | |
| Asset-Backed Securities (including CDOs) | | | — | | | | 2,344,026 | | | | — | | | | 2,344,026 | |
| Foreign Bonds | | | — | | | | 65,669,213 | | | | — | | | | 65,669,213 | |
| Mutual Funds | | | 61,232,279 | | | | — | | | | — | | | | 61,232,279 | |
| Total Investments | | | $1,400,327,318 | | | | $940,849,845 | | | | $— | | | | $2,341,177,163 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $56,873,257 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $19,683,215 would have been considered level 2 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between levels as of the end of the period.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned
22
MFS Total Return Series
Notes to Financial Statements – continued
securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2012, there were no securities on loan or collateral outstanding.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
The fund purchased or sold debt securities on a when-issued or delayed delivery basis, or in a “To Be Announced” (TBA) or “forward commitment” transaction with delivery or payment to occur at a later date beyond the normal settlement period. TBA securities resulting from these transactions are included in the Portfolio of Investments. At the time a fund enters into a commitment to purchase or sell a security, the transaction is recorded and the value of the security acquired is reflected in the fund’s net asset value. The price of such security and the date that the security will be delivered and paid for are fixed at the time the transaction is negotiated. The value of the security may vary with market fluctuations. TBA purchase commitments are held at carrying amount, which approximates fair value and are categorized as Level 2 within the fair value hierarchy disclosure. No interest accrues to the fund until payment takes place. At the time that a fund enters into this type of transaction, the fund is required to have sufficient cash and/or liquid securities to cover its commitments. Losses may arise due to changes in the value of the underlying securities or if the counterparty does not perform under the contract’s terms, or if the issuer does not issue the securities due to political, economic or other factors. Additionally, losses may arise due to declines in the value of the securities prior to settlement date.
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount for the year ended December 31, 2012, is shown as a reduction of total expenses in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Foreign taxes have been accrued by the fund in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to amortization and accretion of debt securities and wash sale deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/12 | | | 12/31/11 | |
| Ordinary income (including any short-term capital gains) | | | $62,960,127 | | | | $65,256,874 | |
23
MFS Total Return Series
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/12 | | | | |
| Cost of investments | | | $2,165,128,895 | |
| Gross appreciation | | | 266,541,242 | |
| Gross depreciation | | | (90,492,974 | ) |
| Net unrealized appreciation (depreciation) | | | $176,048,268 | |
| Undistributed ordinary income | | | 55,747,601 | |
| Capital loss carryforwards | | | (206,583,434 | ) |
| Other temporary differences | | | 7,798 | |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized after December 31, 2010 may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
As of December 31, 2012, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | | |
| Pre-enactment losses: | | | | |
| 12/31/16 | | | $(145,924,046 | ) |
| 12/31/17 | | | (60,659,388 | ) |
| Total | | | $(206,583,434 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/12 | | | Year ended
12/31/11 | |
| Initial Class | | | $41,257,304 | | | | $44,014,211 | |
| Service Class | | | 21,702,823 | | | | 21,242,663 | |
| Total | | | $62,960,127 | | | | $65,256,874 | |
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
| | | | |
| First $3 billion of average daily net assets | | | 0.75% | |
| Next $2 billion of average daily net assets | | | 0.65% | |
| Average daily net assets in excess of $5 billion | | | 0.50% | |
The investment adviser has agreed in writing to reduce its management fee to 0.70% of average daily net assets in excess of $1 billion up to $2.5 billion, and 0.65% of average daily net assets in excess of $2.5 billion up to $3 billion. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2014. This management fee reduction amounted to $698,913, which is shown as a reduction of total expenses in the Statement of Operations.
The management fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.72% of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and
24
MFS Total Return Series
Notes to Financial Statements – continued
variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2012, the fee was $218,819, which equated to 0.0091% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2012, these costs amounted to $2,561.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.0147% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended December 31, 2012, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $20,418 and are included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $8,634, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
Purchases and sales of investments, other than short-term obligations, were as follows:
| | | | | | | | |
| | | Purchases | | | Sales | |
| U.S. Government securities | | | $122,791,427 | | | | $154,559,791 | |
| Investments (non-U.S. Government securities) | | | $390,495,219 | | | | $677,659,269 | |
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 1,388,031 | | | | $27,195,466 | | | | 2,116,823 | | | | $40,124,261 | |
Service Class | | | 5,450,651 | | | | 105,686,433 | | | | 6,166,846 | | | | 114,533,054 | |
| | | 6,838,682 | | | | $132,881,899 | | | | 8,283,669 | | | | $154,657,315 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 2,117,931 | | | | $41,257,304 | | | | 2,445,234 | | | | $44,014,211 | |
Service Class | | | 1,126,834 | | | | 21,702,823 | | | | 1,193,408 | | | | 21,242,663 | |
| | | 3,244,765 | | | | $62,960,127 | | | | 3,638,642 | | | | $65,256,874 | |
25
MFS Total Return Series
Notes to Financial Statements – continued
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (16,612,377 | ) | | | $(325,336,787 | ) | | | (19,049,237 | ) | | | $(358,577,630 | ) |
Service Class | | | (9,435,964 | ) | | | (182,244,729 | ) | | | (10,473,551 | ) | | | (194,432,522 | ) |
| | | (26,048,341 | ) | | | $(507,581,516 | ) | | | (29,522,788 | ) | | | $(553,010,152 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (13,106,415 | ) | | | $(256,884,017 | ) | | | (14,487,180 | ) | | | $(274,439,158 | ) |
Service Class | | | (2,858,479 | ) | | | (54,855,473 | ) | | | (3,113,297 | ) | | | (58,656,805 | ) |
| | | (15,964,894 | ) | | | $(311,739,490 | ) | | | (17,600,477 | ) | | | $(333,095,963 | ) |
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2012, the fund’s commitment fee and interest expense were $15,449 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 25,468,371 | | | | 398,904,513 | | | �� | (363,140,605 | ) | | | 61,232,279 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $46,470 | | | | $61,232,279 | |
26
MFS Total Return Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of
MFS Total Return Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Total Return Series (the “Fund”) (one of the series comprising MFS Variable Insurance Trust) as of December 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Total Return Series as of December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2013
27
MFS Total Return Series
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 1, 2013, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES | | | | | | | | |
Robert J. Manning (k) (age 49) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Chief Executive Officer and Director; President (until December 2009); Chief Investment Officer (until July 2010) | | N/A |
| | | | |
| INDEPENDENT TRUSTEES | | | | | | | | |
David H. Gunning (age 70) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman; Portman Limited (mining), Director (until 2008) |
| | | | |
Robert E. Butler (age 71) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 57) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 71) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 68) | | Trustee | | December 2004 | | Private investor; Rouse Properties Inc. (real estate), Director | | N/A |
| | | | |
John P. Kavanaugh (age 58) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
J. Dale Sherratt (age 74) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner | | N/A |
| | | | |
Laurie J. Thomsen
(age 55) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 71) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
John M. Corcoran (k) (age 47) | | President | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) | | N/A |
| | | | |
| Christopher R. Bohane (k) (age 39) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kino Clark (k) (age 44) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 53) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
| | | | |
Ethan D. Corey (k) (age 49) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
28
MFS Total Return Series
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
David L. DiLorenzo (k) (age 44) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Robyn L. Griffin (age 37) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 39) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 62) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 42) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 42) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 60) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Frank L. Tarantino (age 68) | | Independent
Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 52) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. For the period October 2008, until January 2012, Mr. Corcoran served as Treasurer of the Funds. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2013, the Trustees served as board members of 143 funds within the MFS Family of Funds.
29
MFS Total Return Series
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers Nevin Chitkara William Douglas Steven Gorham Richard Hawkins Joshua Marston Brooks Taylor | | |
30
MFS Total Return Series
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2012 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2011 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2011, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 5th quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 2nd quintile for the one-year period and the 4th quintile for the five-year period ended December 31, 2011 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
The Trustees expressed continued concern to MFS about the substandard investment performance of the Fund. In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year, as to MFS’ efforts to improve the Fund’s performance. In addition, the Trustees requested that they receive a separate update on the Fund’s performance at each of their regular meetings. After reviewing these and related factors, the Trustees concluded, within the context
31
MFS Total Return Series
Board Review of Investment Advisory Agreement – continued
of their overall conclusions regarding the investment advisory agreement, that MFS’ responses and efforts and plans to improve investment performance were sufficient to support approval of the continuance of the investment advisory agreement for an additional one-year period, but that they would continue to closely monitor the performance of the Fund.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each higher than the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to institutional accounts, if any. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund is likely to benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund. They noted that the Fund’s advisory fee rate schedule is subject to contractual breakpoints that reduce the Fund’s advisory fee rate on average daily net assets over $3 billion and $5 billion, and that MFS has agreed in writing to reduce the Fund’s advisory fee on average daily net assets over $1 billion and $2.5 billion, which may not be changed without the Trustees’ approval. The Trustees concluded that the existing breakpoints were sufficient to allow the Fund to benefit from economies of scale as its assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2012.
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of the MFS Web site (mfs.com).
32
MFS Total Return Series
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling
1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 54.82% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
33
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
34
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
35
ANNUAL REPORT
December 31, 2012
MFS® HIGH INCOME SERIES
MFS® Variable Insurance Trust
VHI-ANN
MFS® HIGH INCOME SERIES
CONTENTS
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ NO BANK OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS High Income Series
LETTER FROM THE CHAIRMAN AND CEO
Dear Contract Owners:
The global market outlook for 2013 is one of cautious optimism. While we are seeing some positive economic trends in the United States, Europe and China, the overall environment remains challenging. In the United States, the recent fiscal cliff agreement was received positively by investors, even though it mostly addressed pressing taxation issues and did not resolve additional concerns, including the need for spending cuts and a large-scale reduction of the federal debt. These issues will be front and center again in the spring. Despite the ongoing uncertainty, economic tailwinds are gathering strength as the U.S. housing and job markets are improving and consumer confidence is rising.
Overseas, the debt crisis continues to weigh heavily on eurozone markets, with even Germany — long an economic stalwart — experiencing some contraction. These ongoing challenges could be a drag on global market performance this year. In Asia, manufacturing activity has accelerated in emerging markets such as China and India, and we are seeing signs of stabilized loan growth in China, a leading indicator of that country’s economic health. In contrast, Japan’s economy is contracting sharply under deflationary pressures. Nevertheless, Japanese markets have responded favorably to early actions by the new government, which appears determined to act aggressively, along with the Bank of Japan, to stimulate growth.
As always, managing risk in the face of uncertainty remains a top priority for investors. At MFS®, our uniquely collaborative investment process revolves around global research and our disciplined risk management approach. Our global team of investment professionals shares ideas and evaluates opportunities across continents, investment disciplines and asset classes — all with a goal of building better insights, and ultimately better results, for our clients.
We remain mindful of the many economic challenges investors face today, and believe it is more important than ever to maintain a long-term view, employ time-tested principles, such as asset allocation and diversification, and work closely with investment advisors to identify and pursue the most suitable opportunities.
Respectfully,
Robert J. Manning
Chairman and Chief Executive Officer
MFS Investment Management®
February 15, 2013
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
MFS High Income Series
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | | | |
| Top five industries (i) | | | | |
| Energy – Independent | | | 8.4% | |
| Broadcasting | | | 6.1% | |
| Medical & Health Technology & Services | | | 5.6% | |
| Utilities – Electric Power | | | 4.3% | |
| Telecommunications – Wireless | | | 4.1% | |
| | | | |
Composition including fixed income
credit quality (a)(i) | |
| A | | | 0.3% | |
| BBB | | | 6.4% | |
| BB | | | 31.8% | |
| B | | | 43.3% | |
| CCC | | | 14.4% | |
| CC | | | 0.1% | |
| C | | | 0.1% | |
| D | | | 0.1% | |
| Not Rated (o) | | | 0.0% | |
| Non-Fixed Income | | | 2.7% | |
| Cash & Other | | | 0.8% | |
| |
| Portfolio facts (i) | | | | |
| Average Duration (d) | | | 3.8 | |
| Average Effective Maturity (m) | | | 7.1 yrs. | |
| (a) | | For all securities other than those specifically described below, ratings are assigned to underlying securities utilizing ratings from Moody’s, Fitch, and Standard & Poor’s rating agencies and applying the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). Securities rated BBB or higher are considered investment grade. All ratings are subject to change. Not Rated includes fixed income securities, including fixed income futures contracts, which have not been rated by any rating agency. Non-Fixed Income includes equity securities (including convertible bonds and equity derivatives) and commodities. Cash & Other includes cash, other assets less liabilities, offsets to derivative positions, and short-term securities. The fund may not hold all of these instruments. The fund is not rated by these agencies. |
| (d) | | Duration is a measure of how much a bond’s price is likely to fluctuate with general changes in interest rates, e.g., if rates rise 1.00%, a bond with a 5-year duration is likely to lose about 5.00% of its value due to the interest rate move. |
| (i) | | For purposes of this presentation, the components include the market value of securities, and reflect the impact of the equivalent exposure of derivative positions, if any. These amounts may be negative from time to time. The bond component will include any accrued interest amounts. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than market value. Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio. |
| (m) | | In determining an instrument’s effective maturity for purposes of calculating the fund’s dollar-weighted average effective maturity, MFS uses the instrument’s stated maturity or, if applicable, an earlier date on which MFS believes it is probable that a maturity-shortening device (such as a put, pre-refunding or prepayment) will cause the instrument to be repaid. Such an earlier date can be substantially shorter than the instrument’s stated maturity. |
Percentages are based on net assets as of 12/31/12.
The portfolio is actively managed and current holdings may be different.
2
MFS High Income Series
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2012, Initial Class shares of the MFS High Income Series (“fund”) provided a total return of 14.69%, while Service Class shares of the fund provided a return of 14.43%. These compare with a return of 15.78% over the same period for the fund’s benchmark, the Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index.
Market Environment
The beginning of the period was characterized by a risk-on sentiment as a result of additional liquidity measures by the Federal Reserve Bank (“Fed”) and the European Central Bank (“ECB”) as well as a commensurate improvement in macroeconomic conditions. During this time, global equity valuations rose, credit spreads contracted, and high-quality sovereign yields increased modestly.
During the middle of the period, however, conditions worsened, driven by broadly weaker global macroeconomic indicators, as well as renewed concerns over the eurozone’s capacity and determination to address its ongoing crisis. Despite this deterioration, broad market sentiment remained relatively resilient as equity markets generally maintained gains and credit spreads did not indicate deterioration.
However, this renewed weakness in the fundamentals precipitated a further round of monetary easing by both the Fed (through a third round of quantitative easing) and the ECB (through a new bond purchase facility) in the second half of the period, which soon instilled additional confidence in risk markets. Nonetheless, towards the end of the period, weaker equity earnings reports and declining forward guidance caused market sentiment to soften. In addition, as we moved toward year end, the fiscal cliff negotiations between the Republicans in the U.S. Congress and President Obama were a particular source of market attention, where uncertainty surrounding the fiscal negotiations continued right up to the end-of-year deadline.
Detractors from Performance
Relative to the Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index, the fund’s lesser exposure to “BB” (r) and “B” rated securities detracted from performance as lower-quality issues appeared to have benefited from strong investor demand due to a liquidity-fueled rally during the reporting period.
The portion of the fund’s return derived from yield, which was less than that of the benchmark, weighed on relative results. The fund’s lesser exposure to the telecom sector also hindered relative performance as this market segment performed well during the reporting period.
Bond selection was another negative factor for relative results. Among individual securities, debt holdings of oil and natural gas exploration and production company OGX Petroleo, oil and natural gas property company ATP Oil & Gas (h), and Spanish language radio and television station owner and operator LBI Media were among the fund’s top relative detractors for the reporting period.
Contributors to Performance
The fund’s greater exposure to the finance sector contributed to relative results as this sector posted strong returns for the reporting period. A greater exposure to “BBB” rated securities further supported positive relative results.
Top individual contributors during the reporting period included the fund’s debt holdings of insurance firm American International Group, financial services firm Royal Bank of Scotland, UK-based bank Santander UK, cement producer CEMEX, and investment bank LBG Capital.
Respectfully,
| | |
| William Adams | | David Cole |
| Portfolio Manager | | Portfolio Manager |
| (h) | Security was not held in the portfolio at period end. |
| (r) | Bonds rated “BBB”, “Baa”, or higher are considered investment grade; bonds rated “BB”, “Ba”, or below are considered non-investment grade. The sources for bond quality ratings are Moody’s Investors Service, Standard & Poor’s and Fitch, Inc. and are applied using the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). For securities which are not rated by any of the three agencies, the security is considered Not Rated. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
3
MFS High Income Series
PERFORMANCE SUMMARY THROUGH 12/31/12
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/12
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 7/26/95 | | 14.69% | | 7.35% | | 7.73% | | |
| | | Service Class | | 5/01/00 | | 14.43% | | 7.09% | | 7.47% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index (f) | | 15.78% | | 10.45% | | 10.60% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index – a component of the Barclays U.S. High-Yield Corporate Bond Index, which measures performance of non-investment grade, fixed rate debt. The index limits the maximum exposure to any one issuer to 2%.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
4
MFS High Income Series
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2012 through December 31, 2012
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2012 through December 31, 2012.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | | Beginning
Account Value
7/01/12 | | | Ending Account Value
12/31/12 | | | Expenses Paid
During Period (p)
7/01/12-12/31/12 | |
| Initial Class | | Actual | | | 0.81% | | | | $1,000.00 | | | | $1,074.36 | | | | $4.22 | |
| | Hypothetical (h) | | | 0.81% | | | | $1,000.00 | | | | $1,021.06 | | | | $4.12 | |
| Service Class | | Actual | | | 1.06% | | | | $1,000.00 | | | | $1,072.80 | | | | $5.52 | |
| | Hypothetical (h) | | | 1.06% | | | | $1,000.00 | | | | $1,019.81 | | | | $5.38 | |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
5
MFS High Income Series
PORTFOLIO OF INVESTMENTS – 12/31/12
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – 94.5% | | | | | | | | |
| Aerospace – 2.1% | | | | | | | | |
| Bombardier, Inc., 7.5%, 2018 (n) | | $ | 1,370,000 | | | $ | 1,525,838 | |
| Bombardier, Inc., 7.75%, 2020 (n) | | | 740,000 | | | | 839,900 | |
| CPI International, Inc., 8%, 2018 | | | 1,040,000 | | | | 1,015,300 | |
| Heckler & Koch GmbH, 9.5%, 2018 (z) | | EUR | 386,000 | | | | 440,718 | |
| Huntington Ingalls Industries, Inc., 7.125%, 2021 | | $ | 1,570,000 | | | | 1,707,335 | |
| Kratos Defense & Security Solutions, Inc., 10%, 2017 | | | 1,280,000 | | | | 1,404,800 | |
| | | | | | | | |
| | | | | | $ | 6,933,891 | |
| | | | | | | | |
| Apparel Manufacturers – 1.1% | | | | | | | | |
| Hanesbrands, Inc., 8%, 2016 | | $ | 115,000 | | | $ | 126,213 | |
| Hanesbrands, Inc., 6.375%, 2020 | | | 535,000 | | | | 588,500 | |
| Jones Group, Inc., 6.875%, 2019 | | | 790,000 | | | | 821,600 | |
| Levi Strauss & Co., 6.875%, 2022 | | | 165,000 | | | | 176,963 | |
| PVH Corp., 7.375%, 2020 | | | 1,135,000 | | | | 1,272,619 | |
| PVH Corp., 4.5%, 2022 | | | 600,000 | | | | 606,000 | |
| | | | | | | | |
| | | | | | $ | 3,591,895 | |
| | | | | | | | |
| Asset-Backed & Securitized – 0.4% | | | | | |
| Arbor Realty Mortgage Securities, CDO, FRN, 2.618%, 2038 (z) | | $ | 568,229 | | | $ | 170,469 | |
| Citigroup Commercial Mortgage Trust, FRN, 5.702%, 2049 | | | 985,952 | | | | 187,075 | |
| Crest Ltd., CDO, 7%, 2040 (a)(p) | | | 1,006,567 | | | | 50,328 | |
| CWCapital Cobalt Ltd., CDO, 6.23%, 2045 (a)(p)(z) | | | 1,201,143 | | | | 12,011 | |
| CWCapital Cobalt Ltd., CDO, “F”, FRN, 1.614%, 2050 (z) | | | 525,913 | | | | 1,315 | |
| First Union National Bank Commercial Mortgage Trust, 6.75%, 2032 | | | 548,467 | | | | 274,288 | |
| G-Force LLC, CDO, “A2”, 4.83%, 2036 (z) | | | 511,350 | | | | 513,906 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., “C”, FRN, 6.001%, 2051 | | | 750,000 | | | | 224,906 | |
| | | | | | | | |
| | | | | | $ | 1,434,298 | |
| | | | | | | | |
| Automotive – 3.5% | | | | | | | | |
| Accuride Corp., 9.5%, 2018 | | $ | 1,130,000 | | | $ | 1,090,450 | |
| Allison Transmission, Inc., 7.125%, 2019 (n) | | | 1,480,000 | | | | 1,579,900 | |
| Continental Rubber of America Corp., 4.5%, 2019 (n) | | | 235,000 | | | | 240,498 | |
| Ford Motor Co., 7.45%, 2031 | | | 320,000 | | | | 406,400 | |
| Ford Motor Credit Co. LLC, 12%, 2015 | | | 1,926,000 | | | | 2,364,165 | |
| Ford Motor Credit Co. LLC, 8.125%, 2020 | | | 395,000 | | | | 506,144 | |
| General Motors Financial Co., Inc., 4.75%, 2017 (n) | | | 435,000 | | | | 457,398 | |
| General Motors Financial Co., Inc., 6.75%, 2018 | | | 905,000 | | | | 1,038,201 | |
| Goodyear Tire & Rubber Co., 8.25%, 2020 | | | 230,000 | | | | 252,425 | |
| Goodyear Tire & Rubber Co., 7%, 2022 | | | 425,000 | | | | 455,813 | |
| Jaguar Land Rover PLC, 7.75%, 2018 (n) | | | 200,000 | | | | 218,000 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Automotive – continued | | | | | | | | |
| Jaguar Land Rover PLC, 8.125%, 2021 (n) | | $ | 1,935,000 | | | $ | 2,128,500 | |
| Lear Corp., 8.125%, 2020 | | | 562,000 | | | | 633,655 | |
| | | | | | | | |
| | | | | | $ | 11,371,549 | |
| | | | | | | | |
| Broadcasting – 5.8% | | | | | | | | |
| Allbritton Communications Co., 8%, 2018 | | $ | 490,000 | | | $ | 531,650 | |
| AMC Networks, Inc., 7.75%, 2021 | | | 896,000 | | | | 1,025,920 | |
| Clear Channel Communications, Inc., 9%, 2021 | | | 908,000 | | | | 810,390 | |
| Clear Channel Worldwide Holdings, Inc., 6.5%, 2022 (n) | | | 235,000 | | | | 241,463 | |
| Clear Channel Worldwide Holdings, Inc., 6.5%, 2022 (n) | | | 635,000 | | | | 658,813 | |
| Clear Channel Worldwide Holdings, Inc., “A”, 7.625%, 2020 | | | 50,000 | | | | 49,875 | |
| Clear Channel Worldwide Holdings, Inc., “B”, 7.625%, 2020 | | | 535,000 | | | | 539,013 | |
| Hughes Network Systems LLC, 7.625%, 2021 | | | 645,000 | | | | 733,688 | |
| IAC/InterActiveCorp, 4.75%, 2022 (z) | | | 135,000 | | | | 134,325 | |
| Inmarsat Finance PLC, 7.375%, 2017 (n) | | | 860,000 | | | | 924,500 | |
| Intelsat Bermuda Ltd., 11.25%, 2017 | | | 1,735,000 | | | | 1,834,763 | |
| Intelsat Bermuda Ltd., 11.5%, 2017 (p) | | | 1,480,000 | | | | 1,572,500 | |
| Intelsat Jackson Holdings Ltd., 6.625%, 2022 (n) | | | 785,000 | | | | 810,513 | |
LBI Media, Inc., 13.5% to 2015,
11.5% to 2020 (p)(z) | | | 410,000 | | | | 172,200 | |
| Liberty Media Corp., 8.5%, 2029 | | | 1,375,000 | | | | 1,488,438 | |
| Local TV Finance LLC, 9.25%, 2015 (p)(z) | | | 812,946 | | | | 822,092 | |
| Nexstar Broadcasting Group, Inc., 8.875%, 2017 | | | 430,000 | | | | 471,925 | |
| Nexstar Broadcasting Group, Inc., 6.875%, 2020 (n) | | | 130,000 | | | | 133,413 | |
| Sinclair Broadcast Group, Inc., 9.25%, 2017 (n) | | | 585,000 | | | | 643,500 | |
| Sinclair Broadcast Group, Inc., 8.375%, 2018 | | | 175,000 | | | | 195,563 | |
| SIRIUS XM Radio, Inc., 8.75%, 2015 (n) | | | 595,000 | | | | 673,838 | |
| SIRIUS XM Radio, Inc., 7.625%, 2018 (n) | | | 1,165,000 | | | | 1,298,975 | |
| SIRIUS XM Radio, Inc., 5.25%, 2022 (n) | | | 150,000 | | | | 151,500 | |
| Starz LLC/Starz Finance Corp., 5%, 2019 (n) | | | 370,000 | | | | 379,250 | |
| Townsquare Radio LLC, 9%, 2019 (z) | | | 410,000 | | | | 449,975 | |
| Univision Communications, Inc., 6.875%, 2019 (n) | | | 595,000 | | | | 618,800 | |
| Univision Communications, Inc., 7.875%, 2020 (n) | | | 820,000 | | | | 887,650 | |
| Univision Communications, Inc., 8.5%, 2021 (n) | | | 675,000 | | | | 696,938 | |
| | | | | | | | |
| | | | | | $ | 18,951,470 | |
| | | | | | | | |
| Brokerage & Asset Managers – 0.3% | | | | | | | | |
| E*TRADE Financial Corp., 6.375%, 2019 | | $ | 1,100,000 | | | $ | 1,127,500 | |
| | | | | | | | |
6
MFS High Income Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Building – 2.8% | | | | | | | | |
| Boise Cascade LLC/Finance Corp., 6.375%, 2020 (n) | | $ | 430,000 | | | $ | 442,900 | |
| Building Materials Holding Corp., 6.875%, 2018 (n) | | | 815,000 | | | | 880,200 | |
| Building Materials Holding Corp., 7%, 2020 (n) | | | 480,000 | | | | 523,200 | |
| Building Materials Holding Corp., 6.75%, 2021 (n) | | | 445,000 | | | | 491,725 | |
| CEMEX S.A.B. de C.V., 9.25%, 2020 | | | 815,000 | | | | 884,275 | |
| HD Supply, Inc., 13.5%, 2015 | | | 615,000 | | | | 630,375 | |
| HD Supply, Inc., 8.125%, 2019 (n) | | | 470,000 | | | | 535,800 | |
| HD Supply, Inc., 11.5%, 2020 (n) | | | 375,000 | | | | 422,344 | |
| Masonite International Corp., 8.25%, 2021 (n) | | | 960,000 | | | | 1,027,200 | |
| Nortek, Inc., 8.5%, 2021 | | | 1,300,000 | | | | 1,443,000 | |
| Roofing Supply Group LLC/Roofing Supply Finance, Inc., 10%, 2020 (n) | | | 320,000 | | | | 358,400 | |
| USG Corp., 6.3%, 2016 | | | 822,000 | | | | 850,770 | |
| USG Corp., 7.875%, 2020 (n) | | | 490,000 | | | | 545,125 | |
| | | | | | | | |
| | | | | | $ | 9,035,314 | |
| | | | | | | | |
| Business Services – 1.7% | | | | | | | | |
| Ceridian Corp., 12.25%, 2015 (p) | | $ | 350,000 | | | $ | 350,875 | |
| Ceridian Corp., 8.875%, 2019 (n) | | | 200,000 | | | | 217,000 | |
| Fidelity National Information Services, Inc., 7.625%, 2017 | | | 425,000 | | | | 462,188 | |
| Fidelity National Information Services, Inc., 5%, 2022 | | | 670,000 | | | | 718,575 | |
| iGate Corp., 9%, 2016 | | | 1,072,000 | | | | 1,161,780 | |
| Iron Mountain, Inc., 8.375%, 2021 | | | 1,170,000 | | | | 1,298,700 | |
| Legend Acquisition Sub, Inc., 10.75%, 2020 (n) | | | 610,000 | | | | 552,050 | |
| Lender Processing Services, Inc., 5.75%, 2023 | | | 530,000 | | | | 549,875 | |
SunGard Data Systems, Inc.,
7.375%, 2018 | | | 315,000 | | | | 337,444 | |
| | | | | | | | |
| | | | | | $ | 5,648,487 | |
| | | | | | | | |
| Cable TV – 3.6% | | | | | | | | |
| Bresnan Broadband Holdings LLC, 8%, 2018 (n) | | $ | 270,000 | | | $ | 291,600 | |
| CCO Holdings LLC, 7.875%, 2018 | | | 1,135,000 | | | | 1,221,544 | |
| CCO Holdings LLC, 8.125%, 2020 | | | 1,640,000 | | | | 1,836,800 | |
| CCO Holdings LLC, 7.375%, 2020 | | | 385,000 | | | | 427,350 | |
| CCO Holdings LLC, 5.125%, 2023 | | | 340,000 | | | | 339,150 | |
| Cequel Communications Holdings, 6.375%, 2020 (z) | | | 270,000 | | | | 281,138 | |
| DISH DBS Corp., 6.75%, 2021 | | | 530,000 | | | | 604,200 | |
| DISH DBS Corp., 5%, 2023 (z) | | | 565,000 | | | | 565,000 | |
| EchoStar Corp., 7.125%, 2016 | | | 825,000 | | | | 924,000 | |
| Telenet Finance Luxembourg, 6.375%, 2020 (n) | | EUR | 270,000 | | | | 381,334 | |
| Unitymedia Hessen GmbH & Co., 5.5%, 2023 (z) | | $ | 205,000 | | | | 211,663 | |
| UPC Holding B.V., 9.875%, 2018 (n) | | | 685,000 | | | | 774,050 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Cable TV – continued | | | | | | | | |
| UPCB Finance III Ltd., 6.625%, 2020 (n) | | $ | 1,472,000 | | | $ | 1,576,880 | |
| Virgin Media Finance PLC, 8.375%, 2019 | | | 81,000 | | | | 91,935 | |
| Virgin Media Finance PLC, 4.875%, 2022 | | | 200,000 | | | | 204,500 | |
| Virgin Media Finance PLC, 5.25%, 2022 | | | 1,020,000 | | | | 1,081,200 | |
| Ziggo Bond Co. B.V., 8%, 2018 (n) | | EUR | 700,000 | | | | 1,016,362 | |
| | | | | | | | |
| | | | | | $ | 11,828,706 | |
| | | | | | | | |
| Chemicals – 2.2% | | | | | | | | |
| Celanese U.S. Holdings LLC, 6.625%, 2018 | | $ | 835,000 | | | $ | 918,500 | |
| Hexion U.S. Finance Corp./Hexion Nova Scotia Finance, 8.875%, 2018 | | | 1,025,000 | | | | 1,053,188 | |
| Hexion U.S. Finance Corp./Hexion Nova Scotia Finance, 9%, 2020 | | | 270,000 | | | | 246,375 | |
| Huntsman International LLC, 8.625%, 2021 | | | 1,105,000 | | | | 1,262,463 | |
| INEOS Finance PLC, 8.375%, 2019 (n) | | | 660,000 | | | | 711,150 | |
| INEOS Group Holdings PLC, 8.5%, 2016 (n) | | | 880,000 | | | | 875,600 | |
| LyondellBasell Industries N.V., 5%, 2019 | | | 455,000 | | | | 502,775 | |
| LyondellBasell Industries N.V., 6%, 2021 | | | 805,000 | | | | 943,863 | |
| Momentive Performance Materials, Inc., 11.5%, 2016 | | | 249,000 | | | | 145,665 | |
| Polypore International, Inc., 7.5%, 2017 | | | 455,000 | | | | 495,950 | |
| | | | | | | | |
| | | | | | $ | 7,155,529 | |
| | | | | | | | |
| Computer Software – 1.4% | | | | | | | | |
| Infor U.S., Inc., 11.5%, 2018 | | $ | 1,100,000 | | | $ | 1,287,000 | |
| Nuance Communications, Inc., 5.375%, 2020 (n) | | | 770,000 | | | | 804,650 | |
| Seagate HDD Cayman, 6.875%, 2020 | | | 600,000 | | | | 638,250 | |
| Syniverse Holdings, Inc., 9.125%, 2019 | | | 1,200,000 | | | | 1,281,000 | |
| TransUnion Holding Co., Inc., 9.625%, 2018 | | | 410,000 | | | | 433,575 | |
| TransUnion LLC/TransUnion Financing Corp., 11.375%, 2018 | | | 195,000 | | | | 227,175 | |
| | | | | | | | |
| | | | | | $ | 4,671,650 | |
| | | | | | | | |
| Computer Software – Systems – 0.9% | | | | | |
| Audatex North America, Inc., 6.75%, 2018 (n) | | $ | 645,000 | | | $ | 690,150 | |
| CDW LLC/CDW Finance Corp., 12.535%, 2017 | | | 633,000 | | | | 676,519 | |
| CDW LLC/CDW Finance Corp., 8.5%, 2019 | | | 920,000 | | | | 995,900 | |
| DuPont Fabros Technology, Inc., REIT, 8.5%, 2017 | | | 560,000 | | | | 611,800 | |
| | | | | | | | |
| | | | | | $ | 2,974,369 | |
| | | | | | | | |
| Conglomerates – 1.3% | | | | | | | | |
| Amsted Industries, Inc., 8.125%, 2018 (n) | | $ | 1,710,000 | | | $ | 1,829,700 | |
| Dynacast International LLC, 9.25%, 2019 | | | 745,000 | | | | 797,150 | |
| Griffon Corp., 7.125%, 2018 | | | 1,280,000 | | | | 1,356,800 | |
| Silver II Borrower SCA/Silver II US Holdings, 7.75%, 2020 (z) | | | 395,000 | | | | 408,825 | |
| | | | | | | | |
| | | | | | $ | 4,392,475 | |
| | | | | | | | |
7
MFS High Income Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Consumer Products – 1.1% | | | | | | | | |
| Easton-Bell Sports, Inc., 9.75%, 2016 | | $ | 890,000 | | | $ | 956,839 | |
| Elizabeth Arden, Inc., 7.375%, 2021 | | | 910,000 | | | | 1,016,925 | |
| FGI Operating Co./FGI Finance, Inc., 7.875%, 2020 (n) | | | 85,000 | | | | 87,550 | |
| Jarden Corp., 7.5%, 2020 | | | 770,000 | | | | 845,075 | |
| Libbey Glass, Inc., 6.875%, 2020 | | | 320,000 | | | | 344,000 | |
| Prestige Brands, Inc., 8.125%, 2020 | | | 95,000 | | | | 105,688 | |
| Spectrum Brands Escrow Corp., 6.375%, 2020 (n) | | | 295,000 | | | | 309,750 | |
| Spectrum Brands Escrow Corp., 6.625%, 2022 (z) | | | 75,000 | | | | 80,438 | |
| | | | | | | | |
| | | | | | $ | 3,746,265 | |
| | | | | | | | |
| Consumer Services – 0.8% | | | | | | | | |
| QVC, Inc., 7.375%, 2020 (n) | | $ | 705,000 | | | $ | 784,409 | |
| Service Corp. International, 6.75%, 2015 | | | 565,000 | | | | 621,500 | |
| Service Corp. International, 7%, 2017 | | | 1,015,000 | | | | 1,167,250 | |
| | | | | | | | |
| | | | | | $ | 2,573,159 | |
| | | | | | | | |
| Containers – 2.0% | | | | | | | | |
| Ardagh Packaging Finance PLC, 7.375%, 2017 (n) | | $ | 755,000 | | | $ | 820,119 | |
| Ardagh Packaging Finance PLC, 9.125%, 2020 (n) | | | 970,000 | | | | 1,052,450 | |
| Ardagh Packaging Finance PLC, 9.125%, 2020 (n) | | | 200,000 | | | | 218,000 | |
| Ball Corp., 5%, 2022 | | | 521,000 | | | | 557,470 | |
| Berry Plastics Group, Inc., 9.5%, 2018 | | | 330,000 | | | | 363,000 | |
| Greif, Inc., 6.75%, 2017 | | | 1,070,000 | | | | 1,193,050 | |
| Greif, Inc., 7.75%, 2019 | | | 155,000 | | | | 179,025 | |
| Reynolds Group, 7.125%, 2019 | | | 695,000 | | | | 747,125 | |
| Reynolds Group, 9.875%, 2019 | | | 330,000 | | | | 353,100 | |
| Reynolds Group, 5.75%, 2020 (n) | | | 505,000 | | | | 521,413 | |
| Reynolds Group, 8.25%, 2021 | | | 615,000 | | | | 624,225 | |
| | | | | | | | |
| | | | | | $ | 6,628,977 | |
| | | | | | | | |
| Defense Electronics – 0.6% | | | | | | | | |
| Ducommun, Inc., 9.75%, 2018 | | $ | 945,000 | | | $ | 1,015,875 | |
| MOOG, Inc., 7.25%, 2018 | | | 745,000 | | | | 783,181 | |
| | | | | | | | |
| | | | | | $ | 1,799,056 | |
| | | | | | | | |
| Electrical Equipment – 0.2% | | | | | | | | |
| Avaya, Inc., 9.75%, 2015 | | $ | 615,000 | | | $ | 547,350 | |
| Avaya, Inc., 7%, 2019 (n) | | | 250,000 | | | | 233,750 | |
| | | | | | | | |
| | | | | | $ | 781,100 | |
| | | | | | | | |
| Electronics – 0.9% | | | | | | | | |
Freescale Semiconductor, Inc.,
9.25%, 2018 (n) | | $ | 1,220,000 | | | $ | 1,332,850 | |
| Nokia Corp., 5.375%, 2019 | | | 335,000 | | | | 319,088 | |
| Nokia Corp., 6.625%, 2039 | | | 220,000 | | | | 197,450 | |
| NXP B.V., 9.75%, 2018 (n) | | | 100,000 | | | | 115,875 | |
| Sensata Technologies B.V., 6.5%, 2019 (n) | | | 960,000 | | | | 1,022,400 | |
| | | | | | | | |
| | | | | | $ | 2,987,663 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Energy – Independent – 8.2% | | | | | | | | |
| BreitBurn Energy Partners LP, 8.625%, 2020 | | $ | 445,000 | | | $ | 485,050 | |
| BreitBurn Energy Partners LP, 7.875%, 2022 (n) | | | 960,000 | | | | 996,000 | |
| Carrizo Oil & Gas, Inc., 8.625%, 2018 | | | 385,000 | | | | 415,800 | |
| Chaparral Energy, Inc., 7.625%, 2022 | | | 505,000 | | | | 530,250 | |
| Chesapeake Energy Corp., 6.875%, 2020 | | | 790,000 | | | | 856,163 | |
| Concho Resources, Inc., 8.625%, 2017 | | | 625,000 | | | | 680,469 | |
| Concho Resources, Inc., 6.5%, 2022 | | | 770,000 | | | | 847,000 | |
| Continental Resources, Inc., 8.25%, 2019 | | | 925,000 | | | | 1,036,000 | |
| Denbury Resources, Inc., 8.25%, 2020 | | | 1,270,000 | | | | 1,428,750 | |
| Energy XXI Gulf Coast, Inc., 9.25%, 2017 | | | 1,425,000 | | | | 1,628,063 | |
| EP Energy LLC, 9.375%, 2020 | | | 1,990,000 | | | | 2,243,725 | |
| EPL Oil & Gas, Inc., 8.25%, 2018 (n) | | | 525,000 | | | | 539,438 | |
| EXCO Resources, Inc., 7.5%, 2018 | | | 485,000 | | | | 470,450 | |
| Harvest Operations Corp., 6.875%, 2017 | | | 1,245,000 | | | | 1,381,950 | |
| Hilcorp Energy I/Hilcorp Finance Co., 8%, 2020 (n) | | | 350,000 | | | | 383,250 | |
| Laredo Petroleum, Inc., 9.5%, 2019 | | | 615,000 | | | | 687,263 | |
| LINN Energy LLC, 6.5%, 2019 | | | 445,000 | | | | 449,450 | |
| LINN Energy LLC, 8.625%, 2020 | | | 710,000 | | | | 773,900 | |
| LINN Energy LLC, 7.75%, 2021 | | | 546,000 | | | | 581,490 | |
| MEG Energy Corp., 6.5%, 2021 (n) | | | 300,000 | | | | 315,750 | |
| Newfield Exploration Co., 6.875%, 2020 | | | 905,000 | | | | 968,350 | |
| OGX Petroleo e Gas Participacoes S.A., 8.5%, 2018 (n) | | | 302,000 | | | | 271,800 | |
| Plains Exploration & Production Co., 8.625%, 2019 | | | 905,000 | | | | 1,029,438 | |
| Plains Exploration & Production Co., 6.5%, 2020 | | | 340,000 | | | | 376,550 | |
| Plains Exploration & Production Co., 6.75%, 2022 | | | 695,000 | | | | 780,138 | |
| QEP Resources, Inc., 6.875%, 2021 | | | 1,265,000 | | | | 1,457,913 | |
| Range Resources Corp., 8%, 2019 | | | 1,045,000 | | | | 1,157,338 | |
| Range Resources Corp., 5%, 2022 | | | 300,000 | | | | 313,500 | |
| Samson Investment Co., 9.75%, 2020 (n) | | | 520,000 | | | | 549,900 | |
| SandRidge Energy, Inc., 8%, 2018 (n) | | | 1,595,000 | | | | 1,690,700 | |
| SM Energy Co., 6.5%, 2021 | | | 890,000 | | | | 952,300 | |
| Whiting Petroleum Corp., 6.5%, 2018 | | | 590,000 | | | | 634,250 | |
| | | | | | | | |
| | | | | | $ | 26,912,388 | |
| | | | | | | | |
| Energy – Integrated – 0.1% | | | | | | | | |
| Pacific Rubiales Energy Corp., 7.25%, 2021 (n) | | $ | 304,000 | | | $ | 351,120 | |
| | | | | | | | |
| Engineering – Construction – 0.2% | | | | | | | | |
BakerCorp International, Inc., 8.25%, 2019 | | $ | 800,000 | | | $ | 800,000 | |
| | | | | | | | |
| Entertainment – 1.3% | | | | | | | | |
| AMC Entertainment, Inc., 8.75%, 2019 | | $ | 440,000 | | | $ | 487,300 | |
| AMC Entertainment, Inc., 9.75%, 2020 | | | 725,000 | | | | 837,375 | |
| Cedar Fair LP, 9.125%, 2018 | | | 595,000 | | | | 669,375 | |
| Cinemark USA, Inc., 8.625%, 2019 | | | 760,000 | | | | 841,700 | |
| Cinemark USA, Inc., 5.125%, 2022 (z) | | | 180,000 | | | | 182,250 | |
| NAI Entertainment Holdings LLC, 8.25%, 2017 (n) | | | 405,000 | | | | 446,006 | |
8
MFS High Income Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Entertainment – continued | | | | | | | | |
| Six Flags Entertainment Corp., 5.25%, 2021 (z) | | $ | 695,000 | | | $ | 695,000 | |
| | | | | | | | |
| | | | | | $ | 4,159,006 | |
| | | | | | | | |
| Financial Institutions – 5.3% | | | | | | | | |
| Ally Financial, Inc., 5.5%, 2017 | | $ | 2,150,000 | | | $ | 2,299,990 | |
| CIT Group, Inc., 5.25%, 2014 (n) | | | 795,000 | | | | 822,825 | |
| CIT Group, Inc., 5.25%, 2018 | | | 680,000 | | | | 727,600 | |
| CIT Group, Inc., 6.625%, 2018 (n) | | | 1,419,000 | | | | 1,603,470 | |
| CIT Group, Inc., 5.5%, 2019 (n) | | | 1,086,000 | | | | 1,183,740 | |
| Credit Acceptance Corp., 9.125%, 2017 | | | 815,000 | | | | 890,388 | |
| GMAC, Inc., 8%, 2031 | | | 175,000 | | | | 221,594 | |
| Icahn Enterprises LP, 8%, 2018 | | | 1,075,000 | | | | 1,154,281 | |
| International Lease Finance Corp., 4.875%, 2015 | | | 415,000 | | | | 429,558 | |
| International Lease Finance Corp., 8.625%, 2015 | | | 420,000 | | | | 471,975 | |
| International Lease Finance Corp., 7.125%, 2018 (n) | | | 928,000 | | | | 1,076,480 | |
| Nationstar Mortgage LLC/Capital Corp., 10.875%, 2015 | | | 1,105,000 | | | | 1,182,350 | |
| Nationstar Mortgage LLC/Capital Corp., 9.625%, 2019 (n) | | | 350,000 | | | | 393,750 | |
| Nationstar Mortgage LLC/Capital Corp., 7.875%, 2020 (n) | | | 290,000 | | | | 305,950 | |
| PHH Corp., 9.25%, 2016 | | | 865,000 | | | | 1,009,888 | |
| PHH Corp., 7.375%, 2019 | | | 570,000 | | | | 632,700 | |
| SLM Corp., 8.45%, 2018 | | | 525,000 | | | | 614,250 | |
| SLM Corp., 8%, 2020 | | | 1,805,000 | | | | 2,062,213 | |
| SLM Corp., 7.25%, 2022 | | | 210,000 | | | | 231,525 | |
| | | | | | | | |
| | | | | | $ | 17,314,527 | |
| | | | | | | | |
| Food & Beverages – 1.0% | | | | | | | | |
| ARAMARK Corp., 8.5%, 2015 | | $ | 355,000 | | | $ | 356,779 | |
| B&G Foods, Inc., 7.625%, 2018 | | | 969,000 | | | | 1,041,675 | |
| Constellation Brands, Inc., 7.25%, 2016 | | | 240,000 | | | | 277,200 | |
| JBS USA LLC/JBS USA Finance, 8.25%, 2020 (n) | | | 245,000 | | | | 259,700 | |
| Pinnacle Foods Finance LLC, 8.25%, 2017 | | | 275,000 | | | | 292,875 | |
| TreeHouse Foods, Inc., 7.75%, 2018 | | | 850,000 | | | | 922,250 | |
| | | | | | | | |
| | | | | | $ | 3,150,479 | |
| | | | | | | | |
| Forest & Paper Products – 1.3% | | | | | | | | |
| Ainsworth Lumber Co. Ltd., 7.5%, 2017 (n) | | $ | 105,000 | | | $ | 109,988 | |
| Boise, Inc., 8%, 2020 | | | 665,000 | | | | 734,825 | |
| Georgia-Pacific Corp., 8%, 2024 | | | 91,000 | | | | 127,233 | |
| Graphic Packaging Holding Co., 7.875%, 2018 | | | 415,000 | | | | 458,575 | |
| Millar Western Forest Products Ltd., 8.5%, 2021 | | | 200,000 | | | | 181,000 | |
| Sappi Papier Holding GmbH, 7.75%, 2017 (n) | | | 320,000 | | | | 348,800 | |
| Smurfit Kappa Group PLC, 4.875%, 2018 (n) | | | 290,000 | | | | 295,800 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Forest & Paper Products – continued | | | | | |
| Smurfit Kappa Group PLC, 7.75%, 2019 (n) | | EUR | 715,000 | | | $ | 1,043,804 | |
| Tembec Industries, Inc., 11.25%, 2018 | | $ | 480,000 | | | | 508,800 | |
| Xerium Technologies, Inc., 8.875%, 2018 | | | 368,000 | | | | 331,200 | |
| | | | | | | | |
| | | | | | $ | 4,140,025 | |
| | | | | | | | |
| Gaming & Lodging – 3.6% | | | | | | | | |
| Boyd Gaming Corp., 9%, 2020 (z) | | $ | 350,000 | | | $ | 344,750 | |
| Caesars Entertainment Operating Co., Inc., 8.5%, 2020 | | | 1,010,000 | | | | 1,002,425 | |
| Choice Hotels International, Inc., 5.75%, 2022 | | | 150,000 | | | | 166,125 | |
| CityCenter Holdings LLC, 10.75%, 2017 (p) | | | 345,000 | | | | 374,325 | |
| FelCor Lodging LP, 5.625%, 2023 (z) | | | 135,000 | | | | 134,325 | |
| Fontainebleau Las Vegas Holdings LLC, 10.25%, 2015 (a)(d)(n) | | | 1,190,000 | | | | 744 | |
| GWR Operating Partnership LLP, 10.875%, 2017 | | | 470,000 | | | | 534,625 | |
| Host Hotels & Resorts, Inc., REIT, 5.25%, 2022 | | | 495,000 | | | | 542,025 | |
| Isle of Capri Casinos, Inc., 8.875%, 2020 | | | 785,000 | | | | 855,650 | |
| MGM Mirage, 6.625%, 2015 | | | 360,000 | | | | 386,100 | |
| MGM Resorts International, 11.375%, 2018 | | | 1,100,000 | | | | 1,331,000 | |
| MGM Resorts International, 6.625%, 2021 | | | 360,000 | | | | 360,000 | |
| Penn National Gaming, Inc., 8.75%, 2019 | | | 1,450,000 | | | | 1,653,000 | |
| Pinnacle Entertainment, Inc., 8.75%, 2020 | | | 415,000 | | | | 448,200 | |
| Rivers Pittsburgh Borrower LP/Rivers Pittsburgh Finance Corp., 9.5%, 2019 (n) | | | 160,000 | | | | 173,600 | |
| Seven Seas Cruises S. DE R.L., 9.125%, 2019 | | | 1,180,000 | | | | 1,247,850 | |
| Viking Cruises Ltd., 8.5%, 2022 (n) | | | 565,000 | | | | 610,200 | |
| Wyndham Worldwide Corp., 7.375%, 2020 | | | 535,000 | | | | 643,991 | |
| Wynn Las Vegas LLC, 7.75%, 2020 | | | 820,000 | | | | 934,800 | |
| | | | | | | | |
| | | | | | $ | 11,743,735 | |
| | | | | | | | |
| Industrial – 1.0% | | | | | | | | |
| Dematic S.A., 7.75%, 2020 (z) | | $ | 620,000 | | | $ | 620,000 | |
| Hyva Global B.V., 8.625%, 2016 (n) | | | 695,000 | | | | 660,250 | |
| Mueller Water Products, Inc., 8.75%, 2020 | | | 779,000 | | | | 888,060 | |
| Rexel S.A., 6.125%, 2019 (n) | | | 545,000 | | | | 572,250 | |
| SPL Logistics Escrow LLC, 8.875%, 2020 (n) | | | 445,000 | | | | 471,700 | |
| | | | | | | | |
| | | | | | $ | 3,212,260 | |
| | | | | | | | |
| Insurance – 1.5% | | | | | | | | |
| American International Group, Inc., 8.25%, 2018 | | $ | 890,000 | | | $ | 1,169,359 | |
| American International Group, Inc., 8.175% to 2038, FRN to 2068 | | | 2,405,000 | | | | 3,132,513 | |
9
MFS High Income Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Insurance – continued | | | | | | | | |
MetLife, Inc., 9.25% to 2038,
FRN to 2068 (n) | | $ | 500,000 | | | $ | 690,000 | |
| | | | | | | | |
| | | | | | $ | 4,991,872 | |
| | | | | | | | |
| Insurance – Health – 0.1% | | | | | | | | |
| AMERIGROUP Corp., 7.5%, 2019 | | $ | 361,000 | | | $ | 433,200 | |
| | | | | | | | |
| Insurance – Property & Casualty – 0.9% | | | | | |
| Liberty Mutual Group, Inc., 10.75% to 2038, FRN to 2088 (n) | | $ | 1,075,000 | | | $ | 1,601,750 | |
| XL Group PLC, 6.5% to 2017, FRN to 2049 | | | 1,470,000 | | | | 1,374,450 | |
| | | | | | | | |
| | | | | | $ | 2,976,200 | |
| | | | | | | | |
| Machinery & Tools – 2.1% | | | | | | | | |
| Ashtead Capital, Inc., 6.5%, 2022 (n) | | $ | 235,000 | | | $ | 254,975 | |
| Case New Holland, Inc., 7.875%, 2017 | | | 1,390,000 | | | | 1,643,675 | |
| CNH America LLC, 7.25%, 2016 | | | 545,000 | | | | 613,125 | |
| CNH Capital LLC, 3.875%, 2015 (n) | | | 180,000 | | | | 185,625 | |
| CNH Capital LLC, 6.25%, 2016 | | | 255,000 | | | | 281,138 | |
| H&E Equipment Services LLC, 7%, 2022 (n) | | | 605,000 | | | | 644,325 | |
| NESCO LLC/NESCO Holdings Corp., 11.75%, 2017 (n) | | | 960,000 | | | | 1,032,000 | |
| RSC Equipment Rental, Inc., 8.25%, 2021 | | | 930,000 | | | | 1,048,575 | |
| UR Financing Escrow Corp., 5.75%, 2018 (n) | | | 455,000 | | | | 490,263 | |
| UR Financing Escrow Corp., 7.625%, 2022 (n) | | | 454,000 | | | | 507,345 | |
| | | | | | | | |
| | | | | | $ | 6,701,046 | |
| | | | | | | | |
| Major Banks – 1.2% | | | | | | | | |
| Bank of America Corp., 5.65%, 2018 | | $ | 930,000 | | | $ | 1,082,002 | |
| Barclays Bank PLC, 7.625%, 2022 | | | 660,000 | | | | 659,175 | |
Royal Bank of Scotland Group PLC,
6.99% to 2017, FRN to 2049 (n) | | | 530,000 | | | | 500,850 | |
Royal Bank of Scotland Group PLC,
7.648% to 2031, FRN to 2049 | | | 1,580,000 | | | | 1,595,800 | |
| | | | | | | | |
| | | | | | $ | 3,837,827 | |
| | | | | | | | |
| Medical & Health Technology & Services – 5.5% | | | | | |
| AmSurg Corp., 5.625%, 2020 (n) | | $ | 220,000 | | | $ | 228,800 | |
| Biomet, Inc., 6.5%, 2020 (n) | | | 805,000 | | | | 855,313 | |
| CDRT Holding Corp., 9.25%, 2017 (p)(z) | | | 205,000 | | | | 209,100 | |
| Davita, Inc., 6.375%, 2018 | | | 1,550,000 | | | | 1,662,375 | |
| Davita, Inc., 6.625%, 2020 | | | 1,170,000 | | | | 1,272,375 | |
| Fresenius Medical Care AG & Co. KGaA, 9%, 2015 (n) | | | 865,000 | | | | 996,913 | |
| Fresenius Medical Care Capital Trust III, 5.625%, 2019 (n) | | | 735,000 | | | | 789,206 | |
| HCA, Inc., 8.5%, 2019 | | | 2,170,000 | | | | 2,419,550 | |
| HCA, Inc., 7.5%, 2022 | | | 1,215,000 | | | | 1,391,175 | |
| HCA, Inc., 5.875%, 2022 | | | 675,000 | | | | 734,063 | |
| HealthSouth Corp., 8.125%, 2020 | | | 1,385,000 | | | | 1,525,231 | |
| Hologic, Inc., 6.25%, 2020 (n) | | | 295,000 | | | | 317,863 | |
| IASIS Healthcare LLC/IASIS Capital Corp., 8.375%, 2019 | | | 1,185,000 | | | | 1,119,825 | |
| Physio-Control International, Inc., 9.875%, 2019 (n) | | | 595,000 | | | | 653,013 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Medical & Health Technology & Services – continued | |
| Select Medical Corp., 7.625%, 2015 | | $ | 131,000 | | | $ | 131,164 | |
| Teleflex, Inc., 6.875%, 2019 | | | 545,000 | | | | 588,600 | |
| Tenet Healthcare Corp., 9.25%, 2015 | | | 575,000 | | | | 645,438 | |
| Tenet Healthcare Corp., 8%, 2020 | | | 370,000 | | | | 398,444 | |
| Universal Health Services, Inc., 7%, 2018 | | | 715,000 | | | | 788,288 | |
| Universal Hospital Services, Inc., 7.625%, 2020 (n) | | | 765,000 | | | | 806,119 | |
| Universal Hospital Services, Inc., FRN, 3.902%, 2015 | | | 310,000 | | | | 308,644 | |
| Vanguard Health Systems, Inc., 0%, 2016 | | | 4,000 | | | | 3,000 | |
| | | | | | | | |
| | | | | | $ | 17,844,499 | |
| | | | | | | | |
| Metals & Mining – 1.7% | | | | | | | | |
| Arch Coal, Inc., 7.25%, 2020 | | $ | 670,000 | | | $ | 621,425 | |
| Cloud Peak Energy, Inc., 8.25%, 2017 | | | 1,505,000 | | | | 1,610,350 | |
| Cloud Peak Energy, Inc., 8.5%, 2019 | | | 280,000 | | | | 307,300 | |
| Consol Energy, Inc., 8%, 2017 | | | 595,000 | | | | 644,088 | |
| Consol Energy, Inc., 8.25%, 2020 | | | 335,000 | | | | 362,638 | |
| First Quantum Minerals Ltd., 7.25%, 2019 (n) | | | 389,000 | | | | 392,890 | |
| Fortescue Metals Group Ltd., 8.25%, 2019 (n) | | | 675,000 | | | | 718,875 | |
| Peabody Energy Corp., 6%, 2018 | | | 420,000 | | | | 446,250 | |
| Peabody Energy Corp., 6.25%, 2021 | | | 420,000 | | | | 446,250 | |
| | | | | | | | |
| | | | | | $ | 5,550,066 | |
| | | | | | | | |
| Natural Gas – Distribution – 0.4% | | | | | | | | |
| AmeriGas Finance LLC, 6.75%, 2020 | | $ | 715,000 | | | $ | 784,713 | |
| Ferrellgas LP/Ferrellgas Finance Corp., 6.5%, 2021 | | | 540,000 | | | | 534,600 | |
| | | | | | | | |
| | | | | | $ | 1,319,313 | |
| | | | | | | | |
| Natural Gas – Pipeline – 3.2% | | | | | | | | |
| Access Midstream Partners Co., 4.875%, 2023 | | $ | 340,000 | | | $ | 345,100 | |
| Atlas Pipeline Partners LP, 8.75%, 2018 | | | 1,165,000 | | | | 1,240,725 | |
| Crosstex Energy, Inc., 8.875%, 2018 | | | 1,435,000 | | | | 1,549,800 | |
| El Paso Corp., 7%, 2017 | | | 985,000 | | | | 1,125,203 | |
| El Paso Corp., 7.75%, 2032 | | | 1,415,000 | | | | 1,662,615 | |
| Energy Transfer Equity LP, 7.5%, 2020 | | | 1,150,000 | | | | 1,328,250 | |
Enterprise Products Partners LP,
8.375% to 2016, FRN to 2066 | | | 750,000 | | | | 855,938 | |
Enterprise Products Partners LP,
7.034% to 2018, FRN to 2068 | | | 391,000 | | | | 447,695 | |
| Inergy Midstream LP, 6%, 2020 (n) | | | 580,000 | | | | 598,850 | |
| MarkWest Energy Partners LP, 5.5%, 2023 | | | 630,000 | | | | 683,550 | |
| Rockies Express Pipeline LLC, 5.625%, 2020 (n) | | | 461,000 | | | | 452,933 | |
| | | | | | | | |
| | | | | | $ | 10,290,659 | |
| | | | | | | | |
| Network & Telecom – 1.8% | | | | | | | | |
| Centurylink, Inc., 7.65%, 2042 | | $ | 865,000 | | | $ | 904,020 | |
| Cincinnati Bell, Inc., 8.25%, 2017 | | | 315,000 | | | | 339,413 | |
| Citizens Communications Co., 9%, 2031 | | | 650,000 | | | | 715,000 | |
| Eileme 2 AB, 11.625%, 2020 (n) | | | 686,000 | | | | 799,190 | |
10
MFS High Income Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Network & Telecom – continued | | | | | |
| Frontier Communications Corp., 8.125%, 2018 | | $ | 835,000 | | | $ | 960,250 | |
| Qwest Communications International, Inc., 7.125%, 2018 (n) | | | 695,000 | | | | 725,165 | |
| TW Telecom Holdings, Inc., 5.375%, 2022 (n) | | | 365,000 | | | | 382,338 | |
| Windstream Corp., 8.125%, 2018 | | | 215,000 | | | | 234,888 | |
| Windstream Corp., 7.75%, 2020 | | | 695,000 | | | | 750,600 | |
| | | | | | | | |
| | | | | | $ | 5,810,864 | |
| | | | | | | | |
| Oil Services – 1.4% | | | | | | | | |
| Bristow Group, Inc., 6.25%, 2022 | | $ | 370,000 | | | $ | 395,900 | |
| Chesapeake Energy Corp., 6.625%, 2019 (n) | | | 325,000 | | | | 306,313 | |
| Dresser-Rand Group, Inc., 6.5%, 2021 | | | 415,000 | | | | 439,900 | |
| Edgen Murray Corp., 8.75%, 2020 (n) | | | 755,000 | | | | 762,550 | |
| Pioneer Energy Services Corp., 9.875%, 2018 | | | 635,000 | | | | 690,563 | |
| Shale-Inland Holdings LLC/Finance Co., 8.75%, 2019 (n) | | | 785,000 | | | | 822,288 | |
| Unit Corp., 6.625%, 2021 (n) | | | 410,000 | | | | 420,763 | |
| Unit Corp., 6.625%, 2021 | | | 640,000 | | | | 656,800 | |
| | | | | | | | |
| | | | | | $ | 4,495,077 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 1.6% | | | | | |
Groupe BPCE S.A., 12.5% to 2019,
FRN to 2049 (n) | | $ | 830,000 | | | $ | 961,912 | |
| LBG Capital No. 1 PLC, 7.875%, 2020 (n) | | | 1,525,000 | | | | 1,640,589 | |
Santander UK PLC, 8.963% to 2030,
FRN to 2049 | | | 1,965,000 | | | | 2,227,819 | |
| UBS AG, 7.625%, 2022 | | | 430,000 | | | | 474,951 | |
| | | | | | | | |
| | | | | | $ | 5,305,271 | |
| | | | | | | | |
| Pharmaceuticals – 0.6% | | | | | | | | |
| Capsugel FinanceCo. SCA, 9.875%, 2019 (n) | | EUR | 385,000 | | | $ | 571,704 | |
| Valeant Pharmaceuticals International, Inc., 7%, 2020 (n) | | $ | 840,000 | | | | 913,500 | |
| Valeant Pharmaceuticals International, Inc., 7.25%, 2022 (n) | | | 520,000 | | | | 568,100 | |
| | | | | | | | |
| | | | | | $ | 2,053,304 | |
| | | | | | | | |
| Pollution Control – 0.3% | | | | | | | | |
| Heckmann Corp., 9.875%, 2018 | | $ | 215,000 | | | $ | 220,375 | |
| Heckmann Corp., 9.875%, 2018 | | | 670,000 | | | | 691,775 | |
| | | | | | | | |
| | | | | | $ | 912,150 | |
| | | | | | | | |
| Precious Metals & Minerals – 0.4% | | | | | | | | |
| Eldorado Gold Corp., 6.125%, 2020 (z) | | $ | 545,000 | | | $ | 554,538 | |
| IAMGOLD Corp., 6.75%, 2020 (n) | | | 662,000 | | | | 645,450 | |
| | | | | | | | |
| | | | | | $ | 1,199,988 | |
| | | | | | | | |
| Printing & Publishing – 0.5% | | | | | | | | |
| American Media, Inc., 13.5%, 2018 (z) | | $ | 94,618 | | | $ | 83,264 | |
| Nielsen Finance LLC, 7.75%, 2018 | | | 885,000 | | | | 988,988 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Printing & Publishing – continued | | | | | | | | |
| Nielsen Finance LLC, 4.5%, 2020 (n) | | $ | 435,000 | | | $ | 432,825 | |
| | | | | | | | |
| | | | | | $ | 1,505,077 | |
| | | | | | | | |
| Railroad & Shipping – 0.2% | | | | | | | | |
| Kansas City Southern de Mexico S.A. de C.V., 6.125%, 2021 | | $ | 455,000 | | | $ | 514,150 | |
| | | | | | | | |
| Real Estate – 1.3% | | | | | | | | |
| CB Richard Ellis Group, Inc., 11.625%, 2017 | | $ | 335,000 | | | $ | 368,500 | |
| CNL Lifestyle Properties, Inc., REIT, 7.25%, 2019 | | | 465,000 | | | | 444,075 | |
| Entertainment Properties Trust, REIT, 7.75%, 2020 | | | 1,015,000 | | | | 1,173,065 | |
| Entertainment Properties Trust, REIT, 5.75%, 2022 | | | 185,000 | | | | 191,828 | |
| Kennedy Wilson, Inc., 8.75%, 2019 | | | 390,000 | | | | 415,350 | |
| MPT Operating Partnership LP, REIT, 6.875%, 2021 | | | 780,000 | | | | 846,300 | |
| MPT Operating Partnership LP, REIT, 6.375%, 2022 | | | 630,000 | | | | 661,500 | |
| | | | | | | | |
| | | | | | $ | 4,100,618 | |
| | | | | | | | |
| Retailers – 2.3% | | | | | | | | |
| Academy Ltd., 9.25%, 2019 (n) | | $ | 470,000 | | | $ | 521,700 | |
| Burlington Coat Factory Warehouse Corp., 10%, 2019 | | | 915,000 | | | | 988,200 | |
| J. Crew Group, Inc., 8.125%, 2019 | | | 750,000 | | | | 793,125 | |
| Limited Brands, Inc., 6.9%, 2017 | | | 760,000 | | | | 872,100 | |
| Limited Brands, Inc., 7%, 2020 | | | 300,000 | | | | 345,000 | |
| Limited Brands, Inc., 6.95%, 2033 | | | 415,000 | | | | 422,263 | |
| Pantry, Inc., 8.375%, 2020 (n) | | | 370,000 | | | | 386,650 | |
| Rite Aid Corp., 9.25%, 2020 | | | 615,000 | | | | 654,975 | |
| Sally Beauty Holdings, Inc., 6.875%, 2019 | | | 420,000 | | | | 464,100 | |
| Toys “R” Us Property Co. II LLC, 8.5%, 2017 | | | 355,000 | | | | 376,300 | |
| Toys “R” Us, Inc., 10.75%, 2017 | | | 1,060,000 | | | | 1,142,150 | |
| Yankee Acquisition Corp., 8.5%, 2015 | | | 6,000 | | | | 6,030 | |
| YCC Holdings LLC/Yankee Finance, Inc., 10.25%, 2016 (p) | | | 445,000 | | | | 459,507 | |
| | | | | | | | |
| | | | | | $ | 7,432,100 | |
| | | | | | | | |
| Specialty Chemicals – 0.1% | | | | | | | | |
| Koppers, Inc., 7.875%, 2019 | | $ | 365,000 | | | $ | 401,500 | |
| | | | | | | | |
| Specialty Stores – 0.4% | | | | | | | | |
| Gymboree Corp., 9.125%, 2018 | | $ | 380,000 | | | $ | 338,200 | |
| Michaels Stores, Inc., 11.375%, 2016 | | | 440,000 | | | | 459,800 | |
| Michaels Stores, Inc., 7.75%, 2018 | | | 510,000 | | | | 559,725 | |
| | | | | | | | |
| | | | | | $ | 1,357,725 | |
| | | | | | | | |
| Supermarkets – 0.1% | | | | | | | | |
| SUPERVALU, Inc., 7.5%, 2014 | | $ | 168,000 | | | $ | 162,960 | |
| | | | | | | | |
| Telecommunications – Wireless – 4.1% | | | | | |
| Clearwire Corp., 12%, 2015 (n) | | $ | 900,000 | | | $ | 967,500 | |
| Cricket Communications, Inc., 7.75%, 2016 | | | 275,000 | | | | 291,156 | |
| Cricket Communications, Inc., 7.75%, 2020 | | | 775,000 | | | | 790,500 | |
| Crown Castle International Corp., 7.125%, 2019 | | | 1,315,000 | | | | 1,453,075 | |
11
MFS High Income Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Telecommunications – Wireless – continued | | | | | |
| Crown Castle International Corp., 5.25%, 2023 (n) | | $ | 455,000 | | | $ | 486,850 | |
| Digicel Group Ltd., 12%, 2014 (n) | | | 200,000 | | | | 217,500 | |
| Digicel Group Ltd., 8.25%, 2017 (n) | | | 655,000 | | | | 700,850 | |
| Digicel Group Ltd., 10.5%, 2018 (n) | | | 930,000 | | | | 1,023,000 | |
| MetroPCS Wireless, Inc., 7.875%, 2018 | | | 710,000 | | | | 768,575 | |
| Sprint Capital Corp., 6.875%, 2028 | | | 950,000 | | | | 988,000 | |
| Sprint Nextel Corp., 6%, 2016 | | | 1,050,000 | | | | 1,141,875 | |
| Sprint Nextel Corp., 8.375%, 2017 | | | 825,000 | | | | 959,063 | |
| Sprint Nextel Corp., 9%, 2018 (n) | | | 440,000 | | | | 543,400 | |
| Sprint Nextel Corp., 6%, 2022 | | | 1,020,000 | | | | 1,048,050 | |
| Wind Acquisition Finance S.A., 11.75%, 2017 (n) | | | 1,215,000 | | | | 1,272,713 | |
| Wind Acquisition Finance S.A., 7.25%, 2018 (n) | | | 650,000 | | | | 658,125 | |
| | | | | | | | |
| | | | | | $ | 13,310,232 | |
| | | | | | | | |
| Telephone Services – 0.6% | | | | | | | | |
| Cogent Communications Group, Inc., 8.375%, 2018 (n) | | $ | 470,000 | | | $ | 515,825 | |
| Level 3 Financing, Inc., 9.375%, 2019 | | | 550,000 | | | | 614,625 | |
| Level 3 Financing, Inc., 7%, 2020 (n) | | | 225,000 | | | | 235,125 | |
| Level 3 Financing, Inc., 8.625%, 2020 | | | 415,000 | | | | 460,650 | |
| Sable International Finance Ltd., 8.75%, 2020 (n) | | | 200,000 | | | | 229,000 | |
| | | | | | | | |
| | | | | | $ | 2,055,225 | |
| | | | | | | | |
| Transportation – 0.2% | | | | | | | | |
| Navios South American Logistics, Inc., 9.25%, 2019 | | $ | 779,000 | | | $ | 764,394 | |
| | | | | | | | |
| Transportation – Services – 3.1% | | | | | | | | |
| ACL I Corp., 10.625%, 2016 (p) | | $ | 1,093,827 | | | $ | 1,056,724 | |
| Aguila American Resources Ltd., 7.875%, 2018 (n) | | | 890,000 | | | | 943,400 | |
| Avis Budget Car Rental LLC, 8.25%, 2019 | | | 625,000 | | | | 690,625 | |
| Avis Budget Car Rental LLC, 9.75%, 2020 | | | 365,000 | | | | 421,575 | |
| CEVA Group PLC, 8.375%, 2017 (n) | | | 1,185,000 | | | | 1,167,225 | |
| Commercial Barge Line Co., 12.5%, 2017 | | | 1,890,000 | | | | 2,083,725 | |
| HDTFS, Inc., 5.875%, 2020 (n) | | | 170,000 | | | | 177,650 | |
| Navios Maritime Acquisition Corp., 8.625%, 2017 | | | 1,065,000 | | | | 998,438 | |
| Navios Maritime Holdings, Inc., 8.875%, 2017 | | | 920,000 | | | | 917,700 | |
| Swift Services Holdings, Inc., 10%, 2018 | | | 1,465,000 | | | | 1,607,838 | |
| | | | | | | | |
| | | | | | $ | 10,064,900 | |
| | | | | | | | |
| Utilities – Electric Power – 4.2% | | | | | | | | |
| AES Corp., 8%, 2017 | | $ | 1,025,000 | | | $ | 1,183,875 | |
| Atlantic Power Corp., 9%, 2018 | | | 36,000 | | | | 37,620 | |
| Calpine Corp., 8%, 2016 (n) | | | 805,000 | | | | 855,313 | |
| Calpine Corp., 7.875%, 2020 (n) | | | 1,089,000 | | | | 1,222,403 | |
| Covanta Holding Corp., 7.25%, 2020 | | | 1,165,000 | | | | 1,283,594 | |
| Covanta Holding Corp., 6.375%, 2022 | | | 275,000 | | | | 298,641 | |
| DPL, Inc., 7.25%, 2021 | | | 405,000 | | | | 433,350 | |
| EDP Finance B.V., 6%, 2018 (n) | | | 1,335,000 | | | | 1,399,731 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Utilities – Electric Power – continued | |
| Energy Future Holdings Corp., 10%, 2020 | | $ | 780,000 | | | $ | 871,650 | |
| Energy Future Holdings Corp., 10%, 2020 | | | 2,173,000 | | | | 2,450,058 | |
| Energy Future Holdings Corp., 11.75%, 2022 (n) | | | 600,000 | | | | 666,000 | |
| GenOn Energy, Inc., 9.5%, 2018 | | | 65,000 | | | | 76,700 | |
| GenOn Energy, Inc., 9.875%, 2020 | | | 1,240,000 | | | | 1,432,200 | |
| NRG Energy, Inc., 8.25%, 2020 | | | 960,000 | | | | 1,075,200 | |
| Texas Competitive Electric Holdings Co. LLC, 11.5%, 2020 (n) | | | 470,000 | | | | 367,775 | |
| | | | | | | | |
| | | | | | $ | 13,654,110 | |
| | | | | | | | |
Total Bonds
(Identified Cost, $295,010,364) | | | | | | $ | 308,461,220 | |
| | | | | | | | |
| |
| FLOATING RATE LOANS (g)(r) – 0.2% | | | | | |
| Financial Institutions – 0.1% | | | | | | | | |
| Springleaf Financial Funding Co., Term Loan, 5.5%, 2017 | | $ | 452,233 | | | $ | 449,266 | |
| | | | | | | | |
| Utilities – Electric Power – 0.1% | | | | | | | | |
| Dynegy Midwest Generation LLC, Term Loan, 9.25%, 2016 | | $ | 104,904 | | | $ | 108,786 | |
| Dynegy Power LLC, Term Loan, 9.25%, 2016 | | | 138,751 | | | | 144,698 | |
| | | | | | | | |
| | | | | | $ | 253,484 | |
| | | | | | | | |
Total Floating Rate Loans
(Identified Cost, $690,738) | | | | | | $ | 702,750 | |
| | | | | | | | |
| | |
| COMMON STOCKS – 0.1% | | | | | | | | |
| Automotive – 0.0% | | | | | | | | |
| Accuride Corp. (a) | | | 24,851 | | | $ | 79,772 | |
| | | | | | | | |
| Broadcasting – 0.0% | | | | | | | | |
| New Young Broadcasting Holding Co., Inc. (a) | | | 26 | | | $ | 97,500 | |
| | | | | | | | |
| Printing & Publishing – 0.1% | | | | | | | | |
| American Media Operations, Inc. (a) | | | 24,246 | | | $ | 115,169 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $787,912) | | | | | | $ | 292,441 | |
| | | | | | | | |
|
| CONVERTIBLE PREFERRED STOCKS – 0.2% | |
| Automotive – 0.2% | | | | | | | | |
General Motors Co., 4.75%
(Identified Cost, $817,080) | | $ | 16,430 | | | $ | 725,054 | |
| | | | | | | | |
| |
| PREFERRED STOCKS – 0.4% | | | | | |
| Other Banks & Diversified Financials – 0.4% | | | | | |
| Ally Financial, Inc., 7% (z) | | | 511 | | | $ | 501,882 | |
| GMAC Capital Trust I, 8.125% | | | 28,350 | | | | 755,528 | |
| | | | | | | | |
Total Preferred Stocks
(Identified Cost, $1,193,270) | | | | | | $ | 1,257,410 | |
| | | | | | | | |
12
MFS High Income Series
Portfolio of Investments – continued
| | | | | | | | | | | | | | | | |
| Issuer | | Strike
Price | | | First
Exercise | | | Shares/Par | | | Value ($) | |
| | | | | | | | | | | | | | | | |
| WARRANTS – 0.1% | | | | | | | | | |
| Broadcasting – 0.1% | | | | | | | | | |
| New Young Broadcasting Holding Co., Inc. (1 share for 1 warrant) (Identified Cost, $217,308) (a) | | $ | 0.01 | | | | 7/14/10 | | | | 113 | | | $ | 423,750 | |
| | | | | | | | | | | | | | | | |
| |
| CONVERTIBLE BONDS – 0.3% | | | | | |
| Network & Telecom – 0.3% | | | | | | | | | |
Nortel Networks Corp., 2.125%, 2014 (Identified Cost, $947,481) (a)(d) | | | $ | 960,000 | | | $ | 973,200 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Issuer/Expiration Date/Strike Price | | Numberof
Contracts | | | Value ($) | |
| CALL OPTIONS PURCHASED – 0.1% | | | | | |
| Russell 2000 Index – March 2013 @ $880 (Premiums paid, $249,857) | | | 192 | | | $ | 256,320 | |
| | | | | | | | | | | | |
| | | Shares/Par | | | | |
| |
| MONEY MARKET FUNDS – 1.1% | | | | | |
| MFS Institutional Money Market Portfolio, 0.16%, at Cost and Net Asset Value (v) | | | 3,715,610 | | | $ | 3,715,610 | |
Total Investments
(Identified Cost, $303,629,620) | | | | | | $ | 316,807,755 | |
| | | | | | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 3.0% | | | | | | | 9,641,105 | |
| | | | | | | | | | | | |
| Net Assets – 100.0% | | | | | | $ | 326,448,860 | |
| | | | | | | | | | | | |
| (a) | | Non-income producing security. |
| (d) | | In default. Interest and/or scheduled principal payment(s) have been missed. |
| (g) | | The rate shown represents a weighted average coupon rate on settled positions at period end, unless otherwise indicated. |
| (n) | | Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. At period end, the aggregate value of these securities was $89,260,518, representing 27.3% of net assets. |
| (p) | | Payment-in-kind security. |
| (r) | | Remaining maturities of floating rate loans may be less than stated maturities shown as a result of contractual or optional prepayments by the borrower. Such prepayments cannot be predicted with certainty. These loans may be subject to restrictions on resale. Floating rate loans generally have rates of interest which are determined periodically by reference to a base lending rate plus a premium. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
| (z) | | Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The fund holds the following restricted securities: |
| | | | | | | | | | |
| Restricted Securities | | Acquisition
Date | | Cost | | | Value | |
| Ally Financial, Inc., 7% (Preferred Stock) | | 4/13/11-4/14/11 | | | $479,063 | | | | $501,882 | |
| American Media, Inc., 13.5%, 2018 | | 12/22/10 | | | 95,852 | | | | 83,264 | |
| Arbor Realty Mortgage Securities, CDO, FRN, 2.618%, 2038 | | 12/20/05 | | | 568,229 | | | | 170,469 | |
| Boyd Gaming Corp., 9%, 2020 | | 12/19/12-12/21/12 | | | 349,781 | | | | 344,750 | |
| CDRT Holding Corp., 9.25%, 2017 | | 12/12/12-12/13/12 | | | 211,084 | | | | 209,100 | |
| CWCapital Cobalt Ltd., CDO, 6.23%, 2045 | | 3/20/06 | | | 1,051,079 | | | | 12,011 | |
| CWCapital Cobalt Ltd., CDO, “F”, FRN, 1.614%, 2050 | | 4/12/06 | | | 526,135 | | | | 1,315 | |
| Cequel Communications Holdings, 6.375%, 2020 | | 12/13/12 | | | 278,091 | | | | 281,138 | |
| Cinemark USA, Inc., 5.125%, 2022 | | 12/04/12 | | | 180,000 | | | | 182,250 | |
| DISH DBS Corp., 5%, 2023 | | 12/19/12 | | | 565,000 | | | | 565,000 | |
| Dematic S.A., 7.75%, 2020 | | 12/13/12 | | | 620,000 | | | | 620,000 | |
| Eldorado Gold Corp., 6.125%, 2020 | | 12/10/12-12/12/12 | | | 550,990 | | | | 554,538 | |
| FelCor Lodging LP, 5.625%, 2023 | | 12/12/12 | | | 135,000 | | | | 134,325 | |
| G-Force LLC, CDO, “A2”, 4.83%, 2036 | | 2/14/11 | | | 498,072 | | | | 513,906 | |
| Heckler & Koch GmbH, 9.5%, 2018 | | 5/06/11-5/10/11 | | | 547,983 | | | | 440,718 | |
| IAC/InterActiveCorp, 4.75%, 2022 | | 12/18/12 | | | 135,000 | | | | 134,325 | |
| LBI Media, Inc., 13.5% to 2015, 11.5% to 2020 | | 12/26/12 | | | 195,044 | | | | 172,200 | |
| Local TV Finance LLC, 9.25%, 2015 | | 12/10/07-12/06/12 | | | 807,596 | | | | 822,092 | |
| Silver II Borrower SCA/Silver II US Holdings, 7.75%, 2020 | | 12/05/12-12/17/12 | | | 405,990 | | | | 408,825 | |
13
MFS High Income Series
Portfolio of Investments – continued
| | | | | | | | | | |
| Restricted Securities – continued | | Acquisition
Date | | Cost | | | Value | |
| Six Flags Entertainment Corp., 5.25%, 2021 | | 12/11/12 | | | $695,000 | | | | $695,000 | |
| Spectrum Brands Escrow Corp., 6.625%, 2022 | | 11/01/12 | | | 75,000 | | | | 80,438 | |
| Townsquare Radio LLC, 9%, 2019 | | 3/30/12 | | | 406,226 | | | | 449,975 | |
| Unitymedia Hessen GmbH & Co., 5.5%, 2023 | | 11/30/12 | | | 205,000 | | | | 211,663 | |
| Total Restricted Securities | | | | | | | | | $7,589,184 | |
| % of Net assets | | | | | | | | | 2.3% | |
The following abbreviations are used in this report and are defined:
| CDO | | Collateralized Debt Obligation |
| FRN | | Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end. |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
Abbreviations indicate amounts shown in currencies other than the U.S. dollar. All amounts are stated in U.S. dollars unless otherwise indicated. A list of abbreviations is shown below:
Derivative Contracts at 12/31/12
Forward Foreign Currency Exchange Contracts at 12/31/12
| | | | | | | | | | | | | | | | | | | | | | | | |
| Type | | Currency | | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | | Contracts
at Value | | | Net Unrealized
Appreciation
(Depreciation) | |
| Liability Derivatives | | | | | | | | | | | | | | | | | | | | | | |
| SELL | | | EUR | | | Deutsche Bank AG | | 1,304,490 | | 1/11/13 | | $ | 1,680,877 | | | $ | 1,721,980 | | | $ | (41,103 | ) |
| SELL | | | EUR | | | UBS AG | | 1,304,490 | | 1/11/13 | | | 1,681,279 | | | | 1,721,980 | | | | (40,701 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | $ | (81,804 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
See Notes to Financial Statements
14
MFS High Income Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | | | | |
At 12/31/12 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $299,914,010) | | | $313,092,145 | | | | | |
Underlying affiliated funds, at cost and value | | | 3,715,610 | | | | | |
Total investments, at value (identified cost, $303,629,620) | | | $316,807,755 | | | | | |
Cash | | | 386,862 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 5,141,050 | | | | | |
Fund shares sold | | | 26,682 | | | | | |
Interest | | | 5,700,833 | | | | | |
Other assets | | | 3,002 | | | | | |
Total assets | | | | | | | $328,066,184 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Forward foreign currency exchange contracts | | | $81,804 | | | | | |
Investments purchased | | | 569,523 | | | | | |
Fund shares reacquired | | | 875,891 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 25,590 | | | | | |
Shareholder servicing costs | | | 325 | | | | | |
Distribution and/or service fees | | | 173 | | | | | |
Payable for independent Trustees’ compensation | | | 178 | | | | | |
Accrued expenses and other liabilities | | | 63,840 | | | | | |
Total liabilities | | | | | | | $1,617,324 | |
Net assets | | | | | | | $326,448,860 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $320,248,159 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 13,097,299 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (29,499,869 | ) | | | | |
Undistributed net investment income | | | 22,603,271 | | | | | |
Net assets | | | | | | | $326,448,860 | |
Shares of beneficial interest outstanding | | | | | | | 37,197,908 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $320,147,300 | | | | 36,476,488 | | | | $8.78 | |
Service Class | | | 6,301,560 | | | | 721,420 | | | | 8.73 | |
See Notes to Financial Statements
15
MFS High Income Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | | | | | | |
Year ended 12/31/12 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Interest | | | $24,010,756 | | | | | |
Dividends | | | 215,011 | | | | | |
Dividends from underlying affiliated funds | | | 15,469 | | | | | |
Total investment income | | | | | | | $24,241,236 | |
Expenses | | | | | | | | |
Management fee | | | $2,284,475 | | | | | |
Distribution and/or service fees | | | 16,472 | | | | | |
Shareholder servicing costs | | | 30,217 | | | | | |
Administrative services fee | | | 56,918 | | | | | |
Independent Trustees’ compensation | | | 10,901 | | | | | |
Custodian fee | | | 39,750 | | | | | |
Shareholder communications | | | 38,005 | | | | | |
Audit and tax fees | | | 70,285 | | | | | |
Legal fees | | | 41,878 | | | | | |
Miscellaneous | | | 51,906 | | | | | |
Total expenses | | | | | | | $2,640,807 | |
Fees paid indirectly | | | (269 | ) | | | | |
Reduction of expenses by investment adviser | | | (1,160 | ) | | | | |
Net expenses | | | | | | | $2,639,378 | |
Net investment income | | | | | | | $21,601,858 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $808,904 | | | | | |
Foreign currency | | | 159,869 | | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | 968,773 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $21,724,671 | | | | | |
Translation of assets and liabilities in foreign currencies | | | (214,126 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $21,510,545 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $22,479,318 | |
Change in net assets from operations | | | | | | | $44,081,176 | |
See Notes to Financial Statements
16
MFS High Income Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | | | |
For years ended 12/31 | | | 2012 | | | | 2011 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $21,601,858 | | | | $23,913,403 | |
Net realized gain (loss) on investments and foreign currency | | | 968,773 | | | | 4,671,000 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 21,510,545 | | | | (14,447,125 | ) |
Change in net assets from operations | | | $44,081,176 | | | | $14,137,278 | |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(25,020,251 | ) | | | $(28,856,819 | ) |
Change in net assets from fund share transactions | | | $(13,021,145 | ) | | | $(44,715,689 | ) |
Total change in net assets | | | $6,039,780 | | | | $(59,435,230 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 320,409,080 | | | | 379,844,310 | |
At end of period (including undistributed net investment income of $22,603,271 and
$24,740,863, respectively) | | | $326,448,860 | | | | $320,409,080 | |
See Notes to Financial Statements
17
MFS High Income Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $8.29 | | | | $8.78 | | | | $8.25 | | | | $6.25 | | | | $9.52 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.57 | | | | $0.61 | | | | $0.63 | | | | $0.63 | | | | $0.71 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.61 | | | | (0.28 | ) | | | 0.53 | | | | 1.98 | | | | (3.18 | ) |
Total from investment operations | | | $1.18 | | | | $0.33 | | | | $1.16 | | | | $2.61 | | | | $(2.47 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.69 | ) | | | $(0.82 | ) | | | $(0.63 | ) | | | $(0.61 | ) | | | $(0.80 | ) |
Net asset value, end of period (x) | | | $8.78 | | | | $8.29 | | | | $8.78 | | | | $8.25 | | | | $6.25 | |
Total return (%) (k)(r)(s)(x) | | | 14.69 | | | | 4.10 | | | | 14.73 | | | | 45.08 | | | | (28.26 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.80 | | | | 0.79 | | | | 0.80 | | | | 0.81 | | | | 0.87 | |
Expenses after expense reductions (f) | | | 0.80 | | | | 0.79 | | | | 0.80 | | | | 0.81 | | | | 0.82 | |
Net investment income | | | 6.62 | | | | 7.01 | | | | 7.55 | | | | 8.89 | | | | 8.66 | |
Portfolio turnover | | | 42 | | | | 59 | | | | 70 | | | | 52 | | | | 60 | |
Net assets at end of period (000 omitted) | | | $320,147 | | | | $313,703 | | | | $372,412 | | | | $344,186 | | | | $203,800 | |
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $8.25 | | | | $8.74 | | | | $8.22 | | | | $6.22 | | | | $9.47 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.55 | | | | $0.59 | | | | $0.61 | | | | $0.62 | | | | $0.69 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.60 | | | | (0.28 | ) | | | 0.53 | | | | 1.96 | | | | (3.17 | ) |
Total from investment operations | | | $1.15 | | | | $0.31 | | | | $1.14 | | | | $2.58 | | | | $(2.48 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.67 | ) | | | $(0.80 | ) | | | $(0.62 | ) | | | $(0.58 | ) | | | $(0.77 | ) |
Net asset value, end of period (x) | | | $8.73 | | | | $8.25 | | | | $8.74 | | | | $8.22 | | | | $6.22 | |
Total return (%) (k)(r)(s)(x) | | | 14.30 | | | | 3.85 | | | | 14.40 | | | | 44.75 | | | | (28.43 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.05 | | | | 1.04 | | | | 1.05 | | | | 1.07 | | | | 1.12 | |
Expenses after expense reductions (f) | | | 1.05 | | | | 1.04 | | | | 1.05 | | | | 1.06 | | | | 1.07 | |
Net investment income | | | 6.38 | | | | 6.77 | | | | 7.31 | | | | 8.78 | | | | 8.40 | |
Portfolio turnover | | | 42 | | | | 59 | | | | 70 | | | | 52 | | | | 60 | |
Net assets at end of period (000 omitted) | | | $6,302 | | | | $6,706 | | | | $7,432 | | | | $7,210 | | | | $6,442 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (r) | Certain expenses have been reduced without which performance would have been lower. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (x) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
18
MFS High Income Series
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS High Income Series (the fund) is a series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests in high-yield securities rated below investment grade. Investments in high-yield securities involve greater degrees of credit and market risk than investments in higher-rated securities and tend to be more sensitive to economic conditions. The fund invests in foreign securities. Investments in foreign securities are vulnerable to the effects of changes in the relative values of the local currency and the U.S. dollar and to the effects of changes in each country’s legal, political, and economic environment.
In this reporting period the fund adopted Financial Accounting Standards Board (FASB) Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 seeks to improve the comparability of fair value measurements as presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) by providing common requirements for fair value measurement and disclosure.
In December 2011, the FASB issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods, ASU 2011-11 is intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. Although still evaluating the potential impacts of ASU 2011-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures.
Investment Valuations – Debt instruments and floating rate loans (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as provided by a third-party pricing service. Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Exchange-traded options are generally valued at the last sale or official closing price as provided by a third-party pricing service on the exchange on which such options are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as provided by a third-party pricing service on the exchange on which such options are primarily traded. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. Foreign currency options are generally valued at valuations provided by a third-party pricing service. Forward foreign currency exchange contracts are generally valued at the mean of bid and asked prices for the time period interpolated from rates provided by a third-party pricing service for proximate time periods. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of
trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is
19
MFS High Income Series
Notes to Financial Statements – continued
principally traded. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. Other financial instruments are derivative instruments not reflected in total investments, such as forward foreign currency exchange contracts. The following is a summary of the levels used as of December 31, 2012 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities | | | $1,816,674 | | | | $1,023,132 | | | | $115,169 | | | | $2,954,975 | |
| U.S. Corporate Bonds | | | — | | | | 255,246,989 | | | | — | | | | 255,246,989 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 686,268 | | | | — | | | | 686,268 | |
| Asset-Backed Securities (including CDOs) | | | — | | | | 748,030 | | | | — | | | | 748,030 | |
| Foreign Bonds | | | — | | | | 52,753,133 | | | | — | | | | 52,753,133 | |
| Floating Rate Loans | | | — | | | | 702,750 | | | | — | | | | 702,750 | |
| Mutual Funds | | | 3,715,610 | | | | — | | | | — | | | | 3,715,610 | |
| Total Investments | | | $5,532,284 | | | | $311,160,302 | | | | $115,169 | | | | $316,807,755 | |
| | | | |
| Other Financial Instruments | | | | | | | | | | | | |
| Forward Foreign Currency Exchange Contracts | | | $— | | | | $(81,804 | ) | | | $— | | | | $(81,804 | ) |
For further information regarding security characteristics, see the Portfolio of Investments.
The following is a reconciliation of level 3 assets for which significant unobservable inputs were used to determine fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period. The table presents the activity of level 3 securities held at the beginning and the end of the period.
| | | | |
| | | Equity Securities | |
| Balance as of 12/31/11 | | | $288,285 | |
Change in unrealized appreciation (depreciation) | | | (173,116 | ) |
| Balance as of 12/31/12 | | | $115,169 | |
The net change in unrealized appreciation (depreciation) from investments still held as level 3 at December 31, 2012 is $(173,116).
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Derivatives – The fund uses derivatives for different purposes, primarily to increase or decrease exposure to a particular market or segment of the market, or security, to increase or decrease interest rate or currency exposure, or as alternatives to direct investments. Derivatives are used for hedging or non-hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. When the fund uses derivatives as an investment to increase market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative’s original cost.
20
MFS High Income Series
Notes to Financial Statements – continued
The derivative instruments used by the fund were purchased options and forward foreign currency exchange contracts. At December 31, 2012, the fund’s period end derivatives, as presented in the Portfolio of Investments and the associated Derivative Contract Tables, generally are indicative of the volume of its derivative activity during the period.
The following table presents, by major type of derivative contract, the fair value, on a gross basis, of the asset and liability components of derivatives held by the fund at December 31, 2012 as reported in the Statement of Assets and Liabilities:
| | | | | | | | | | |
| | | | | Fair Value (a) | |
| Risk | | Derivative Contracts | | Asset Derivatives | | | Liability Derivatives | |
| Foreign Exchange | | Forward Foreign Currency Exchange | | | $— | | | | $(81,804 | ) |
| Equity | | Purchased Equity Options | | | 256,320 | | | | — | |
| Total | | | | | $256,320 | | | | $(81,804 | ) |
| (a) | The value of purchased options outstanding is included in total investments, at value, within the fund’s Statement of Assets and Liabilities. |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2012 as reported in the Statement of Operations:
| | | | | | | | |
| Risk | | Foreign Currency | | | Investments
(Purchased Options) | |
| Foreign Exchange | | | $165,530 | | | | $— | |
| Equity | | | — | | | | (69,757 | ) |
| Total | | | $165,530 | | | | $(69,757 | ) |
The following table presents, by major type of derivative contract, the change in unrealized appreciation (depreciation) on derivatives held by the fund for the year ended December 31, 2012 as reported in the Statement of Operations:
| | | | | | | | |
| Risk | | Translation of
Assets and Liabilities in Foreign Currencies | | | Investments
(Purchased Options) | |
| Foreign Exchange | | | $(216,917 | ) | | | $— | |
| Equity | | | — | | | | 138,335 | |
| Total | | | $(216,917 | ) | | | $138,335 | |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an International Swaps and Derivatives Association (ISDA) Master Agreement on a bilateral basis with each of the counterparties with whom it undertakes a significant volume of transactions. The ISDA Master Agreement gives each party to the agreement the right to terminate all transactions traded under such agreement if there is a certain deterioration in the credit quality of the other party. The ISDA Master Agreement gives the fund the right, upon an event of default by the applicable counterparty or a termination of the agreement, to close out all transactions traded under such agreement and to net amounts owed under each transaction to one net amount payable by one party to the other. This right to close out and net payments across all transactions traded under the ISDA Master Agreement could result in a reduction of the fund’s credit risk to such counterparty equal to any amounts payable by the fund under the applicable transactions, if any. However, absent an event of default by the counterparty or a termination of the agreement, the ISDA Master Agreement does not result in an offset of reported amounts of assets and liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearing house for exchange traded derivatives (i.e., futures contracts and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forward foreign currency exchange contracts, swap agreements and over-the-counter options). For derivatives traded under an ISDA Master Agreement, the collateral requirements are netted across all transactions traded under such agreement and one amount is posted from one party to the other to collateralize such obligations. Cash collateral that has been pledged to cover obligations of the fund under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as restricted cash. Securities collateral pledged for the same purpose, if any, is noted in the Portfolio of Investments.
Purchased Options – The fund purchased call and put options for a premium. Purchased call and put options entitle the holder to buy and sell a specified number of shares or units of a particular security, currency or index at a specified price at a specified date or within a specified period of time. Purchasing call options may be used to hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or to increase the fund’s exposure to an underlying instrument. Purchasing put options may hedge against a decline in the value of portfolio securities or currency.
21
MFS High Income Series
Notes to Financial Statements – continued
The premium paid is initially recorded as an investment in the Statement of Assets and Liabilities. That investment is subsequently marked-to-market daily with the difference between the premium paid and the market value of the purchased option being recorded as unrealized appreciation or depreciation. Premiums paid for purchased call and put options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased call option, the premium paid is added to the cost of the security or financial instrument. Upon the exercise or closing of a purchased put option, the premium paid is offset against the proceeds on the sale of the underlying security or financial instrument in order to determine the realized gain or loss on investments.
The risk in purchasing an option is that the fund pays a premium whether or not the option is exercised. The fund’s maximum risk of loss due to counterparty credit risk is limited to the market value of the option. For over-the-counter options, this risk is mitigated in cases where there is an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and for posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.
Forward Foreign Currency Exchange Contracts – The fund entered into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. These contracts may be used to hedge the fund’s currency risk or for non-hedging purposes. For hedging purposes, the fund may enter into contracts to deliver or receive foreign currency that the fund will receive from or use in its normal investment activities. The fund may also use contracts to hedge against declines in the value of foreign currency denominated securities due to unfavorable exchange rate movements. For non-hedging purposes, the fund may enter into contracts with the intent of changing the relative exposure of the fund’s portfolio of securities to different currencies to take advantage of anticipated exchange rate changes.
Forward foreign currency exchange contracts are adjusted by the daily exchange rate of the underlying currency and any unrealized gains or losses are recorded as a receivable or payable for forward foreign currency exchange contracts until the contract settlement date. On contract settlement date, any gain or loss on the contract is recorded as realized gains or losses on foreign currency.
Risks may arise upon entering into these contracts from unanticipated movements in the value of the contract and from the potential inability of counterparties to meet the terms of their contracts. Generally, the fund’s maximum risk due to counterparty credit risk is the unrealized gain on the contract due to the use of Continuous Linked Settlement, an industry accepted settlement system. This risk is mitigated in cases where there is an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and for posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.
Loans and Other Direct Debt Instruments – The fund invests in loans and loan participations or other receivables. These investments may include standby financing commitments, including revolving credit facilities, which obligate the fund to supply additional cash to the borrower on demand. Loan participations involve a risk of insolvency of the lending bank or other financial intermediary.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles. The fund earns certain fees in connection with its floating rate loan purchasing activities. These fees are in addition to interest payments earned and may include amendment fees, commitment fees, facility fees, consent fees, and prepayment fees. Commitment fees are recorded on an accrual basis as income in the accompanying financial statements. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date. Debt obligations may be placed on non-accrual status or set to accrue at a rate of interest less than the contractual coupon when the collection of all or a portion of interest has become doubtful. Interest income for those debt obligations may be further reduced by the write-off of the related interest receivables when deemed uncollectible.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
22
MFS High Income Series
Notes to Financial Statements – continued
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount, for the year ended December 31, 2012, is shown as a reduction of total expenses in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to amortization and accretion of debt securities.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/12 | | | 12/31/11 | |
| Ordinary income (including any short-term capital gains) | | | $25,020,251 | | | | $28,856,819 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/12 | | | | |
| Cost of investments | | | $305,169,420 | |
| Gross appreciation | | | 18,804,267 | |
| Gross depreciation | | | (7,165,932 | ) |
| Net unrealized appreciation (depreciation) | | | $11,638,335 | |
| Undistributed ordinary income | | | 22,627,917 | |
| Capital loss carryforwards | | | (27,953,606 | ) |
| Other temporary differences | | | (111,945 | ) |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized after December 31, 2010 may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
As of December 31, 2012, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | | |
| Pre-enactment losses: | | | | |
| 12/31/16 | | | $(20,426,634 | ) |
| 12/31/17 | | | (7,524,848 | ) |
| Total | | | $(27,951,482 | ) |
| | | | |
| Post-enactment losses: | | | | |
| Long-Term | | | $(2,124 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/12 | | | Year ended
12/31/11 | |
| Initial Class | | | $24,535,958 | | | | $28,197,014 | |
| Service Class | | | 484,293 | | | | 659,805 | |
| Total | | | $25,020,251 | | | | $28,856,819 | |
23
MFS High Income Series
Notes to Financial Statements – continued
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
| | | | |
| First $1 billion of average daily net assets | | | 0.70% | |
| Average daily net assets in excess of $1 billion | | | 0.65% | |
The management fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.70% of the fund’s average daily net assets.
The investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses, such that total annual operating expenses do not exceed 0.85% of average daily net assets for the Initial Class shares and 1.10% of average daily net assets for the Service Class shares. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2014. For the year ended December 31, 2012, the fund’s actual operating expenses did not exceed the limit and therefore, the investment adviser did not pay any portion of the fund’s expenses related to this agreement.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2012, the fee was $29,749, which equated to 0.0091% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2012, these costs amounted to $468.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.0174% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended December 31, 2012, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $2,914 and are included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $1,160, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
Purchases and sales of investments, other than purchased option transactions and short-term obligations, aggregated $129,823,832 and $140,482,771, respectively.
24
MFS High Income Series
Notes to Financial Statements – continued
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 6,196,321 | | | | $54,301,955 | | | | 7,341,306 | | | | $62,780,029 | |
Service Class | | | 84,162 | | | | 724,686 | | | | 108,386 | | | | 967,172 | |
| | | 6,280,483 | | | | $55,026,641 | | | | 7,449,692 | | | | $63,747,201 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 2,927,919 | | | | $24,535,958 | | | | 3,507,091 | | | | $28,197,014 | |
Service Class | | | 57,999 | | | | 484,293 | | | | 82,373 | | | | 659,805 | |
| | | 2,985,918 | | | | $25,020,251 | | | | 3,589,464 | | | | $28,856,819 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (10,507,653 | ) | | | $(91,048,875 | ) | | | (15,422,605 | ) | | | $(135,365,132 | ) |
Service Class | | | (233,988 | ) | | | (2,019,162 | ) | | | (228,069 | ) | | | (1,954,577 | ) |
| | | (10,741,641 | ) | | | $(93,068,037 | ) | | | (15,650,674 | ) | | | $(137,319,709 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (1,383,413 | ) | | | $(12,210,962 | ) | | | (4,574,208 | ) | | | $(44,388,089 | ) |
Service Class | | | (91,827 | ) | | | (810,183 | ) | | | (37,310 | ) | | | (327,600 | ) |
| | | (1,475,240 | ) | | | $(13,021,145 | ) | | | (4,611,518 | ) | | | $(44,715,689 | ) |
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2012, the fund’s commitment fee and interest expense were $2,096 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 10,895,508 | | | | 102,873,077 | | | | (110,052,975 | ) | | | 3,715,610 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $15,469 | | | | $3,715,610 | |
25
MFS High Income Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of MFS High Income Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS High Income Series (the “Fund”) (one of the series comprising MFS Variable Insurance Trust) as of December 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS High Income Series as of December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2013
26
MFS High Income Series
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 1, 2013, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES | | | | | | | | |
Robert J. Manning (k) (age 49) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Chief Executive Officer and Director; President (until December 2009); Chief Investment Officer (until July 2010) | | N/A |
| | | | |
| INDEPENDENT TRUSTEES | | | | | | | | |
David H. Gunning (age 70) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman; Portman Limited (mining), Director (until 2008) |
| | | | |
Robert E. Butler (age 71) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 57) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 71) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 68) | | Trustee | | December 2004 | | Private investor; Rouse Properties Inc. (real estate), Director | | N/A |
| | | | |
John P. Kavanaugh (age 58) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
J. Dale Sherratt (age 74) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner | | N/A |
| | | | |
Laurie J. Thomsen
(age 55) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 71) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
John M. Corcoran (k) (age 47) | | President | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) | | N/A |
| | | | |
| Christopher R. Bohane (k) (age 39) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kino Clark (k) (age 44) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 53) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
| | | | |
Ethan D. Corey (k) (age 49) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
27
MFS High Income Series
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
David L. DiLorenzo (k) (age 44) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Robyn L. Griffin (age 37) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 39) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 62) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 42) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 42) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 60) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Frank L. Tarantino (age 68) | | Independent
Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 52) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. For the period October 2008, until January 2012, Mr. Corcoran served as Treasurer of the Funds. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2013, the Trustees served as board members of 143 funds within the MFS Family of Funds.
28
MFS High Income Series
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers William Adams David Cole | | |
29
MFS High Income Series
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2012 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2011 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2011, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 2nd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 3rd quintile for the one-year period and the 4th quintile for the five-year period ended December 31, 2011 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In addition to considering the performance information provided in connection with the contract review meetings, the independent Trustees noted that, in light of the Fund’s substandard relative performance at the time of their contract review meetings in 2011, they had met at each of their regular meetings since then with MFS’ senior investment management personnel to discuss the Fund’s performance and MFS’ efforts to improve the Fund’s performance. The independent Trustees further noted that the Fund’s three-year performance as compared to its Lipper performance universe improved for the period ended December 31, 2011, as
30
MFS High Income Series
Board Review of Investment Advisory Agreement – continued
compared to the prior year. Taking this information into account, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate was higher than the Lipper expense group median, and the Fund’s total expense ratio was approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to institutional accounts, if any. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund is likely to benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2012.
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of the MFS Web site (mfs.com).
31
MFS High Income Series
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling
1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of mfs.com.
32
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
33
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
34
ANNUAL REPORT
December 31, 2012
MFS® RESEARCH BOND SERIES
MFS® Variable Insurance Trust
VFB-ANN
MFS® RESEARCH BOND SERIES
CONTENTS
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ NO BANK OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Research Bond Series
LETTER FROM THE CHAIRMAN AND CEO
Dear Contract Owners:
The global market outlook for 2013 is one of cautious optimism. While we are seeing some positive economic trends in the United States, Europe and China, the overall environment remains challenging. In the United States, the recent fiscal cliff agreement was received positively by investors, even though it mostly addressed pressing taxation issues and did not resolve additional concerns, including the need for spending cuts and a large-scale reduction of the federal debt. These issues will be front and center again in the spring. Despite the ongoing uncertainty, economic tailwinds are gathering strength as the U.S. housing and job markets are improving and consumer confidence is rising.
Overseas, the debt crisis continues to weigh heavily on eurozone markets, with even Germany — long an economic stalwart — experiencing some contraction. These ongoing challenges could be a drag on global market performance this year. In Asia, manufacturing activity has accelerated in emerging markets such as China and India, and we are seeing signs of stabilized loan growth in China, a leading indicator of that country’s economic health. In contrast, Japan’s economy is contracting sharply under deflationary pressures. Nevertheless, Japanese markets have responded favorably to early actions by the new government, which appears determined to act aggressively, along with the Bank of Japan, to stimulate growth.
As always, managing risk in the face of uncertainty remains a top priority for investors. At MFS®, our uniquely collaborative investment process revolves around global research and our disciplined risk management approach. Our global team of investment professionals shares ideas and evaluates opportunities across continents, investment disciplines and asset classes — all with a goal of building better insights, and ultimately better results, for our clients.
We remain mindful of the many economic challenges investors face today, and believe it is more important than ever to maintain a long-term view, employ time-tested principles, such as asset allocation and diversification, and work closely with investment advisors to identify and pursue the most suitable opportunities.
Respectfully,
Robert J. Manning
Chairman and Chief Executive Officer
MFS Investment Management®
February 15, 2013
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
MFS Research Bond Series
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | | | |
| Fixed income sectors (i) | | | | |
| High Grade Corporates | | | 36.4% | |
| Mortgage-Backed Securities | | | 25.8% | |
| U.S. Treasury Securities | | | 10.5% | |
| Commercial Mortgage-Backed Securities | | | 8.5% | |
| High Yield Corporates | | | 4.7% | |
| Emerging Markets Bonds | | | 3.1% | |
| Asset-Backed Securities | | | 2.4% | |
| U.S. Government Agencies | | | 0.6% | |
| Collateralized Debt Obligations | | | 0.4% | |
| Non-U.S. Government Bonds | | | 0.3% | |
| Residential Mortgage-Backed Securities | | | 0.1% | |
| Municipal Bonds | | | 0.1% | |
| | | | |
| Composition including fixed income credit quality (a)(i) | |
| AAA | | | 5.8% | |
| AA | | | 2.6% | |
| A | | | 13.7% | |
| BBB | | | 28.4% | |
| BB | | | 4.3% | |
| B | | | 1.1% | |
| CCC | | | 0.1% | |
| CC (o) | | | 0.0% | |
| C (o) | | | 0.0% | |
| U.S. Government | | | 16.3% | |
| Federal Agencies | | | 26.4% | |
| Not Rated | | | (5.8)% | |
| Cash & Other | | | 7.1% | |
| |
| Portfolio facts (i) | | | | |
| Average Duration (d) | | | 4.6 | |
| Average Effective Maturity (m) | | | 7.0 yrs. | |
| (a) | | For all securities other than those specifically described below, ratings are assigned to underlying securities utilizing ratings from Moody’s, Fitch, and Standard & Poor’s rating agencies and applying the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). Securities rated BBB or higher are considered investment grade. All ratings are subject to change. U.S. Government includes securities issued by the U.S. Department of the Treasury. Federal Agencies includes rated and unrated U.S. Agency fixed-income securities, U.S. Agency mortgage-backed securities, and collateralized mortgage obligations of U.S. Agency mortgage-backed securities. Not Rated includes fixed income securities, including fixed income futures contracts, which have not been rated by any rating agency. Cash & Other includes cash, other assets less liabilities, offsets to derivative positions, and short-term securities. The fund may not hold all of these instruments. The fund is not rated by these agencies. |
| (d) | | Duration is a measure of how much a bond’s price is likely to fluctuate with general changes in interest rates, e.g., if rates rise 1.00%, a bond with a 5-year duration is likely to lose about 5.00% of its value due to the interest rate move. |
| (i) | | For purposes of this presentation, the components include the market value of securities, and reflect the impact of the equivalent exposure of derivative positions, if any. These amounts may be negative from time to time. The bond component will include any accrued interest amounts. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than market value. Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio. |
| (m) | | In determining an instrument’s effective maturity for purposes of calculating the fund’s dollar-weighted average effective maturity, MFS uses the instrument’s stated maturity or, if applicable, an earlier date on which MFS believes it is probable that a maturity-shortening device (such as a put, pre-refunding or prepayment) will cause the instrument to be repaid. Such an earlier date can be substantially shorter than the instrument’s stated maturity. |
Percentages are based on net assets as of 12/31/12.
The portfolio is actively managed and current holdings may be different.
2
MFS Research Bond Series
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2012, Initial Class shares of the MFS Research Bond Series (“fund”) provided a total return of 7.35%, while Service Class shares of the fund provided a total return of 7.06%. These compare with a return of 4.21% over the same period for the fund’s benchmark, the Barclays U.S. Aggregate Bond Index.
Market Environment
The beginning of the period was characterized by a risk-on sentiment as a result of additional liquidity measures by the Federal Reserve Bank (“Fed”) and the European Central Bank (“ECB”) as well as a commensurate improvement in macroeconomic conditions. During this time, global equity valuations rose, credit spreads contracted, and high-quality sovereign yields increased modestly.
During the middle of the period, however, conditions worsened, driven by broadly weaker global macroeconomic indicators, as well as renewed concerns over the eurozone’s capacity and determination to address its ongoing crisis. Despite this deterioration, broad market sentiment remained relatively resilient as equity markets generally maintained gains and credit spreads did not indicate deterioration.
However, this renewed weakness in the fundamentals precipitated a further round of monetary easing by both the Fed (through a third round of quantitative easing) and the ECB (through a new bond purchase facility) in the second half of the period, which soon instilled additional confidence in risk markets. Nonetheless, towards the end of the period, weaker equity earnings reports and declining forward guidance caused market sentiment to soften. In addition, as we moved toward year end, the fiscal cliff negotiations between the Republicans in the U.S. Congress and President Obama were a particular source of market attention, where uncertainty surrounding the fiscal negotiations continued right up to the end-of-year deadline.
Contributors to Performance
The fund’s greater exposure to bonds in the financial and banking sectors benefited performance relative to the Barclays U.S. Aggregate Bond Index. Both sectors outperformed the benchmark as spreads narrowed during the period.
The fund’s greater exposure to “BBB” (r) and “BB” rated bonds was another primary contributor to relative performance as bonds in these credit quality segments outperformed over the reporting period.
The portion of the fund’s return derived from yield, which was greater than that of the benchmark, was another major contributor to relative performance.
Detractors from Performance
The fund’s positioning in agency mortgage-backed securities held back the fund’s relative performance over the reporting period.
Respectfully,
| | | | |
| Joshua Marston | | Robert Persons | | Jeffrey Wakelin |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| (r) | Bonds rated “BBB”, “Baa”, or higher are considered investment grade; bonds rated “BB”, “Ba”, or below are considered non-investment grade. The source for bond quality ratings is Moody’s Investors Service, Standard & Poor’s and Fitch, Inc. and are applied using the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). For securities which are not rated by any of the three agencies, the security is considered Not Rated. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
3
MFS Research Bond Series
PERFORMANCE SUMMARY THROUGH 12/31/12
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/12
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 10/24/95 | | 7.35% | | 6.91% | | 5.95% | | |
| | | Service Class | | 5/01/00 | | 7.06% | | 6.64% | | 5.69% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Barclays U.S. Aggregate Bond Index (f) | | 4.21% | | 5.95% | | 5.18% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Barclays U.S. Aggregate Bond Index – a market capitalization-weighted index that measures the performance of the U.S. investment-grade, fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities with at least one year to final maturity.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
4
MFS Research Bond Series
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2012 through December 31, 2012
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2012 through December 31, 2012.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | | Beginning
Account Value
7/01/12 | | | Ending Account Value
12/31/12 | | | Expenses Paid
During Period (p)
7/01/12-12/31/12 | |
| Initial Class | | Actual | | | 0.56% | | | | $1,000.00 | | | | $1,037.62 | | | | $2.87 | |
| | Hypothetical (h) | | | 0.56% | | | | $1,000.00 | | | | $1,022.32 | | | | $2.85 | |
| Service Class | | Actual | | | 0.81% | | | | $1,000.00 | | | | $1,035.89 | | | | $4.15 | |
| | Hypothetical (h) | | | 0.81% | | | | $1,000.00 | | | | $1,021.06 | | | | $4.12 | |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
5
MFS Research Bond Series
PORTFOLIO OF INVESTMENTS – 12/31/12
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – 98.0% | | | | | | | | |
| Aerospace – 0.3% | | | | | | | | |
| Bombardier, Inc., 7.75%, 2020 (n) | | $ | 2,620,000 | | | $ | 2,973,700 | |
| Huntington Ingalls Industries, Inc., 6.875%, 2018 | | | 4,750,000 | | | | 5,165,625 | |
| | | | | | | | |
| | | | | | $ | 8,139,325 | |
| | | | | | | | |
| Airlines – 0.1% | | | | | | | | |
| Continental Airlines, Inc., FRN, 0.66%, 2013 | | $ | 2,440,896 | | | $ | 2,392,078 | |
| | | | | | | | |
| Apparel Manufacturers – 0.1% | | | | | | | | |
| PVH Corp., 7.375%, 2020 | | $ | 1,455,000 | | | $ | 1,631,419 | |
| PVH Corp., 4.5%, 2022 | | | 60,000 | | | | 60,600 | |
| | | | | | | | |
| | | | | | $ | 1,692,019 | |
| | | | | | | | |
| Asset-Backed & Securitized – 11.3% | |
| Ameriquest Mortgage Securities, Inc., “M1”, FRN, 0.679%, 2035 | | $ | 2,800,000 | | | $ | 2,395,490 | |
| Anthracite Ltd., “A”, CDO, FRN, 0.57%, 2019 (z) | | | 1,066,093 | | | | 1,041,999 | |
| Anthracite Ltd., “CFL”, CDO, FRN, 1.46%, 2037 (z) | | | 263,618 | | | | 246,483 | |
| Anthracite Ltd., CDO, FRN, 1.06%, 2037 (z) | | | 262,719 | | | | 260,539 | |
| ARI Fleet Lease Trust, “A”, FRN, 0.759%, 2020 (n) | | | 1,562,473 | | | | 1,566,842 | |
| ARI Fleet Lease Trust, “A”, FRN, 0.509%, 2021 (n) | | | 2,224,897 | | | | 2,225,495 | |
| Banc of America Commercial Mortgage, Inc., 5.337%, 2043 (z) | | | 2,801,036 | | | | 3,114,996 | |
| Banc of America Commercial Mortgage, Inc., FRN, 5.619%, 2049 (z) | | | 637,169 | | | | 736,909 | |
| Banc of America Large Loan Ball, FRN, 5.325%, 2044 (z) | | | 7,500,000 | | | | 8,098,883 | |
| Bayview Commercial Asset Trust, FRN, 2.93%, 2036 (i)(z) | | | 282,428 | | | | 1,844 | |
| Bayview Commercial Asset Trust, FRN, 2.79%, 2036 (i)(z) | | | 416,414 | | | | 1,679 | |
| Bayview Commercial Asset Trust, FRN, 3.175%, 2036 (i)(z) | | | 314,320 | | | | 3,491 | |
| Bayview Commercial Asset Trust, FRN, 3.893%, 2036 (i)(z) | | | 835,991 | | | | 19,943 | |
| Bayview Commercial Asset Trust, FRN, 3.81%, 2036 (i)(z) | | | 417,016 | | | | 14,099 | |
| Bayview Commercial Asset Trust, FRN, 4.042%, 2037 (i)(z) | | | 922,350 | | | | 35,936 | |
| Bayview Financial Acquisition Trust, FRN, 5.483%, 2041 | | | 26,685 | | | | 27,237 | |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.809%, 2040 (z) | | | 163,081 | | | | 103,089 | |
| Bear Stearns Commercial Mortgage Securities, Inc., “A3”, 5.793%, 2042 | | | 891,251 | | | | 921,915 | |
| Bear Stearns Commercial Mortgage Securities, Inc., “A4”, FRN, 5.471%, 2045 | | | 5,150,000 | | | | 5,998,772 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Asset-Backed & Securitized – continued | |
| Bear Stearns Commercial Mortgage Securities, Inc., “A4”, FRN, 5.742%, 2042 | | $ | 2,810,000 | | | $ | 3,350,804 | |
| Bear Stearns Cos., Inc., “A2”, FRN, 0.659%, 2042 | | | 2,070,235 | | | | 1,989,742 | |
| Capital Trust Realty Ltd., CDO, 5.16%, 2035 (n) | | | 379,149 | | | | 382,788 | |
| Capital Trust Realty Ltd., CDO, 5.267%, 2035 (z) | | | 1,677,300 | | | | 1,692,731 | |
| Chesapeake Funding LLC, “A”, FRN, 0.958%, 2023 (z) | | | 2,121,000 | | | | 2,125,793 | |
| Citibank OMNI Master Trust, “A4”, FRN, 2.959%, 2018 | | | 2,700,000 | | | | 2,808,772 | |
| Citigroup/Deutsche Bank Commercial Mortgage Trust, 5.322%, 2049 | | | 25,289,455 | | | | 29,009,787 | |
| Citigroup/Deutsche Bank Commercial Mortgage Trust, FRN, 5.219%, 2044 | | | 500,000 | | | | 549,827 | |
| Citigroup/Deutsche Bank Commercial Mortgage Trust, FRN, 5.219%, 2044 | | | 750,000 | | | | 762,433 | |
| Commercial Mortgage Acceptance Corp., FRN, 1.856%, 2030 (i) | | | 129,355 | | | | 4,376 | |
| Commercial Mortgage Asset Trust, FRN, 0.646%, 2032 (i)(z) | | | 2,345,687 | | | | 12,427 | |
| Commercial Mortgage Pass-Through Certificates, “A4”, 5.306%, 2046 | | | 1,361,478 | | | | 1,564,398 | |
| Commercial Mortgage Trust, “A4”, 3.147%, 2045 | | | 3,950,000 | | | | 4,168,336 | |
| Credit Acceptance Auto Loan Trust, “A”, 1.52%, 2020 (n) | | | 1,490,000 | | | | 1,490,416 | |
| Credit Acceptance Auto Loan Trust, “A”, 2.2%, 2019 (z) | | | 939,000 | | | | 944,412 | |
| Credit Suisse Mortgage Capital Certificate, 5.311%, 2039 | | | 2,250,000 | | | | 2,554,616 | |
| Credit Suisse Mortgage Capital Certificate, FRN, 5.694%, 2040 | | | 375,725 | | | | 394,003 | |
| Credit-Based Asset Servicing & Securitization LLC, 5.303%, 2035 | | | 30,376 | | | | 28,704 | |
| Crest Ltd., “A1” CDO, FRN, 0.79%, 2018 (z) | | | 296,525 | | | | 292,077 | |
| Crest Ltd., “A2”, CDO, 4.669%, 2018 (z) | | | 64,128 | | | | 64,850 | |
| Crest Ltd., “B”, CDO, FRN, 1.663%, 2035 (z) | | | 95,442 | | | | 94,965 | |
| CWCapital Cobalt Ltd., “A4”, FRN, 5.802%, 2046 | | | 2,286,764 | | | | 2,694,652 | |
| CWCapital LLC, 5.223%, 2048 | | | 600,000 | | | | 680,140 | |
| Duane Street CLO, “A”, FRN, 0.561%, 2017 | | | 4,052,558 | | | | 4,014,062 | |
| Falcon Franchise Loan LLC, FRN, 6.542%, 2025 (i)(z) | | | 64,171 | | | | 10,088 | |
| First Union National Bank Commercial Mortgage Trust, FRN, 1.583%, 2043 (i)(z) | | | 219,198 | | | | 288 | |
6
MFS Research Bond Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Asset-Backed & Securitized – continued | |
| Ford Credit Floorplan Master Owner Trust, “A”, FRN, 0.559%, 2016 | | $ | 11,322,000 | | | $ | 11,325,895 | |
| GE Capital Commercial Mortgage Corp., “A”, 5.543%, 2049 | | | 974,966 | | | | 1,113,004 | |
| GE Equipment Transportation LLC, “A2”, 0.77%, 2014 | | | 1,593,575 | | | | 1,595,852 | |
| GMAC LLC, FRN, 6.02%, 2033 (z) | | | 21,474 | | | | 21,895 | |
| GMAC LLC, FRN, 7.718%, 2034 (d)(n)(q) | | | 110,000 | | | | 80,496 | |
| Greenwich Capital Commercial Funding Corp., 5.736%, 2049 | | | 25,105,137 | | | | 29,594,036 | |
| Hertz Vehicle Financing LLC, 2010-1A, “A1”, 2.6%, 2015 (n) | | | 1,205,000 | | | | 1,228,140 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., 5.552%, 2045 | | | 725,000 | | | | 832,838 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., “A3”, 4.171%, 2046 | | | 600,000 | | | | 683,329 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., “A3”, FRN, 5.228%, 2044 | | | 550,000 | | | | 567,891 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., “A3”, FRN, 5.812%, 2049 | | | 3,564,937 | | | | 3,824,197 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., “A3”, FRN, 5.93%, 2051 | | | 4,621,335 | | | | 4,916,162 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., “A4”, FRN, 4.879%, 2038 | | | 2,503,451 | | | | 2,569,768 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., “A4”, FRN, 5.811%, 2049 | | | 14,820,511 | | | | 17,282,939 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.435%, 2042 (n) | | | 130,000 | | | | 13,321 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.727%, 2049 | | | 763,398 | | | | 895,297 | |
| JPMorgan Mortgage Trust, “A1”, FRN, 2.365%, 2033 | | | 656,805 | | | | 666,511 | |
| KKR Financial CLO Ltd., “A1”, FRN, 0.584%, 2017 (z) | | | 430,633 | | | | 426,121 | |
| LB-UBS Commercial Mortgage Trust, “A4”, 5.156%, 2031 | | | 2,000,000 | | | | 2,232,860 | |
| LB-UBS Commercial Mortgage Trust, “A4”, 5.372%, 2039 | | | 2,900,000 | | | | 3,334,208 | |
| Lehman Brothers Commercial Conduit Mortgage Trust, FRN, 1.067%, 2030 (i) | | | 86,818 | | | | 1,593 | |
| Mach One Trust Commercial Mortgage, CDO, “B”, 5.43%, 2040 (z) | | | 851,000 | | | | 852,064 | |
| Merrill Lynch Mortgage Investors Inc., “A”, FRN, 2.341%, 2036 | | | 1,404,489 | | | | 1,389,964 | |
| Merrill Lynch Mortgage Investors Inc., “A5”, FRN, 2.479%, 2035 | | | 1,060,536 | | | | 1,046,679 | |
| Merrill Lynch Mortgage Trust, “A3”, FRN, 5.85%, 2050 | | | 3,575,513 | | | | 3,802,129 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Asset-Backed & Securitized – continued | |
| Merrill Lynch/Countrywide Commercial Mortgage Trust, FRN, 5.741%, 2050 | | $ | 19,690,646 | | | $ | 22,557,683 | |
| Morgan Stanley Bank of America/Merrill Lynch Trust, “A4”, 3.176%, 2045 | | | 5,000,000 | | | | 5,311,930 | |
| Morgan Stanley Capital I Trust, “A4”, FRN, 5.651%, 2042 | | | 2,382,000 | | | | 2,820,714 | |
| Morgan Stanley Capital I Trust, “A5”, FRN, 5.11%, 2040 | | | 585,205 | | | | 612,930 | |
| Morgan Stanley Capital I, Inc., FRN, 0.978%, 2030 (i)(n) | | | 194,705 | | | | 4,124 | |
| Morgan Stanley Re-REMIC Trust, FRN, 5.789%, 2045 (z) | | | 5,000,000 | | | | 5,598,870 | |
| Pacifica CDO Ltd., “A1”, FRN, 0.574%, 2020 | | | 3,661,456 | | | | 3,612,755 | |
| Preferred Term Securities XIX Ltd., CDO, FRN, 0.658%, 2035 (z) | | | 440,412 | | | | 299,480 | |
| Prudential Securities Secured Financing Corp., FRN, 7.167%, 2013 (z) | | | 1,596,000 | | | | 1,594,800 | |
| Residential Funding Mortgage Securities, Inc., FRN, 5.32%, 2035 | | | 171,273 | | | | 102,929 | |
| Santander Drive Auto Receivable Trust, “A2”, 0.57%, 2015 | | | 15,572,000 | | | | 15,587,089 | |
| Santander Drive Auto Receivable Trust, “A2”, 0.91%, 2015 | | | 1,252,159 | | | | 1,255,381 | |
| Smart Trust, “A2B”, FRN, 0.536%, 2015 (n) | | | 4,758,000 | | | | 4,758,000 | |
| Smart Trust, “A2B”, FRN, 0.759%, 2014 (n) | | | 2,480,991 | | | | 2,483,950 | |
| Wachovia Bank Commercial Mortgage Trust, “A3”, FRN, 5.921%, 2051 | | | 2,970,517 | | | | 3,107,473 | |
| Wachovia Bank Commercial Mortgage Trust, “A4”, FRN, 5.921%, 2051 | | | 12,115,917 | | | | 14,214,648 | |
| Wachovia Bank Commercial Mortgage Trust, FRN, 5.737%, 2049 | | | 17,192,887 | | | | 20,037,588 | |
| | | | | | | | |
| | | | | | $ | 282,758,661 | |
| | | | | | | | |
| Automotive – 1.4% | | | | | | | | |
| Ford Motor Credit Co. LLC, 3.984%, 2016 | | $ | 891,000 | | | $ | 946,087 | |
| Ford Motor Credit Co. LLC, 12%, 2015 | | | 1,400,000 | | | | 1,718,500 | |
| Ford Motor Credit Co. LLC, 5.625%, 2015 | | | 1,300,000 | | | | 1,423,544 | |
| Ford Motor Credit Co. LLC, 8%, 2014 | | | 1,350,000 | | | | 1,472,022 | |
| Ford Motor Credit Co. LLC, 5%, 2018 | | | 850,000 | | | | 937,921 | |
| Ford Motor Credit Co. LLC, 8%, 2016 | | | 910,000 | | | | 1,098,796 | |
| Ford Motor Credit Co. LLC, 7%, 2015 | | | 1,900,000 | | | | 2,118,572 | |
| Ford Motor Credit Co. LLC, 3%, 2017 | | | 3,250,000 | | | | 3,339,131 | |
| Harley-Davidson Financial Services, 3.875%, 2016 (n) | | | 6,870,000 | | | | 7,374,237 | |
| Hyundai Capital America, 2.125%, 2017 (n) | | | 3,475,000 | | | | 3,499,881 | |
| Hyundai Capital America, 3.75%, 2016 (n) | | | 951,000 | | | | 1,003,655 | |
| Lear Corp., 8.125%, 2020 | | | 3,745,000 | | | | 4,222,488 | |
7
MFS Research Bond Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Automotive – continued | | | | | |
| Volkswagen International Finance N.V., 1.15%, 2015 (n) | | $ | 6,800,000 | | | $ | 6,809,404 | |
| | | | | | | | |
| | | | | | $ | 35,964,238 | |
| | | | | | | | |
| Banks & Diversified Financials (Covered Bonds) – 0.0% | |
| Compagnie de Financement Foncier, 2.125%, 2013 (n) | | $ | 900,000 | | | $ | 904,049 | |
| | | | | | | | |
| Biotechnology – 0.2% | | | | | | | | |
| Life Technologies Corp., 5%, 2021 | | $ | 3,337,000 | | | $ | 3,760,509 | |
| | | | | | | | |
| Broadcasting – 0.7% | | | | | | | | |
| Discovery Communications, Inc., 4.95%, 2042 | | $ | 3,823,000 | | | $ | 4,086,015 | |
| NBCUniversal Media LLC, 5.95%, 2041 | | | 2,838,000 | | | | 3,479,476 | |
| NBCUniversal Media LLC, 2.875%, 2023 | | | 1,820,000 | | | | 1,827,744 | |
| News America, Inc., 8.5%, 2025 | | | 152,000 | | | | 206,383 | |
| Vivendi S.A., 4.75%, 2022 (n) | | | 4,307,000 | | | | 4,474,672 | |
| WPP Finance, 3.625%, 2022 | | | 3,675,000 | | | | 3,655,405 | |
| | | | | | | | |
| | | | | | $ | 17,729,695 | |
| | | | | | | | |
| Brokerage & Asset Managers – 0.7% | | | | | |
| E*Trade Financial Corp., 6%, 2017 | | $ | 9,560,000 | | | $ | 9,775,100 | |
| Invesco Finance PLC, 3.125%, 2022 | | | 2,470,000 | | | | 2,494,925 | |
| TD Ameritrade Holding Corp., 5.6%, 2019 | | | 3,959,000 | | | | 4,698,624 | |
| | | | | | | | |
| | | | | | $ | 16,968,649 | |
| | | | | | | | |
| Building – 0.1% | | | | | | | | |
| Owens Corning, Inc., 4.2%, 2022 | | $ | 1,476,000 | | | $ | 1,501,070 | |
| Owens Corning, Inc., 6.5%, 2016 | | | 465,000 | | | | 522,504 | |
| | | | | | | | |
| | | | | | $ | 2,023,574 | |
| | | | | | | | |
| Business Services – 0.1% | | | | | | | | |
| Tencent Holdings Ltd., 3.375%, 2018 (n) | | $ | 2,600,000 | | | $ | 2,682,092 | |
| | | | | | | | |
| Cable TV – 1.5% | | | | | | | | |
| CCO Holdings LLC, 7.875%, 2018 | | $ | 5,320,000 | | | $ | 5,725,650 | |
| Comcast Corp., 4.65%, 2042 | | | 1,275,000 | | | | 1,343,930 | |
| Cox Communications, Inc., 9.375%, 2019 (n) | | | 1,055,000 | | | | 1,450,585 | |
| DIRECTV Holdings LLC, 4.6%, 2021 | | | 2,500,000 | | | | 2,706,353 | |
| DIRECTV Holdings LLC, 5.2%, 2020 | | | 2,110,000 | | | | 2,394,458 | |
| DIRECTV Holdings LLC, 3.8%, 2022 | | | 7,721,000 | | | | 7,965,408 | |
| Myriad International Holdings B.V., 6.375%, 2017 (n) | | | 2,182,000 | | | | 2,460,205 | |
| Time Warner Cable, Inc., 4.125%, 2021 | | | 1,143,000 | | | | 1,251,727 | |
| Time Warner Cable, Inc., 4%, 2021 | | | 3,210,000 | | | | 3,523,505 | |
| Time Warner Entertainment Co. LP, 8.375%, 2033 | | | 290,000 | | | | 423,246 | |
| Videotron Ltee, 5%, 2022 | | | 3,610,000 | | | | 3,785,988 | |
| Virgin Media Finance PLC, 5.25%, 2022 | | | 4,305,000 | | | | 4,563,300 | |
| | | | | | | | |
| | | | | | $ | 37,594,355 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Chemicals – 0.5% | | | | | | | | |
| Dow Chemical Co., 8.55%, 2019 | | $ | 5,739,000 | | | $ | 7,748,086 | |
| LyondellBasell Industries N.V., 5.75%, 2024 | | | 5,090,000 | | | | 5,980,750 | |
| | | | | | | | |
| | | | | | $ | 13,728,836 | |
| | | | | | | | |
| Computer Software – 0.1% | | | | | | | | |
| Oracle Corp., 2.5%, 2022 | | $ | 2,550,000 | | | $ | 2,572,973 | |
| | | | | | | | |
| Conglomerates – 0.4% | | | | | | | | |
| General Electric Co., 4.125%, 2042 | | $ | 4,422,000 | | | $ | 4,548,681 | |
| Roper Industries, Inc., 3.125%, 2022 | | | 4,270,000 | | | | 4,297,960 | |
| | | | | | | | |
| | | | | | $ | 8,846,641 | |
| | | | | | | | |
| Consumer Products – 0.4% | | | | | | | | |
| Mattel, Inc., 5.45%, 2041 | | $ | 2,688,000 | | | $ | 3,036,456 | |
| Newell Rubbermaid, Inc., 2.05%, 2017 | | | 3,072,000 | | | | 3,112,851 | |
| Newell Rubbermaid, Inc., 4.7%, 2020 | | | 2,840,000 | | | | 3,136,754 | |
| | | | | | | | |
| | | | | | $ | 9,286,061 | |
| | | | | | | | |
| Consumer Services – 0.3% | | | | | | | | |
| eBay, Inc., 2.6%, 2022 | | $ | 2,250,000 | | | $ | 2,273,038 | |
| Experian Finance PLC, 2.375%, 2017 (n) | | | 4,321,000 | | | | 4,395,926 | |
| | | | | | | | |
| | | | | | $ | 6,668,964 | |
| | | | | | | | |
| Containers – 0.2% | | | | | | | | |
| Greif, Inc., 7.75%, 2019 | | $ | 4,075,000 | | | $ | 4,706,625 | |
| | | | | | | | |
| Defense Electronics – 0.0% | | | | | | | | |
| BAE Systems Holdings, Inc., 6.375%, 2019 (n) | | $ | 500,000 | | | $ | 596,903 | |
| | | | | | | | |
| Electrical Equipment – 0.2% | | | | | | | | |
| Ericsson, Inc., 4.125%, 2022 | | $ | 4,239,000 | | | $ | 4,405,572 | |
| | | | | | | | |
| Electronics – 0.2% | | | | | | | | |
| Intel Corp., 4.25%, 2042 | | $ | 3,030,000 | | | $ | 3,038,099 | |
| Tyco Electronics Group S.A., 3.5%, 2022 | | | 949,000 | | | | 975,345 | |
| Tyco Electronics Group S.A., 6.55%, 2017 | | | 708,000 | | | | 848,971 | |
| | | | | | | | |
| | | | | | $ | 4,862,415 | |
| | | | | | | | |
| Emerging Market Quasi-Sovereign – 1.4% | |
| Banco do Brasil S.A., 5.875%, 2022 | | $ | 2,307,000 | | | $ | 2,543,468 | |
| CEZ A.S., 4.25%, 2022 (n) | | | 3,504,000 | | | | 3,750,822 | |
| CNPC (HK) Overseas Capital Ltd., 4.5%, 2021 (n) | | | 4,859,000 | | | | 5,435,180 | |
| Gazprom Neft, 4.375%, 2022 (n) | | | 362,000 | | | | 370,145 | |
| Petrobras International Finance Co., 5.375%, 2021 | | | 1,980,000 | | | | 2,229,124 | |
| Petrobras International Finance Co., 7.875%, 2019 | | | 2,900,000 | | | | 3,622,320 | |
| Petroleos Mexicanos, 6.5%, 2041 | | | 4,258,000 | | | | 5,343,790 | |
| Petroleos Mexicanos, 4.875%, 2022 | | | 770,000 | | | | 868,945 | |
| PTT PLC, 3.375%, 2022 (z) | | | 5,038,000 | | | | 5,008,266 | |
| PTT PLC, 4.5%, 2042 (z) | | | 1,784,000 | | | | 1,748,297 | |
| Rosneft, 4.199%, 2022 (z) | | | 1,774,000 | | | | 1,805,045 | |
| Rosneft, 3.149%, 2017 (z) | | | 1,067,000 | | | | 1,083,005 | |
| | | | | | | | |
| | | | | | $ | 33,808,407 | |
| | | | | | | | |
8
MFS Research Bond Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| �� | | | | | | | |
| BONDS – continued | | | | | | | | |
| Energy – Independent – 1.3% | | | | | |
| Anadarko Petroleum Corp., 6.95%, 2019 | | $ | 1,400,000 | | | $ | 1,769,344 | |
| Anadarko Petroleum Corp., 6.375%, 2017 | | | 1,253,000 | | | | 1,496,702 | |
| ConocoPhillips, 6%, 2020 | | | 740,000 | | | | 939,083 | |
| EOG Resources, Inc., 2.625%, 2023 | | | 3,172,000 | | | | 3,194,318 | |
| EQT Corp., 4.875%, 2021 | | | 1,575,000 | | | | 1,690,821 | |
| Noble Energy, Inc., 4.15%, 2021 | | | 7,180,000 | | | | 7,926,289 | |
| Pioneer Natural Resources Co., 6.65%, 2017 | | | 5,160,000 | | | | 6,079,342 | |
| Plains Exploration & Production Co., 6.875%, 2023 | | | 2,660,000 | | | | 3,039,050 | |
| Southwestern Energy Co., 7.5%, 2018 | | | 2,144,000 | | | | 2,627,378 | |
| Southwestern Energy Co., 4.1%, 2022 | | | 3,180,000 | | | | 3,420,592 | |
| | | | | | | | |
| | | | | | $ | 32,182,919 | |
| | | | | | | | |
| Energy – Integrated – 0.8% | | | | | | | | |
| BG Energy Capital PLC, 2.875%, 2016 (n) | | $ | 1,855,000 | | | $ | 1,957,849 | |
| Cenovus Energy, Inc., 4.45%, 2042 | | | 7,324,000 | | | | 7,614,682 | |
| Chevron Corp., 1.104%, 2017 | | | 1,560,000 | | | | 1,570,892 | |
| Total Capital International S.A., 2.7%, 2023 | | | 2,914,000 | | | | 2,968,573 | |
| Total Capital International S.A., 1.55%, 2017 | | | 6,036,000 | | | | 6,129,057 | |
| | | | | | | | |
| | | | | | $ | 20,241,053 | |
| | | | | | | | |
| Financial Institutions – 2.4% | | | | | | | | |
| Ally Financial, Inc., 8.3%, 2015 | | $ | 2,400,000 | | | $ | 2,673,000 | |
| CIT Group, Inc., 5.5%, 2019 (n) | | | 5,769,000 | | | | 6,288,210 | |
| CIT Group, Inc., 5.25%, 2018 | | | 75,000 | | | | 80,250 | |
| General Electric Capital Corp., 7.5%, 2035 | | | 4,000,000 | | | | 5,667,804 | |
| General Electric Capital Corp., 2.1%, 2019 | | | 2,064,000 | | | | 2,069,835 | |
| General Electric Capital Corp., 5.55%, 2020 | | | 5,100,000 | | | | 6,062,768 | |
| General Electric Capital Corp., 3.15%, 2022 | | | 5,800,000 | | | | 5,925,819 | |
| General Electric Capital Corp., 6.375% to 2017, FRN to 2067 | | | 1,700,000 | | | | 1,793,500 | |
| General Electric Capital Corp., 4.65%, 2021 | | | 1,733,000 | | | | 1,977,415 | |
| General Electric Capital Corp., FRN, 7.125%, 2049 | | | 1,000,000 | | | | 1,130,290 | |
| International Lease Finance Corp., 6.375%, 2013 | | | 2,000,000 | | | | 2,021,000 | |
| International Lease Finance Corp., 7.125%, 2018 (n) | | | 1,190,000 | | | | 1,380,400 | |
| International Lease Finance Corp., 5.75%, 2016 | | | 3,705,000 | | | | 3,905,400 | |
| Nationstar Mortgage LLC/Capital Corp., 9.625%, 2019 (n) | | | 490,000 | | | | 548,800 | |
| Nationstar Mortgage LLC/Capital Corp., 9.625%, 2019 (n) | | | 830,000 | | | | 933,750 | |
| NYSE Euronext, 2%, 2017 | | | 3,115,000 | | | | 3,166,644 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Financial Institutions – continued | | | | | |
| SLM Corp., 4.625%, 2017 | | $ | 2,500,000 | | | $ | 2,559,378 | |
| SLM Corp., 8.45%, 2018 | | | 2,300,000 | | | | 2,691,000 | |
| SLM Corp., 8%, 2020 | | | 1,100,000 | | | | 1,256,750 | |
| SLM Corp., 6%, 2017 | | | 540,000 | | | | 584,550 | |
| SLM Corp., 6.25%, 2016 | | | 1,081,000 | | | | 1,175,588 | |
| SLM Corp., 5%, 2013 | | | 5,700,000 | | | | 5,835,375 | |
| | | | | | | | |
| | | | | | $ | 59,727,526 | |
| | | | | | | | |
| Food & Beverages – 1.7% | | | | | | | | |
| Anheuser-Busch InBev S.A., 7.75%, 2019 | | $ | 4,567,000 | | | $ | 6,099,754 | |
| Anheuser-Busch InBev S.A., 5.375%, 2020 | | | 3,000,000 | | | | 3,651,102 | |
| Campbell Soup Co., 3.8%, 2042 | | | 2,924,000 | | | | 2,850,792 | |
| Grupo Bimbo S.A.B. de C.V., 4.5%, 2022 (n) | | | 3,618,000 | | | | 3,953,797 | |
| Heineken N.V., 2.75%, 2023 (n) | | | 4,681,000 | | | | 4,596,208 | |
| Kraft Foods Group, Inc., 3.5%, 2022 (n) | | | 2,480,000 | | | | 2,647,070 | |
| Kraft Foods Group, Inc., 5%, 2042 (z) | | | 1,703,000 | | | | 1,915,022 | |
| Kraft Foods, Inc., 6.125%, 2018 | | | 1,819,000 | | | | 2,213,306 | |
| Kraft Foods, Inc., 5.375%, 2020 | | | 810,000 | | | | 977,881 | |
| Mead Johnson Nutrition Co., “A”, 4.9%, 2019 | | | 903,000 | | | | 1,030,557 | |
| Molson Coors Brewing Co., 5%, 2042 | | | 3,962,000 | | | | 4,440,063 | |
| Tyson Foods, Inc., 6.6%, 2016 | | | 2,065,000 | | | | 2,366,376 | |
| Tyson Foods, Inc., 4.5%, 2022 | | | 5,671,000 | | | | 6,138,948 | |
| | | | | | | | |
| | | | | | $ | 42,880,876 | |
| | | | | | | | |
| Food & Drug Stores – 0.4% | | | | | | | | |
| CVS Caremark Corp., 2.75%, 2022 | | $ | 7,000,000 | | | $ | 7,026,047 | |
| Walgreen Co., 3.1%, 2022 | | | 4,124,000 | | | | 4,159,755 | |
| | | | | | | | |
| | | | | | $ | 11,185,802 | |
| | | | | | | | |
| Forest & Paper Products – 0.4% | | | | | |
| Georgia-Pacific Corp., 5.4%, 2020 (n) | | $ | 5,381,000 | | | $ | 6,401,421 | |
| Smurfit Kappa Group PLC, 4.875%, 2018 (n) | | | 4,715,000 | | | | 4,809,300 | |
| | | | | | | | |
| | | | | | $ | 11,210,721 | |
| | | | | | | | |
| Gaming & Lodging – 0.3% | | | | | |
| Wyndham Worldwide Corp., 4.25%, 2022 | | $ | 3,977,000 | | | $ | 4,106,320 | |
| Wyndham Worldwide Corp., 6%, 2016 | | | 22,000 | | | | 24,881 | |
| Wyndham Worldwide Corp., 7.375%, 2020 | | | 2,200,000 | | | | 2,648,186 | |
| | | | | | | | |
| | | | | | $ | 6,779,387 | |
| | | | | | | | |
| Insurance – 1.6% | | | | | | | | |
| American International Group, Inc., 6.4%, 2020 | | $ | 2,142,000 | | | $ | 2,657,789 | |
| American International Group, Inc., 4.875%, 2016 | | | 9,468,000 | | | | 10,589,778 | |
| American International Group, Inc., 3.8%, 2017 | | | 1,870,000 | | | | 2,023,965 | |
| American International Group, Inc., 8.25%, 2018 | | | 1,000,000 | | | | 1,313,886 | |
9
MFS Research Bond Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Insurance – continued | | | | | |
| American International Group, Inc., 5.85%, 2018 | | $ | 950,000 | | | $ | 1,123,087 | |
| Metlife, Inc., 4.125%, 2042 | | | 2,950,000 | | | | 2,950,395 | |
| Metlife, Inc., 1.756%, 2017 | | | 972,000 | | | | 987,302 | |
| Metropolitan Life Global Funding I, 1.7%, 2015 | | | 5,295,000 | | | | 5,405,072 | |
| Metropolitan Life Global Funding I, 5.125%, 2013 (n) | | | 4,620,000 | | | | 4,677,856 | |
| Metropolitan Life Global Funding I, 5.125%, 2014 (n) | | | 1,890,000 | | | | 2,009,259 | |
| Swiss Re Ltd. , 4.25%, 2042 (n) | | | 926,000 | | | | 917,604 | |
| Unum Group, 7.125%, 2016 | | | 2,028,000 | | | | 2,389,087 | |
| UnumProvident Corp., 6.85%, 2015 (n) | | | 2,243,000 | | | | 2,537,766 | |
| | | | | | | | |
| | | | | | $ | 39,582,846 | |
| | | | | | | | |
| Insurance – Health – 0.4% | | | | | | | | |
| Humana, Inc., 7.2%, 2018 | | $ | 6,739,000 | | | $ | 8,310,029 | |
| Wellpoint Inc., 4.65%, 2043 | | | 2,582,000 | | | | 2,690,744 | |
| | | | | | | | |
| | | | | | $ | 11,000,773 | |
| | | | | | | | |
| Insurance – Property & Casualty – 1.8% | |
| Allied World Assurance, 5.5%, 2020 | | $ | 2,640,000 | | | $ | 2,926,297 | |
| AXIS Capital Holdings Ltd., 5.75%, 2014 | | | 555,000 | | | | 595,221 | |
| CNA Financial Corp., 5.875%, 2020 | | | 3,280,000 | | | | 3,869,760 | |
| CNA Financial Corp., 7.35%, 2019 | | | 1,500,000 | | | | 1,881,363 | |
| Liberty Mutual Group, Inc., 6.5%, 2042 (z) | | | 2,829,000 | | | | 3,182,733 | |
| Marsh & McLennan Cos., Inc., 4.8%, 2021 | | | 7,863,000 | | | | 8,847,794 | |
| PartnerRe Ltd., 5.5%, 2020 | | | 3,483,000 | | | | 3,886,969 | |
| QBE Capital Funding III Ltd., FRN, 7.25%, 2041 (n) | | | 5,170,000 | | | | 5,350,950 | |
| XL Group PLC, 6.5% to 2017, FRN to 2049 | | | 8,654,000 | | | | 8,091,490 | |
| ZFS Finance USA Trust II, 6.45% to 2016, FRN to 2065 (n) | | | 1,842,000 | | | | 1,970,940 | |
| ZFS Finance USA Trust V, 6.5% to 2017, FRN to 2067 (n) | | | 4,852,000 | | | | 5,173,445 | |
| | | | | | | | |
| | | | | | $ | 45,776,962 | |
| | | | | | | | |
| International Market Quasi-Sovereign – 0.3% | |
| Achmea Hypotheekbank N.V., 3.2%, 2014 (n) | | $ | 699,000 | | | $ | 732,755 | |
| ING Bank N.V., 3.9%, 2014 (n) | | | 1,500,000 | | | | 1,559,402 | |
| NIBC Bank N.V., 2.8%, 2014 (z) | | | 1,500,000 | | | | 1,557,383 | |
| Societe Financement de l’ Economie Francaise, 3.375%, 2014 (n) | | | 842,000 | | | | 874,825 | |
| Statoil A.S.A., 2.45%, 2023 | | | 2,114,000 | | | | 2,109,049 | |
| | | | | | | | |
| | | | | | $ | 6,833,414 | |
| | | | | | | | |
| Internet – 0.0% | | | | | | | | |
| Baidu, Inc., 3.5%, 2022 | | $ | 869,000 | | | $ | 871,438 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Local Authorities – 0.6% | | | | | | | | |
| State of California (Build America Bonds), 7.625%, 2040 | | $ | 860,000 | | | $ | 1,242,442 | |
| State of California (Build America Bonds), 7.6%, 2040 | | | 7,175,000 | | | | 10,481,742 | |
| State of Illinois (Build America Bonds), 6.63%, 2035 | | | 1,825,000 | | | | 2,068,601 | |
| | | | | | | | |
| | | | | | $ | 13,792,785 | |
| | | | | | | | |
| Machinery & Tools – 0.3% | | | | | | | | |
| Case New Holland, Inc., 7.75%, 2013 | | $ | 1,000,000 | | | $ | 1,040,000 | |
| Case New Holland, Inc., 7.875%, 2017 | | | 5,980,000 | | | | 7,071,350 | |
| | | | | | | | |
| | | | | | $ | 8,111,350 | |
| | | | | | | | |
| Major Banks – 5.8% | | | | | | | | |
| ABN AMRO Bank N.V., 4.25%, 2017 (n) | | $ | 5,664,000 | | | $ | 6,177,810 | |
| Banco Santander U.S. Debt S.A.U., 3.781%, 2015 (n) | | | 1,500,000 | | | | 1,508,535 | |
| Bank of America Corp., 5.65%, 2018 | | | 5,215,000 | | | | 6,067,355 | |
| Bank of America Corp., 5.625%, 2020 | | | 8,555,000 | | | | 10,143,039 | |
| Bank of America Corp., 5.875%, 2021 | | | 1,670,000 | | | | 1,999,459 | |
| Bank of America Corp., 6.5%, 2016 | | | 10,085,000 | | | | 11,645,745 | |
| Bank of America Corp., 5%, 2021 | | | 1,280,000 | | | | 1,461,315 | |
| Bank of America Corp., 5.875%, 2042 | | | 3,383,000 | | | | 4,220,594 | |
| Bank of America Corp., 6.1%, 2017 | | | 1,725,000 | | | | 1,987,636 | |
| BNP Paribas, FRN, 1.205%, 2014 | | | 2,100,000 | | | | 2,106,382 | |
| DBS Bank Ltd., 3.625% to 2017, FRN to 2022 (n) | | | 4,108,000 | | | | 4,297,457 | |
| Goldman Sachs Group, Inc., 5.625%, 2017 | | | 2,636,000 | | | | 2,892,159 | |
| Goldman Sachs Group, Inc., 7.5%, 2019 | | | 1,438,000 | | | | 1,809,371 | |
| HSBC Holdings PLC, 4%, 2022 | | | 5,466,000 | | | | 5,984,538 | |
| HSBC USA, Inc., 4.875%, 2020 | | | 4,090,000 | | | | 4,558,051 | |
| ING Bank N.V., 2%, 2015 (n) | | | 1,900,000 | | | | 1,914,060 | |
| ING Bank N.V., 3.75%, 2017 (n) | | | 5,855,000 | | | | 6,222,518 | |
| JPMorgan Chase & Co., 3.25%, 2022 | | | 1,376,000 | | | | 1,416,979 | |
| JPMorgan Chase & Co., 2%, 2017 | | | 6,637,000 | | | | 6,779,669 | |
| JPMorgan Chase & Co., 6.3%, 2019 | | | 3,850,000 | | | | 4,749,984 | |
| JPMorgan Chase & Co., 4.5%, 2022 | | | 1,800,000 | | | | 2,036,227 | |
| JPMorgan Chase & Co., 4.25%, 2020 | | | 2,800,000 | | | | 3,113,956 | |
| JPMorgan Chase Bank N.A., 5.875%, 2016 | | | 250,000 | | | | 285,106 | |
| Macquarie Bank Ltd., 5%, 2017 (n) | | | 4,802,000 | | | | 5,251,947 | |
| Macquarie Group Ltd., 6%, 2020 (n) | | | 448,000 | | | | 484,776 | |
| Merrill Lynch & Co., Inc., 6.05%, 2016 | | | 4,869,000 | | | | 5,360,073 | |
| Merrill Lynch & Co., Inc., 6.15%, 2013 | | | 2,870,000 | | | | 2,916,072 | |
| Morgan Stanley, 4.875%, 2022 | | | 11,903,000 | | | | 12,324,295 | |
| Morgan Stanley, 5.75%, 2016 | | | 944,000 | | | | 1,046,488 | |
| Morgan Stanley, 5.5%, 2020 | | | 1,600,000 | | | | 1,800,016 | |
| Morgan Stanley, 5.5%, 2021 | | | 3,541,000 | | | | 4,020,359 | |
| Morgan Stanley, 5.95%, 2017 | | | 400,000 | | | | 452,962 | |
| PNC Funding Corp., 5.625%, 2017 | | | 6,173,000 | | | | 7,127,235 | |
| Royal Bank of Scotland PLC, 2.55%, 2015 | | | 3,137,000 | | | | 3,210,437 | |
10
MFS Research Bond Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Major Banks – continued | | | | | |
| Santander International Debt S.A., 2.991%, 2013 (n) | | $ | 1,800,000 | | | $ | 1,803,042 | |
| Wachovia Corp., 6.605%, 2025 | | | 1,764,000 | | | | 2,224,030 | |
| Wells Fargo & Co., 3.5%, 2022 | | | 3,230,000 | | | | 3,445,286 | |
| | | | | | | | |
| | | | | | $ | 144,844,963 | |
| | | | | | | | |
| Medical & Health Technology & Services – 1.4% | |
| Aristotle Holding, Inc., 3.9%, 2022 (n) | | $ | 7,349,000 | | | $ | 7,924,074 | |
| Aristotle Holding, Inc., 2.65%, 2017 (n) | | | 5,011,000 | | | | 5,208,378 | |
| Catholic Health Initiatives, 2.95%, 2022 | | | 3,130,000 | | | | 3,159,266 | |
| Express Scripts Holding Co., 4.75%, 2021 | | | 4,700,000 | | | | 5,333,678 | |
| HCA, Inc., 7.875%, 2020 | | | 6,230,000 | | | | 6,930,875 | |
| McKesson Corp., 5.7%, 2017 | | | 1,210,000 | | | | 1,429,477 | |
| Thermo Fisher Scientific, Inc., 3.15%, 2023 | | | 4,609,000 | | | | 4,710,283 | |
| | | | | | | | |
| | | | | | $ | 34,696,031 | |
| | | | | | | | |
| Metals & Mining – 0.3% | | | | | | | | |
| Southern Copper Corp., 5.25%, 2042 | | $ | 2,361,000 | | | $ | 2,362,955 | |
| Southern Copper Corp., 6.75%, 2040 | | | 3,829,000 | | | | 4,609,637 | |
| | | | | | | | |
| | | | | | $ | 6,972,592 | |
| | | | | | | | |
| Mortgage-Backed – 25.7% | | | | | | | | |
| Fannie Mae, 4.557%, 2013 | | $ | 172,471 | | | $ | 172,624 | |
| Fannie Mae, 5.144%, 2013 | | | 1,029,455 | | | | 1,040,225 | |
| Fannie Mae, 4.561%, 2014 | | | 90,988 | | | | 94,150 | |
| Fannie Mae, 4.6%, 2014 - 2019 | | | 847,185 | | | | 975,961 | |
| Fannie Mae, 4.607%, 2014 | | | 61,065 | | | | 62,819 | |
| Fannie Mae, 4.77%, 2014 - 2019 | | | 473,315 | | | | 543,602 | |
| Fannie Mae, 4.88%, 2014 - 2020 | | | 193,938 | | | | 206,105 | |
| Fannie Mae, 3%, 2015 - 2042 | | | 11,008,365 | | | | 11,558,537 | |
| Fannie Mae, 4.53%, 2015 | | | 96,840 | | | | 103,920 | |
| Fannie Mae, 4.56%, 2015 | | | 50,465 | | | | 54,105 | |
| Fannie Mae, 4.665%, 2015 | | | 34,588 | | | | 36,815 | |
| Fannie Mae, 4.7%, 2015 | | | 190,462 | | | | 205,720 | |
| Fannie Mae, 4.74%, 2015 | | | 45,354 | | | | 48,484 | |
| Fannie Mae, 4.78%, 2015 | | | 96,774 | | | | 104,140 | |
| Fannie Mae, 4.815%, 2015 | | | 51,094 | | | | 54,750 | |
| Fannie Mae, 4.85%, 2015 | | | 160,866 | | | | 171,161 | |
| Fannie Mae, 4.86%, 2015 | | | 83,094 | | | | 88,135 | |
| Fannie Mae, 4.87%, 2015 | | | 31,346 | | | | 33,603 | |
| Fannie Mae, 4.89%, 2015 | | | 88,915 | | | | 95,808 | |
| Fannie Mae, 4.907%, 2015 | | | 50,869 | | | | 54,994 | |
| Fannie Mae, 4.94%, 2015 | | | 120,000 | | | | 129,467 | |
| Fannie Mae, 5.1%, 2015 | | | 275,000 | | | | 300,312 | |
| Fannie Mae, 5.464%, 2015 | | | 743,371 | | | | 816,493 | |
| Fannie Mae, 2.82%, 2016 | | | 606,065 | | | | 639,079 | |
| Fannie Mae, 5.08%, 2016 | | | 340,904 | | | | 372,526 | |
| Fannie Mae, 5.09%, 2016 | | | 112,493 | | | | 123,036 | |
| Fannie Mae, 5.152%, 2016 | | | 3,091,562 | | | | 3,444,806 | |
| Fannie Mae, 5.35%, 2016 | | | 670,597 | | | | 748,030 | |
| Fannie Mae, 5.395%, 2016 | | | 126,055 | | | | 140,622 | |
| Fannie Mae, 5.424%, 2016 | | | 1,098,892 | | | | 1,233,732 | |
| Fannie Mae, 5.725%, 2016 | | | 1,577,360 | | | | 1,787,209 | |
| Fannie Mae, 1.18%, 2017 | | | 2,491,679 | | | | 2,527,099 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Mortgage-Backed – continued | | | | | |
| Fannie Mae, 2.71%, 2017 | | $ | 383,305 | | | $ | 410,893 | |
| Fannie Mae, 3.308%, 2017 | | | 1,366,276 | | | | 1,495,535 | |
| Fannie Mae, 4.992%, 2017 | | | 144,363 | | | | 153,789 | |
| Fannie Mae, 5.05%, 2017 | | | 249,749 | | | | 277,841 | |
| Fannie Mae, 5.28%, 2017 | | | 135,149 | | | | 151,283 | |
| Fannie Mae, 5.478%, 2017 | | | 760,875 | | | | 885,828 | |
| Fannie Mae, 5.5%, 2017 - 2040 | | | 50,339,467 | | | | 54,986,356 | |
| Fannie Mae, 5.54%, 2017 | | | 103,106 | | | | 115,794 | |
| Fannie Mae, 5.65%, 2017 | | | 154,496 | | | | 172,618 | |
| Fannie Mae, 2.578%, 2018 | | | 4,500,000 | | | | 4,818,393 | |
| Fannie Mae, 3.739%, 2018 | | | 2,771,798 | | | | 3,122,581 | |
| Fannie Mae, 3.84%, 2018 | | | 683,544 | | | | 764,171 | |
| Fannie Mae, 3.99%, 2018 | | | 600,000 | | | | 677,002 | |
| Fannie Mae, 5.341%, 2018 | | | 493,787 | | | | 581,399 | |
| Fannie Mae, 1.97%, 2019 | | | 1,098,364 | | | | 1,134,385 | |
| Fannie Mae, 2.03%, 2019 | | | 1,370,957 | | | | 1,420,268 | |
| Fannie Mae, 4.45%, 2019 | | | 527,774 | | | | 611,034 | |
| Fannie Mae, 5.18%, 2019 | | | 127,944 | | | | 146,874 | |
| Fannie Mae, 5.51%, 2019 | | | 191,552 | | | | 220,762 | |
| Fannie Mae, 5%, 2020 - 2040 | | | 33,109,476 | | | | 35,989,925 | |
| Fannie Mae, 5.19%, 2020 | | | 183,884 | | | | 211,643 | |
| Fannie Mae, 3.89%, 2021 | | | 1,200,000 | | | | 1,360,871 | |
| Fannie Mae, 6%, 2022 - 2039 | | | 18,014,788 | | | | 19,777,816 | |
| Fannie Mae, 4.5%, 2024 - 2040 | | | 104,958,887 | | | | 113,623,405 | |
| Fannie Mae, 3.5%, 2025 - 2042 | | | 25,420,221 | | | | 27,118,589 | |
| Fannie Mae, 4%, 2025 - 2041 | | | 7,406,776 | | | | 7,949,188 | |
| Fannie Mae, 4.5%, 2025 | | | 448,913 | | | | 484,415 | |
| Fannie Mae, 6.5%, 2032 - 2033 | | | 19,832 | | | | 22,576 | |
| Fannie Mae, 5.5%, 2035 - 2039 | | | 166,999 | | | | 181,523 | |
| Fannie Mae, STRIPS, 1.99%, 2019 (i) | | | 2,700,000 | | | | 2,789,236 | |
| Fannie Mae, TBA, 3%, 2043 | | | 2,950,000 | | | | 3,091,047 | |
| Fannie Mae, TBA, 3.5%, 2043 | | | 25,080,000 | | | | 26,732,535 | |
| Fannie Mae, TBA, 4%, 2043 | | | 7,800,000 | | | | 8,360,625 | |
| Federal Home Loan Bank, 5%, 2035 | | | 10,915,373 | | | | 11,800,180 | |
| Freddie Mac, 1.655%, 2016 | | | 1,696,158 | | | | 1,748,028 | |
| Freddie Mac, 3.882%, 2017 | | | 1,936,000 | | | | 2,175,692 | |
| Freddie Mac, 2.303%, 2018 | | | 8,971,000 | | | | 9,442,686 | |
| Freddie Mac, 2.323%, 2018 | | | 1,194,000 | | | | 1,259,837 | |
| Freddie Mac, 2.412%, 2018 | | | 2,300,000 | | | | 2,433,267 | |
| Freddie Mac, 3.154%, 2018 | | | 935,000 | | | | 1,022,781 | |
| Freddie Mac, 5%, 2018 - 2040 | | | 3,064,056 | | | | 3,331,081 | |
| Freddie Mac, 1.883%, 2019 | | | 14,950,000 | | | | 15,341,451 | |
| Freddie Mac, 2.086%, 2019 | | | 7,200,000 | | | | 7,479,641 | |
| Freddie Mac, 2.13%, 2019 | | | 4,704,000 | | | | 4,901,742 | |
| Freddie Mac, 5.5%, 2019 - 2038 | | | 2,471,281 | | | | 2,694,538 | |
| Freddie Mac, 2.757%, 2020 | | | 1,339,645 | | | | 1,426,903 | |
| Freddie Mac, 3.32%, 2020 | | | 2,779,124 | | | | 3,020,407 | |
| Freddie Mac, 4.251%, 2020 | | | 807,000 | | | | 932,506 | |
| Freddie Mac, 4%, 2025 - 2040 | | | 8,175,508 | | | | 8,715,446 | |
| Freddie Mac, 4.5%, 2025 - 2041 | | | 1,233,464 | | | | 1,322,654 | |
| Freddie Mac, 3.5%, 2026 - 2042 | | | 5,206,556 | | | | 5,568,103 | |
| Freddie Mac, 6%, 2034 - 2038 | | | 650,677 | | | | 715,490 | |
| Freddie Mac, 5.5%, 2035 | | | 158,111 | | | | 170,730 | |
| Freddie Mac, TBA, 3%, 2043 | | | 5,000,000 | | | | 5,216,407 | |
| Freddie Mac, TBA, 2.5%, 2028 | | | 24,391,000 | | | | 25,454,296 | |
11
MFS Research Bond Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Mortgage-Backed – continued | | | | | |
| Freddie Mac, TBA, 0%, 2042 | | $ | 4,000,000 | | | $ | 4,185,894 | |
| Freddie Mac, TBA, 3.5%, 2043 | | | 45,200,000 | | | | 47,933,908 | |
| Ginnie Mae, 6%, 2036 - 2039 | | | 1,315,065 | | | | 1,470,589 | |
| Ginnie Mae, 5.5%, 2038 - 2042 | | | 3,752,409 | | | | 4,120,760 | |
| Ginnie Mae, 4.5%, 2039 - 2041 | | | 18,600,081 | | | | 20,572,316 | |
| Ginnie Mae, 3.5%, 2040 - 2042 | | | 6,704,300 | | | | 7,337,878 | |
| Ginnie Mae, 4%, 2040 | | | 3,541,820 | | | | 3,889,672 | |
| Ginnie Mae, TBA, 3%, 2043 | | | 30,770,000 | | | | 32,688,297 | |
| Ginnie Mae, TBA, 3.5%, 2043 | | | 11,500,000 | | | | 12,473,008 | |
| Ginnie Mae, TBA, 4%, 2043 | | | 8,000,000 | | | | 8,708,750 | |
| Ginnie Mae, TBA, 4.5%, 2043 | | | 32,000,000 | | | | 35,025,002 | |
| | | | | | | | |
| | | | | | $ | 642,388,209 | |
| | | | | | | | |
| Municipals – 0.1% | | | | | | | | |
| Kaiser Foundation Hospitals, 3.5%, 2022 | | $ | 1,870,000 | | | $ | 1,971,853 | |
| | | | | | | | |
| Natural Gas – Distribution – 0.3% | |
| GDF Suez, 2.875%, 2022 (n) | | $ | 4,232,000 | | | $ | 4,188,796 | |
| ONEOK, Inc., 4.25%, 2022 | | | 2,645,000 | | | | 2,873,978 | |
| | | | | | | | |
| | | | | | $ | 7,062,774 | |
| | | | | | | | |
| Natural Gas – Pipeline – 1.3% | | | | | |
| Energy Transfer Partners LP, 4.65%, 2021 | | $ | 6,198,000 | | | $ | 6,809,935 | |
| Enterprise Products Operating LP, 4.85%, 2042 | | | 7,300,000 | | | | 7,835,470 | |
| Enterprise Products Partners LP, 7.034% to 2018, FRN to 2068 | | | 3,000,000 | | | | 3,435,000 | |
| Enterprise Products Partners LP, 5.65%, 2013 | | | 227,000 | | | | 229,531 | |
| Kinder Morgan Energy Partners LP, 7.4%, 2031 | | | 103,000 | | | | 134,149 | |
| Kinder Morgan Energy Partners LP, 6.375%, 2041 | | | 2,240,000 | | | | 2,771,877 | |
| Kinder Morgan Energy Partners LP, 6.95%, 2038 | | | 3,181,000 | | | | 4,185,767 | |
| Kinder Morgan Finance Corp., 6%, 2018 | | | 3,000,000 | | | | 3,297,429 | |
| Spectra Energy Capital LLC, 8%, 2019 | | | 613,000 | | | | 809,576 | |
| Williams Cos., Inc., 3.7%, 2023 | | | 1,921,000 | | | | 1,937,624 | |
| | | | | | | | |
| | | | | | $ | 31,446,358 | |
| | | | | | | | |
| Network & Telecom – 0.6% | | | | | | | | |
| AT&T, Inc., 5.55%, 2041 | | $ | 920,000 | | | $ | 1,104,114 | |
| AT&T, Inc., 5.35%, 2040 | | | 3,870,000 | | | | 4,506,801 | |
| Centurylink, Inc., 7.65%, 2042 | | | 8,527,000 | | | | 8,911,653 | |
| | | | | | | | |
| | | | | | $ | 14,522,568 | |
| | | | | | | | |
| Oil Services – 1.0% | | | | | | | | |
| Qgog Constellation S.A., 6.25%, 2019 (z) | | $ | 2,566,000 | | | $ | 2,675,055 | |
| Rowan Cos., Inc., 5.4%, 2042 | | | 6,573,000 | | | | 6,656,497 | |
| Schlumberger Norge A.S., 1.25%, 2017 (n) | | | 8,144,000 | | | | 8,109,380 | |
| Transocean, Inc., 3.8%, 2022 | | | 1,100,000 | | | | 1,127,425 | |
| Transocean, Inc., 6%, 2018 | | | 1,910,000 | | | | 2,215,197 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Oil Services – continued | | | | | | | | |
| Transocean, Inc., 6.5%, 2020 | | $ | 2,900,000 | | | $ | 3,512,257 | |
| | | | | | | | |
| | | | | | $ | 24,295,811 | |
| | | | | | | | |
| Oils – 0.2% | | | | | | | | |
| Phillips 66, 4.3%, 2022 (n) | | $ | 3,503,000 | | | $ | 3,914,319 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 3.0% | | | | | |
| American Express Centurion Bank, 5.5%, 2013 | | $ | 400,000 | | | $ | 405,786 | |
| American Express Co., 7%, 2018 | | | 2,000,000 | | | | 2,526,864 | |
| American Express Co., 4.875%, 2013 | | | 500,000 | | | | 511,635 | |
| American Express Credit Corp., 5.125%, 2014 | | | 4,200,000 | | | | 4,499,641 | |
| Banco Santander Brasil, FRN, 2.408%, 2014 | | | 1,000,000 | | | | 996,432 | |
| BB&T Corp., 1.45%, 2018 | | | 1,657,000 | | | | 1,664,403 | |
| BBVA Bancomer S.A. de C.V., 6.5%, 2021 (n) | | | 600,000 | | | | 666,000 | |
| BBVA Bancomer S.A. de C.V., 6.75%, 2022 (n) | | | 3,317,000 | | | | 3,731,625 | |
| Capital One Financial Corp., 6.15%, 2016 | | | 1,970,000 | | | | 2,253,719 | |
| Capital One Financial Corp., 8.8%, 2019 | | | 2,593,000 | | | | 3,511,174 | |
| Citigroup, Inc., 4.875%, 2015 | | | 1,000,000 | | | | 1,063,109 | |
| Citigroup, Inc., 4.5%, 2022 | | | 3,500,000 | | | | 3,904,964 | |
| Citigroup, Inc., 5.5%, 2013 | | | 700,000 | | | | 707,212 | |
| Citigroup, Inc., 5.5%, 2014 | | | 400,000 | | | | 429,136 | |
| Citigroup, Inc., 6.125%, 2018 | | | 559,000 | | | | 669,912 | |
| Citigroup, Inc., 8.5%, 2019 | | | 3,510,000 | | | | 4,719,676 | |
| Citigroup, Inc., 5.375%, 2020 | | | 2,500,000 | | | | 2,946,120 | |
| Citigroup, Inc., 4.45%, 2017 | | | 1,711,000 | | | | 1,895,446 | |
| Discover Bank, 7%, 2020 | | | 7,009,000 | | | | 8,703,047 | |
| Fifth Third Bancorp, 3.5%, 2022 | | | 2,780,000 | | | | 2,913,649 | |
| Groupe BPCE S.A., 12.5% to 2019, FRN to 2049 (n) | | | 2,557,000 | | | | 2,963,384 | |
| Grupo Financiero BBVA Bancomer S.A. de C.V., 7.25%, 2020 (n) | | | 1,100,000 | | | | 1,226,500 | |
| Itau Unibanco Holding S.A., 6.2%, 2020 | | | 1,800,000 | | | | 1,975,500 | |
| LBG Capital No. 1 PLC, 7.875%, 2020 (n) | | | 3,000,000 | | | | 3,227,388 | |
| Rabobank Nederland N.V., 3.95%, 2022 | | | 4,408,000 | | | | 4,513,942 | |
| Santander Holdings USA, Inc., 4.625%, 2016 | | | 2,621,000 | | | | 2,740,229 | |
| Santander UK PLC, 8.963% to 2030, FRN to 2049 | | | 4,290,000 | | | | 4,863,788 | |
| SunTrust Banks, Inc., 3.5%, 2017 | | | 2,732,000 | | | | 2,933,958 | |
| Svenska Handelsbanken AB, 2.875%, 2017 | | | 1,400,000 | | | | 1,479,241 | |
| | | | | | | | |
| | | | | | $ | 74,643,480 | |
| | | | | | | | |
| Personal Computers & Peripherals – 0.2% | |
| Equifax, Inc., 3.3%, 2022 | | $ | 6,210,000 | | | $ | 6,159,960 | |
| | | | | | | | |
| Pharmaceuticals – 0.9% | | | | | | | | |
| Celgene Corp., 2.45%, 2015 | | $ | 4,949,000 | | | $ | 5,135,617 | |
| Celgene Corp., 1.9%, 2017 | | | 5,062,000 | | | | 5,152,863 | |
| Teva Pharmaceutical Finance B.V., 2.95%, 2022 | | | 4,149,000 | | | | 4,196,954 | |
12
MFS Research Bond Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Pharmaceuticals – continued | | | | | | | | |
| Teva Pharmaceutical Finance IV LLC, 3.65%, 2021 | | $ | 7,420,000 | | | $ | 7,941,121 | |
| | | | | | | | |
| | | | | | $ | 22,426,555 | |
| | | | | | | | |
| Precious Metals & Minerals – 0.0% | |
| Teck Resources Ltd., 3%, 2019 | | $ | 217,000 | | | $ | 223,707 | |
| | | | | | | | |
| Printing & Publishing – 0.2% | | | | | | | | |
| Moody’s Corp., 4.5%, 2022 | | $ | 1,855,000 | | | $ | 1,983,268 | |
| Pearson Funding Four PLC, 3.75%, 2022 (n) | | | 1,784,000 | | | | 1,882,281 | |
| | | | | | | | |
| | | | | | $ | 3,865,549 | |
| | | | | | | | |
| Railroad & Shipping – 0.0% | | | | | | | | |
| Canadian Pacific Railway Co., 4.45%, 2023 | | $ | 862,000 | | | $ | 955,423 | |
| | | | | | | | |
| Real Estate – 1.7% | | | | | | | | |
| Alexandria Real Estate Equities, Inc., REIT, 4.6%, 2022 | | $ | 3,461,000 | | | $ | 3,714,965 | |
| Boston Properties LP, REIT, 3.7%, 2018 | | | 1,395,000 | | | | 1,515,370 | |
| Boston Properties LP, REIT, 3.85%, 2023 | | | 3,100,000 | | | | 3,256,500 | |
| DDR Corp., REIT, 4.625%, 2022 | | | 2,365,000 | | | | 2,581,047 | |
| HCP, Inc., REIT, 2.625%, 2020 | | | 4,000,000 | | | | 3,984,388 | |
| HCP, Inc., REIT, 3.75%, 2019 | | | 1,264,000 | | | | 1,333,951 | |
| HCP, Inc., REIT, 5.375%, 2021 | | | 1,134,000 | | | | 1,291,349 | |
| Health Care REIT, Inc., 2.25%, 2018 | | | 1,957,000 | | | | 1,955,352 | |
| HRPT Properties Trust, REIT, 6.25%, 2016 | | | 6,789,000 | | | | 7,447,784 | |
| Kimco Realty Corp., REIT, 5.783%, 2016 | | | 1,794,000 | | | | 2,014,237 | |
| Liberty Property LP, REIT, 5.5%, 2016 | | | 1,013,000 | | | | 1,150,471 | |
| Simon Property Group, Inc., REIT, 10.35%, 2019 | | | 3,213,000 | | | | 4,594,548 | |
| WEA Finance LLC, REIT, 6.75%, 2019 (n) | | | 5,010,000 | | | | 6,206,548 | |
| WEA Finance LLC/WT Finance Australia, 3.375%, 2022 (n) | | | 2,420,000 | | | | 2,487,061 | |
| | | | | | | | |
| | | | | | $ | 43,533,571 | |
| | | | | | | | |
| Retailers – 0.8% | | | | | | | | |
| Gap, Inc., 5.95%, 2021 | | $ | 7,492,000 | | | $ | 8,571,110 | |
| Home Depot, Inc., 5.95%, 2041 | | | 2,318,000 | | | | 3,129,928 | |
| Kohl’s Corp., 3.25%, 2023 | | | 5,182,000 | | | | 5,031,520 | |
| Target Corp., 4%, 2042 | | | 3,278,000 | | | | 3,367,748 | |
| Wesfarmers Ltd., 6.998%, 2013 (n) | | | 1,000,000 | | | | 1,016,543 | |
| | | | | | | | |
| | | | | | $ | 21,116,849 | |
| | | | | | | | |
| Specialty Chemicals – 0.3% | | | | | | | | |
| Mexichem S.A.B. de C.V., 6.75%, 2042 (z) | | $ | 6,309,000 | | | $ | 7,081,853 | |
| | | | | | | | |
| Specialty Stores – 0.2% | | | | | | | | |
| Advance Auto Parts, Inc., 5.75%, 2020 | | $ | 4,612,000 | | | $ | 4,969,347 | |
| | | | | | | �� | |
| Telecommunications – Wireless – 0.8% | |
| America Movil S.A.B. de C.V., 3.125%, 2022 | | $ | 1,825,000 | | | $ | 1,855,018 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Telecommunications – Wireless – continued | |
| American Tower Corp., REIT, 5.05%, 2020 | | $ | 4,000,000 | | | $ | 4,485,804 | |
| American Tower Corp., REIT, 4.5%, 2018 | | | 3,373,000 | | | | 3,697,530 | |
| Crown Castle Towers LLC, 6.113%, 2020 (n) | | | 5,096,000 | | | | 6,138,045 | |
| Crown Castle Towers LLC, 4.883%, 2020 (n) | | | 2,400,000 | | | | 2,708,071 | |
| Rogers Cable, Inc., 5.5%, 2014 | | | 734,000 | | | | 776,467 | |
| | | | | | | | |
| | | | | | $ | 19,660,935 | |
| | | | | | | | |
| Telephone Services – 0.0% | | | | | | | | |
| Oi S.A., 5.75%, 2022 (n) | | $ | 700,000 | | | $ | 729,750 | |
| | | | | | | | |
| Tobacco – 0.8% | | | | | | | | |
| Lorillard Tobacco Co., 8.125%, 2019 | | $ | 8,616,000 | | | $ | 10,994,257 | |
| Reynolds American, Inc., 6.75%, 2017 | | | 7,300,000 | | | | 8,815,611 | |
| | | | | | | | |
| | | | | | $ | 19,809,868 | |
| | | | | | | | |
| Transportation – Services – 0.4% | | | | | | | | |
| ERAC USA Finance Co., 7%, 2037 (n) | | $ | 6,389,000 | | | $ | 8,112,937 | |
| ERAC USA Finance Co., 2.75%, 2017 (n) | | | 2,112,000 | | | | 2,204,468 | |
| Ryder System, Inc., 6%, 2013 | | | 400,000 | | | | 403,038 | |
| | | | | | | | |
| | | | | | $ | 10,720,443 | |
| | | | | | | | |
| U.S. Government Agencies and Equivalents – 0.7% | |
| National Credit Union Administration Guaranteed Note, 2.9%, 2020 | | $ | 980,000 | | | $ | 1,044,647 | |
| Small Business Administration, 3.21%, 2030 | | | 8,822,083 | | | | 9,510,666 | |
| Small Business Administration, 2.37%, 2032 | | | 1,503,000 | | | | 1,553,207 | |
| Small Business Administration, 4.93%, 2024 | | | 63,170 | | | | 69,750 | |
| Small Business Administration, 4.34%, 2024 | | | 87,939 | | | | 96,674 | |
| Small Business Administration, 4.43%, 2029 | | | 927,093 | | | | 1,030,361 | |
| Small Business Administration, 4.99%, 2024 | | | 71,405 | | | | 80,582 | |
| Small Business Administration, 4.86%, 2025 | | | 155,317 | | | | 173,506 | |
| Small Business Administration, 4.625%, 2025 | | | 155,156 | | | | 173,475 | |
| Small Business Administration, 5.11%, 2025 | | | 117,845 | | | | 132,651 | |
| Small Business Administration, 3.25%, 2030 | | | 832,609 | | | | 889,271 | |
| Small Business Administration, 2.85%, 2031 | | | 1,735,284 | | | | 1,835,228 | |
| | | | | | | | |
| | | | | | $ | 16,590,018 | |
| | | | | | | | |
| U.S. Treasury Obligations – 16.2% | |
| U.S. Treasury Bonds, 3.375%, 2019 | | $ | 1,800,000 | | | $ | 2,069,579 | |
| U.S. Treasury Bonds, 5.375%, 2031 | | | 4,842,000 | | | | 6,911,955 | |
| U.S. Treasury Bonds, 4.5%, 2036 | | | 116,000 | | | | 152,667 | |
13
MFS Research Bond Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| U.S. Treasury Obligations – continued | |
| U.S. Treasury Bonds, 4.75%, 2037 | | $ | 22,300,000 | | | $ | 30,425,563 | |
| U.S. Treasury Bonds, 4.375%, 2038 | | | 22,650,000 | | | | 29,388,375 | |
| U.S. Treasury Bonds, 4.5%, 2039 | | | 20,171,600 | | | | 26,730,517 | |
| U.S. Treasury Bonds, 3.125%, 2041 | | | 500,000 | | | | 523,360 | |
| U.S. Treasury Bonds, 3.125%, 2042 | | | 1,300,000 | | | | 1,359,313 | |
| U.S. Treasury Notes, 1.375%, 2013 | | | 36,081,000 | | | | 36,172,610 | |
| U.S. Treasury Notes, 3.125%, 2013 | | | 201,000 | | | | 205,389 | |
| U.S. Treasury Notes, 0.25%, 2013 | | | 3,200,000 | | | | 3,202,000 | |
| U.S. Treasury Notes, 1.875%, 2014 | | | 33,959,000 | | | | 34,612,982 | |
| U.S. Treasury Notes, 2.375%, 2014 | | | 7,100,000 | | | | 7,351,276 | |
| U.S. Treasury Notes, 0.5%, 2014 | | | 7,275,000 | | | | 7,307,963 | |
| U.S. Treasury Notes, 4.25%, 2014 | | | 41,100,000 | | | | 44,152,004 | |
| U.S. Treasury Notes, 2.125%, 2015 (f) | | | 76,244,000 | | | | 79,549,864 | |
| U.S. Treasury Notes, 1.75%, 2015 | | | 51,500,000 | | | | 53,382,943 | |
| U.S. Treasury Notes, 1.25%, 2015 | | | 12,900,000 | | | | 13,227,544 | |
| U.S. Treasury Notes, 0.375%, 2015 | | | 5,600,000 | | | | 5,605,253 | |
| U.S. Treasury Notes, 2.875%, 2018 | | | 2,000,000 | | | | 2,217,188 | |
| U.S. Treasury Notes, 2.625%, 2018 | | | 1,600,000 | | | | 1,753,501 | |
| U.S. Treasury Notes, 1.5%, 2018 | | | 4,300,000 | | | | 4,452,181 | |
| U.S. Treasury Notes, 1%, 2019 | | | 5,600,000 | | | | 5,567,190 | |
| U.S. Treasury Notes, 3.625%, 2020 | | | 4,200,000 | | | | 4,907,440 | |
| U.S. Treasury Notes, TIPS, 2%, 2014 | | | 786,068 | | | | 811,185 | |
| U.S. Treasury Notes, TIPS, 1.625%, 2015 | | | 835,763 | | | | 887,932 | |
| U.S. Treasury Notes, TIPS, 2%, 2016 | | | 1,433,294 | | | | 1,589,165 | |
| | | | | | | | |
| | | | | | $ | 404,516,939 | |
| | | | | | | | |
| Utilities – Electric Power – 2.6% | | | | | | | | |
| American Electric Power Co., Inc., 1.65%, 2017 | | $ | 2,171,000 | | | $ | 2,178,607 | |
| American Electric Power Co., Inc., 2.95%, 2022 | | | 3,200,000 | | | | 3,201,024 | |
| APT Pipelines Ltd., 3.875%, 2022 (n) | | | 3,640,000 | | | | 3,624,883 | |
| CenterPoint Energy, Inc., 5.95%, 2017 | | | 540,000 | | | | 627,351 | |
| CMS Energy Corp., 6.25%, 2020 | | | 1,925,000 | | | | 2,248,234 | |
| CMS Energy Corp., 5.05%, 2022 | | | 3,094,000 | | | | 3,448,158 | |
| CMS Energy Corp., 5.05%, 2018 | | | 1,000,000 | | | | 1,126,035 | |
| Constellation Energy Group, Inc., 5.15%, 2020 | | | 2,487,000 | | | | 2,842,939 | |
| Duke Energy Corp., 3.05%, 2022 | | | 5,800,000 | | | | 5,903,721 | |
| Duke Energy Corp., 5.05%, 2019 | | | 4,636,000 | | | | 5,377,695 | |
| Enel Finance International S.A., 6%, 2039 (n) | | | 3,700,000 | | | | 3,582,884 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Utilities – Electric Power – continued | | | | | |
| Exelon Corp., 4.9%, 2015 | | $ | 5,842,000 | | | $ | 6,359,181 | |
| Florida Power & Light Co., 3.8%, 2042 | | | 4,292,000 | | | | 4,304,211 | |
| Oncor Electric Delivery Co., 4.1%, 2022 | | | 4,950,000 | | | | 5,395,163 | |
| Pacific Gas & Electric Co., 4.45%, 2042 | | | 1,750,000 | | | | 1,868,060 | |
| PPL Corp., 3.5%, 2022 | | | 1,050,000 | | | | 1,068,792 | |
| PPL WEM Holdings PLC, 5.375%, 2021 (n) | | | 6,909,000 | | | | 7,770,532 | |
| Progress Energy, Inc., 3.15%, 2022 | | | 2,679,000 | | | | 2,712,021 | |
| TECO Energy, Inc., 5.15%, 2020 | | | 1,810,000 | | | | 2,105,278 | |
| Waterford 3 Funding Corp., 8.09%, 2017 | | | 52,768 | | | | 54,494 | |
| | | | | | | | |
| | | | | | $ | 65,799,263 | |
| | | | | | | | |
Total Bonds
(Identified Cost, $2,380,836,801) | | | $ | 2,447,189,481 | |
| | | | | | | | |
|
| SHORT-TERM OBLIGATIONS (y) – 0.4% | |
| Itau Unibanco Holding S.A., 0.01%, due 10/31/13 | | $ | 5,800,000 | | | $ | 5,730,122 | |
| U.S. Treasury Bills, 0.145%, due 4/11/13 | | | 99,000 | | | | 98,982 | |
| U.S. Treasury Bills, 0.205%, due 6/27/13 | | | 1,788,000 | | | | 1,787,040 | |
| U.S. Treasury Bills, 0.176%, due 7/25/13 | | | 280,000 | | | | 279,802 | |
| U.S. Treasury Bills, 0.19%, due 8/22/13 | | | 1,939,000 | | | | 1,937,408 | |
| U.S. Treasury Bills, 0.01%, due 9/19/13 | | | 116,000 | | | | 115,893 | |
| | | | | | | | |
| Total Short-Term Obligations, (Identified Cost, $9,938,693) | | | | | | $ | 9,949,247 | |
| | | | | | | | |
|
| MONEY MARKET FUNDS – 9.0% | |
| MFS Institutional Money Market Portfolio, 0.16%, at Cost and Net Asset Value (v) | | | 224,031,860 | | | $ | 224,031,860 | |
| | | | | | | | |
Total Investments
(Identified Cost, $2,614,807,354) | | | $ | 2,681,170,588 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (7.4)% | | | | | | | (184,462,784 | ) |
| | | | | | | | |
| Net Assets – 100.0% | | | | | | $ | 2,496,707,804 | |
| | | | | | | | |
| (d) | | In default. Interest and/or scheduled principal payment(s) have been missed. |
| (f) | | All or a portion of the security has been segregated as collateral for open futures contracts. |
| (i) | | Interest only security for which the fund receives interest on notional principal (Par amount). Par amount shown is the notional principal and does not reflect the cost of the security. |
| (n) | | Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. At period end, the aggregate value of these securities was $237,020,627 representing 9.5% of net assets. |
| (q) | | Interest received was less than stated coupon rate. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
| (y) | | The rate shown represents an annualized yield at time of purchase. |
14
MFS Research Bond Series
Portfolio of Investments – continued
| (z) | | Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The fund holds the following restricted securities: |
| | | | | | | | | | |
| Restricted Securities | | Acquisition
Date | | Cost | | | Value | |
| Anthracite Ltd., “A”, CDO, FRN, 0.57%, 2019 | | 1/15/10-8/11/11 | | | $837,649 | | | | $1,041,999 | |
| Anthracite Ltd., “CFL”, CDO, FRN, 1.46%, 2037 | | 3/03/11 | | | 249,235 | | | | 246,483 | |
| Anthracite Ltd., CDO, FRN, 1.06%, 2037 | | 2/24/10-3/03/11 | | | 240,035 | | | | 260,539 | |
| Banc of America Commercial Mortgage, Inc., 5.337%, 2043 | | 10/26/12 | | | 3,057,052 | | | | 3,114,996 | |
| Banc of America Commercial Mortgage, Inc., FRN, 5.619%, 2049 | | 10/03/12 | | | 702,633 | | | | 736,909 | |
| Banc of America Large Loan Ball, FRN, 5.325%, 2044 | | 11/16/12 | | | 8,056,361 | | | | 8,098,883 | |
| Bayview Commercial Asset Trust, FRN, 2.93%, 2036 | | 3/29/06 | | | 23,741 | | | | 1,844 | |
| Bayview Commercial Asset Trust, FRN, 2.79%, 2036 | | 2/28/06 | | | 35,916 | | | | 1,679 | |
| Bayview Commercial Asset Trust, FRN, 3.175%, 2036 | | 5/16/06 | | | 24,053 | | | | 3,491 | |
| Bayview Commercial Asset Trust, FRN, 3.893%, 2036 | | 9/11/06 | | | 90,136 | | | | 19,943 | |
| Bayview Commercial Asset Trust, FRN, 3.81%, 2036 | | 10/25/06 | | | 52,452 | | | | 14,099 | |
| Bayview Commercial Asset Trust, FRN, 4.042%, 2037 | | 1/26/07 | | | 40,115 | | | | 35,936 | |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.809%, 2040 | | 3/01/06 | | | 163,081 | | | | 103,089 | |
| Capital Trust Realty Ltd., CDO, 5.267%, 2035 | | 9/14/10-3/25/11 | | | 1,548,849 | | | | 1,692,731 | |
| Chesapeake Funding LLC, “A”, FRN, 0.958%, 2023 | | 5/10/12 | | | 2,121,000 | | | | 2,125,793 | |
| Commercial Mortgage Asset Trust, FRN, 0.646%, 2032 | | 4/09/12 | | | 11,960 | | | | 12,427 | |
| Credit Acceptance Auto Loan Trust, “A”, 2.2%, 2019 | | 3/22/12 | | | 938,903 | | | | 944,412 | |
| Crest Ltd., “A1” CDO, FRN, 0.79%, 2018 | | 1/21/10 | | | 239,213 | | | | 292,077 | |
| Crest Ltd., “A2”, CDO, 4.669%, 2018 | | 3/02/10 | | | 54,763 | | | | 64,850 | |
| Crest Ltd., “B”, CDO, FRN, 1.663%, 2035 | | 1/12/10 | | | 80,974 | | | | 94,965 | |
| Falcon Franchise Loan LLC, FRN, 6.542%, 2025 | | 1/29/03 | | | 5,249 | | | | 10,088 | |
| First Union National Bank Commercial Mortgage Trust, FRN, 1.583%, 2043 | | 4/09/12 | | | 7 | | | | 288 | |
| GMAC LLC, FRN, 6.02%, 2033 | | 3/20/02 | | | 11,778 | | | | 21,895 | |
| KKR Financial CLO Ltd., “A1”, FRN, 0.584%, 2017 | | 4/11/11 | | | 416,569 | | | | 426,121 | |
| Kraft Foods Group, Inc., 5%, 2042 | | 5/30/12 | | | 1,696,581 | | | | 1,915,022 | |
| Liberty Mutual Group, Inc., 6.5%, 2042 | | 5/01/12-11/27/12 | | | 2,958,387 | | | | 3,182,733 | |
| Mach One Trust Commercial Mortgage, CDO, “B”, 5.43%, 2040 | | 3/10/10 | | | 803,084 | | | | 852,064 | |
| Mexichem S.A.B. de C.V., 6.75%, 2042 | | 9/12/12 | | | 6,788,036 | | | | 7,081,853 | |
| Morgan Stanley Re-REMIC Trust, FRN, 5.789%, 2045 | | 12/06/12 | | | 5,623,970 | | | | 5,598,870 | |
| NIBC Bank N.V., 2.8%, 2014 | | 11/24/09 | | | 1,498,691 | | | | 1,557,383 | |
| PTT PLC, 3.375%, 2022 | | 10/18/12-11/29/12 | | | 5,010,059 | | | | 5,008,266 | |
| PTT PLC, 4.5%, 2042 | | 10/18/12-11/29/12 | | | 1,791,441 | | | | 1,748,297 | |
| Preferred Term Securities XIX Ltd., CDO, FRN, 0.658%, 2035 | | 9/08/05-3/28/11 | | | 311,254 | | | | 299,480 | |
| Prudential Securities Secured Financing Corp., FRN, 7.167%, 2013 | | 12/06/04-8/11/11 | | | 1,593,424 | | | | 1,594,800 | |
| Qgog Constellation S.A., 6.25%, 2019 | | 11/28/12-11/30/12 | | | 2,637,064 | | | | 2,675,055 | |
| Rosneft, 3.149%, 2017 | | 11/29/12 | | | 1,067,000 | | | | 1,083,005 | |
| Rosneft, 4.199%, 2022 | | 11/29/12 | | | 1,774,000 | | | | 1,805,045 | |
| Total Restricted Securities | | | | | | | | | $53,767,410 | |
| % of Net assets | | | | | | | | | 2.2% | |
15
MFS Research Bond Series
Portfolio of Investments – continued
The following abbreviations are used in this report and are defined:
| CDO | | Collateralized Debt Obligation |
| CLO | | Collateralized Loan Obligation |
| FRN | | Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end. |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
| STRIPS | | Separate Trading of Registered Interest and Principal of Securities |
| TIPS | | Treasury Inflation Protected Security |
Derivative Contracts at 12/31/12
Futures Contracts Outstanding at 12/31/12
| | | | | | | | | | | | | | | | | | |
| Description | | Currency | | | Contracts | | | Value | | Expiration
Date | | | Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives | | | | | | | | | | | | | | | | | | |
| Interest Rate Futures | | | | | | | | | | | | | | | | | | |
| U.S. Treasury Note 10 yr (Short) | | | USD | | | | 755 | | | $100,249,844 | | | March - 2013 | | | | $145,642 | |
| U.S. Treasury Bond 30 yr (Short) | | | USD | | | | 295 | | | 43,512,500 | | | March - 2013 | | | | 305,124 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | $450,766 | |
| | | | | | | | | | | | | | | | | | |
At December 31, 2012, the fund had liquid securities with an aggregate value of $1,766,408 to cover any commitments for certain derivative contracts.
See Notes to Financial Statements
16
MFS Research Bond Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | | | | |
At 12/31/12 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $2,390,775,494) | | | $2,457,138,728 | | | | | |
Underlying affiliated funds, at cost and value | | | 224,031,860 | | | | | |
Total investments, at value (identified cost, $2,614,807,354) | | | $2,681,170,588 | | | | | |
Cash | | | 524,930 | | | | | |
Receivables for | | | | | | | | |
Daily variation margin on open futures contracts | | | 387,891 | | | | | |
Investments sold | | | 10,554,939 | | | | | |
Fund shares sold | | | 1,338,370 | | | | | |
Interest | | | 17,730,435 | | | | | |
Other assets | | | 39,156 | | | | | |
Total assets | | | | | | | $2,711,746,309 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | $3,457,538 | | | | | |
TBA purchase commitments | | | 209,893,713 | | | | | |
Fund shares reacquired | | | 1,314,451 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 140,089 | | | | | |
Shareholder servicing costs | | | 1,913 | | | | | |
Distribution and/or service fees | | | 45,015 | | | | | |
Payable for independent Trustees’ compensation | | | 29 | | | | | |
Accrued expenses and other liabilities | | | 185,757 | | | | | |
Total liabilities | | | | | | | $215,038,505 | |
Net assets | | | | | | | $2,496,707,804 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $2,391,824,046 | | | | | |
Unrealized appreciation (depreciation) on investments | | | 66,814,000 | | | | | |
Accumulated net realized gain (loss) on investments | | | 6,650,607 | | | | | |
Undistributed net investment income | | | 31,419,151 | | | | | |
Net assets | | | | | | | $2,496,707,804 | |
Shares of beneficial interest outstanding | | | | | | | 186,825,873 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
| Initial Class | | | $850,416,799 | | | | 63,044,132 | | | | $13.49 | |
| Service Class | | | 1,646,291,005 | | | | 123,781,741 | | | | 13.30 | |
See Notes to Financial Statements
17
MFS Research Bond Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | | | | | | |
Year ended 12/31/12 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Interest | | | $33,378,596 | | | | | |
Dividends | | | 103,575 | | | | | |
Dividends from underlying affiliated funds | | | 3,750 | | | | | |
Foreign taxes withheld | | | (593 | ) | | | | |
Total investment income | | | | | | | $33,485,328 | |
Expenses | | | | | | | | |
Management fee | | | $5,065,990 | | | | | |
Distribution and/or service fees | | | 1,522,343 | | | | | |
Shareholder servicing costs | | | 89,535 | | | | | |
Administrative services fee | | | 152,170 | | | | | |
Independent Trustees’ compensation | | | 20,004 | | | | | |
Custodian fee | | | 99,322 | | | | | |
Shareholder communications | | | 69,337 | | | | | |
Audit and tax fees | | | 66,639 | | | | | |
Legal fees | | | 58,808 | | | | | |
Miscellaneous | | | 69,554 | | | | | |
Total expenses | | | | | | | $7,213,702 | |
Fees paid indirectly | | | (511 | ) | | | | |
Reduction of expenses by investment adviser | | | (3,072 | ) | | | | |
Net expenses | | | | | | | $7,210,119 | |
Net investment income | | | | | | | $26,275,209 | |
Realized and unrealized gain (loss) on investments | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $15,612,658 | | | | | |
Futures contracts | | | (425,778 | ) | | | | |
Net realized gain (loss) on investments | | | | | | | $15,186,880 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $20,659,486 | | | | | |
Futures contracts | | | 450,766 | | | | | |
Net unrealized gain (loss) on investments | | | | | | | $21,110,252 | |
Net realized and unrealized gain (loss) on investments | | | | | | | $36,297,132 | |
Change in net assets from operations | | | | | | | $62,572,341 | |
See Notes to Financial Statements
18
MFS Research Bond Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | | | |
For years ended 12/31 | | | 2012 | | | | 2011 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $26,275,209 | | | | $22,449,683 | |
Net realized gain (loss) on investments | | | 15,186,880 | | | | 7,598,826 | |
Net unrealized gain (loss) on investments | | | 21,110,252 | | | | 13,313,908 | |
Change in net assets from operations | | | $62,572,341 | | | | $43,362,417 | |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(25,375,106 | ) | | | $(18,525,349 | ) |
From net realized gain on investments | | | (6,259,882 | ) | | | (8,107,984 | ) |
Total distributions declared to shareholders | | | $(31,634,988 | ) | | | $(26,633,333 | ) |
Change in net assets from fund share transactions | | | $1,692,099,620 | | | | $173,999,741 | |
Total change in net assets | | | $1,723,036,973 | | | | $190,728,825 | |
| Net assets | | | | | | | | |
At beginning of period | | | 773,670,831 | | | | 582,942,006 | |
At end of period (including undistributed net investment income of $31,419,151 and
$25,358,931, respectively) | | | $2,496,707,804 | | | | $773,670,831 | |
See Notes to Financial Statements
19
MFS Research Bond Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $13.01 | | | | $12.66 | | | | $12.20 | | | | $11.00 | | | | $11.60 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.37 | | | | $0.44 | | | | $0.44 | | | | $0.51 | | | | $0.52 | |
Net realized and unrealized gain (loss) on investments | | | 0.57 | | | | 0.41 | | | | 0.45 | | | | 1.20 | | | | (0.78 | ) |
Total from investment operations | | | $0.94 | | | | $0.85 | | | | $0.89 | | | | $1.71 | | | | $(0.26 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.37 | ) | | | $(0.35 | ) | | | $(0.39 | ) | | | $(0.51 | ) | | | $(0.34 | ) |
From net realized gain on investments | | | (0.09 | ) | | | (0.15 | ) | | | (0.04 | ) | | | — | | | | — | |
Total distributions declared to shareholders | | | $(0.46 | ) | | | $(0.50 | ) | | | $(0.43 | ) | | | $(0.51 | ) | | | $(0.34 | ) |
Net asset value, end of period (x) | | | $13.49 | | | | $13.01 | | | | $12.66 | | | | $12.20 | | | | $11.00 | |
Total return (%) (k)(r)(s)(x) | | | 7.35 | | | | 6.75 | | | | 7.47 | | | | 16.16 | | | | (2.37 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.56 | | | | 0.57 | | | | 0.59 | | | | 0.62 | | | | 0.74 | |
Expenses after expense reductions (f) | | | 0.56 | | | | 0.57 | | | | 0.59 | | | | 0.62 | | | | 0.64 | |
Net investment income | | | 2.76 | | | | 3.41 | | | | 3.51 | | | | 4.38 | | | | 4.63 | |
Portfolio turnover | | | 114 | | | | 60 | | | | 66 | | | | 113 | | | | 115 | |
Net assets at end of period (000 omitted) | | | $850,417 | | | | $367,398 | | | | $371,865 | | | | $317,851 | | | | $184,984 | |
See Notes to Financial Statements
20
MFS Research Bond Series
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $12.85 | | | | $12.53 | | | | $12.10 | | | | $10.91 | | | | $11.51 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.33 | | | | $0.40 | | | | $0.40 | | | | $0.47 | | | | $0.49 | |
Net realized and unrealized gain (loss) on investments | | | 0.57 | | | | 0.41 | | | | 0.45 | | | | 1.20 | | | | (0.78 | ) |
Total from investment operations | | | $0.90 | | | | $0.81 | | | | $0.85 | | | | $1.67 | | | | $(0.29 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.36 | ) | | | $(0.34 | ) | | | $(0.38 | ) | | | $(0.48 | ) | | | $(0.31 | ) |
From net realized gain on investments | | | (0.09 | ) | | | (0.15 | ) | | | (0.04 | ) | | | — | | | | — | |
Total distributions declared to shareholders | | | $(0.45 | ) | | | $(0.49 | ) | | | $(0.42 | ) | | | $(0.48 | ) | | | $(0.31 | ) |
Net asset value, end of period (x) | | | $13.30 | | | | $12.85 | | | | $12.53 | | | | $12.10 | | | | $10.91 | |
Total return (%) (k)(r)(s)(x) | | | 7.06 | | | | 6.48 | | | | 7.20 | | | | 15.91 | | | | (2.64 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.81 | | | | 0.82 | | | | 0.84 | | | | 0.87 | | | | 0.99 | |
Expenses after expense reductions (f) | | | 0.81 | | | | 0.82 | | | | 0.84 | | | | 0.87 | | | | 0.89 | |
Net investment income | | | 2.48 | | | | 3.13 | | | | 3.20 | | | | 4.07 | | | | 4.37 | |
Portfolio turnover | | | 114 | | | | 60 | | | | 66 | | | | 113 | | | | 115 | |
Net assets at end of period (000 omitted) | | | $1,646,291 | | | | $406,273 | | | | $211,077 | | | | $44,776 | | | | $14,518 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (r) | Certain expenses have been reduced without which performance would have been lower. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (x) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
21
MFS Research Bond Series
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Research Bond Series (the fund) is a series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests a significant portion of its assets in asset-backed and/or mortgage-backed securities. The value of these securities may depend, in part, on the issuer’s or borrower’s credit quality or ability to pay principal and interest when due and may fall if an issuer or borrower defaults on its obligation to pay principal or interest or if the instrument’s credit rating is downgraded by a credit rating agency. U.S. Government securities not supported as to the payment of principal or interest by the U.S. Treasury, such as those issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, are subject to greater credit risk than are U.S. Government securities supported by the U.S. Treasury, such as those issued by Ginnie Mae. The fund invests in foreign securities. Investments in foreign securities are vulnerable to the effects of changes in the relative values of the local currency and the U.S. dollar and to the effects of changes in each country’s legal, political, and economic environment.
In this reporting period the fund adopted Financial Accounting Standards Board (FASB) Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 seeks to improve the comparability of fair value measurements as presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) by providing common requirements for fair value measurement and disclosure.
In December 2011, the FASB issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods, ASU 2011-11 is intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. Although still evaluating the potential impacts of ASU 2011-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures.
Investment Valuations – Debt instruments and floating rate loans (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as provided by a third-party pricing service. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Futures contracts are generally valued at last posted settlement price as provided by a third-party pricing service on the market on which they are primarily traded. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation as provided by a third-party pricing service on the market on which such futures contracts are primarily traded. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and
22
MFS Research Bond Series
Notes to Financial Statements – continued
at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. Other financial instruments are derivative instruments not reflected in total investments, such as futures contracts. The following is a summary of the levels used as of December 31, 2012 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| U.S. Treasury Bonds & U.S. Government Agency & Equivalents | | | $— | | | | $421,106,957 | | | | $— | | | | $421,106,957 | |
| Non-U.S. Sovereign Debt | | | — | | | | 40,641,821 | | | | — | | | | 40,641,821 | |
| Municipal Bonds | | | — | | | | 1,971,853 | | | | — | | | | 1,971,853 | |
| U.S. Corporate Bonds | | | — | | | | 843,383,357 | | | | — | | | | 843,383,357 | |
| Residential Mortgage-Backed Securities | | | — | | | | 650,603,356 | | | | — | | | | 650,603,356 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 211,763,474 | | | | — | | | | 211,763,474 | |
| Asset-Backed Securities (including CDOs) | | | — | | | | 62,780,040 | | | | — | | | | 62,780,040 | |
| Foreign Bonds | | | — | | | | 214,938,623 | | | | — | | | | 214,938,623 | |
| Short Term Securities | | | — | | | | 9,949,247 | | | | — | | | | 9,949,247 | |
| Mutual Funds | | | 224,031,860 | | | | — | | | | — | | | | 224,031,860 | |
| Total Investments | | | $224,031,860 | | | | $2,457,138,728 | | | | $— | | | | $2,681,170,588 | |
| | | | |
| Other Financial Instruments | | | | | | | | | | | | |
| Futures Contracts | | | $450,766 | | | | $— | | | | $— | | | | $450,766 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Inflation-Adjusted Debt Securities – The fund invests in inflation-adjusted debt securities issued by the U.S. Treasury. The fund may also invest in inflation-adjusted debt securities issued by U.S. Government agencies and instrumentalities other than the U.S. Treasury and by other entities such as U.S. and foreign corporations and foreign governments. The principal value of these debt securities is adjusted through income according to changes in the Consumer Price Index or another general price or wage index. These debt securities typically pay a fixed rate of interest, but this fixed rate is applied to the inflation-adjusted principal amount. The principal paid at maturity of the debt security is typically equal to the inflation-adjusted principal amount, or the security’s original par value, whichever is greater. Other types of inflation-adjusted securities may use other methods to adjust for other measures of inflation.
Derivatives – The fund uses derivatives in an attempt to adjust exposure to markets, asset classes, and currencies based on the adviser’s assessment of the relative attractiveness of such markets, asset classes, and currencies. Derivatives are used to increase or decrease the fund’s exposure to markets, asset classes, or currencies resulting from the fund’s individual security selections, and to expose the fund to markets, asset classes, or currencies in which the fund’s individual security selection has resulted in little or no exposure. Derivatives are used for hedging or non-hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. When the fund uses derivatives as an investment to increase or decrease market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative’s original cost.
The derivative instruments used by the fund were futures contracts. The fund’s period end derivatives, as presented in the Portfolio of Investments and the associated Derivative Contract tables, generally are indicative of the volume of its derivative activity during the period.
23
MFS Research Bond Series
Notes to Financial Statements – continued
The following table presents, by major type of derivative contract, the fair value, on a gross basis, of the asset and liability components of derivatives held by the fund at December 31, 2012 as reported in the Statement of Assets and Liabilities:
| | | | | | |
| | | | | Fair Value (a) | |
| Risk | | Derivative Contracts | | Asset Derivatives | |
| Interest Rate | | Interest Rate Futures | | | $450,766 | |
| (a) | The value of futures contracts outstanding includes cumulative appreciation (depreciation) as reported in the fund’s Portfolio of Investments. Only the current day variation margin for futures contracts is separately reported within the fund’s Statement of Assets and Liabilities. |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2012 as reported in the Statement of Operations:
| | | | |
| Risk | | Futures Contracts | |
| Interest Rate | | | $(425,778 | ) |
The following table presents, by major type of derivative contract, the change in unrealized appreciation (depreciation) on derivatives held by the fund for the year ended December 31, 2012 as reported in the Statement of Operations:
| | | | |
| Risk | | Futures Contracts | |
| Interest Rate | | | $450,766 | |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an International Swaps and Derivatives Association (ISDA) Master Agreement on a bilateral basis with each of the counterparties with whom it undertakes a significant volume of transactions. The ISDA Master Agreement gives each party to the agreement the right to terminate all transactions traded under such agreement if there is a certain deterioration in the credit quality of the other party. The ISDA Master Agreement gives the fund the right, upon an event of default by the applicable counterparty or a termination of the agreement, to close out all transactions traded under such agreement and to net amounts owed under each transaction to one net amount payable by one party to the other. This right to close out and net payments across all transactions traded under the ISDA Master Agreement could result in a reduction of the fund’s credit risk to such counterparty equal to any amounts payable by the fund under the applicable transactions, if any. However, absent an event of default by the counterparty or a termination of the agreement, the ISDA Master Agreement does not result in an offset of reported amounts of assets and liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearing house for exchange traded derivatives (i.e., futures contracts and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forward foreign currency exchange contracts, swap agreements and over-the-counter options). For derivatives traded under an ISDA Master Agreement, the collateral requirements are netted across all transactions traded under such agreement and one amount is posted from one party to the other to collateralize such obligations. Cash collateral that has been pledged to cover obligations of the fund under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as restricted cash. Securities collateral pledged for the same purpose, if any, is noted in the Portfolio of Investments.
Futures Contracts – The fund entered into futures contracts which may be used to hedge against or obtain broad market exposure, interest rate exposure, currency exposure, or to manage duration. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
Upon entering into a futures contract, the fund is required to deposit with the broker, either in cash or securities, an initial margin in an amount equal to a certain percentage of the notional amount of the contract. Subsequent payments (variation margin) are made or received by the fund each day, depending on the daily fluctuations in the value of the contract, and are recorded for financial statement purposes as unrealized gain or loss by the fund until the contract is closed or expires at which point the gain or loss on futures contracts is realized.
The fund bears the risk of interest rates, exchange rates or securities prices moving unexpectedly, in which case, the fund may not achieve the anticipated benefits of the futures contracts and may realize a loss. While futures contracts may present less counterparty risk to the fund since the contracts are exchange traded and the exchange’s clearinghouse guarantees payments to the broker, there is still counterparty credit risk due to the insolvency of the broker. The fund’s maximum risk of loss due to counterparty credit risk is equal to the margin posted by the fund to the broker plus any gains or minus any losses on the outstanding futures contracts.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
24
MFS Research Bond Series
Notes to Financial Statements – continued
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles. Inflation-indexed bonds are fixed-income securities whose principal value is periodically adjusted upward or downward to the rate of inflation. Interest is accrued based on the principal value, which is adjusted for inflation. Any increase or decrease in the principal amount of an inflation-indexed bond is generally recorded as an increase or decrease in interest income, respectively, even though the adjusted principal is not received until maturity. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date. Debt obligations may be placed on non-accrual status or set to accrue at a rate of interest less than the contractual coupon when the collection of all or a portion of interest has become doubtful. Interest income for those debt obligations may be further reduced by the write-off of the related interest receivables when deemed uncollectible.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
The fund purchased or sold debt securities on a when-issued or delayed delivery basis, or in a “To Be Announced” (TBA) or “forward commitment” transaction with delivery or payment to occur at a later date beyond the normal settlement period. TBA securities resulting from these transactions are included in the Portfolio of Investments. At the time a fund enters into a commitment to purchase or sell a security, the transaction is recorded and the value of the security acquired is reflected in the fund’s net asset value. The price of such security and the date that the security will be delivered and paid for are fixed at the time the transaction is negotiated. The value of the security may vary with market fluctuations. TBA purchase commitments are held at carrying amount, which approximates fair value and are categorized as Level 2 within the fair value hierarchy disclosure. No interest accrues to the fund until payment takes place. At the time that a fund enters into this type of transaction, the fund is required to have sufficient cash and/or liquid securities to cover its commitments. Losses may arise due to changes in the value of the underlying securities or if the counterparty does not perform under the contract’s terms, or if the issuer does not issue the securities due to political, economic or other factors. Additionally, losses may arise due to declines in the value of the securities prior to settlement date.
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount, for the year ended December 31, 2012, is shown as a reduction of total expenses in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Foreign taxes have been accrued by the fund in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to amortization and accretion of debt securities.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/12 | | | 12/31/11 | |
| Ordinary income (including any short-term capital gains) | | | $27,596,422 | | | | $24,586,584 | |
| Long-term capital gains | | | 4,038,566 | | | | 2,046,749 | |
| Total distributions | | | $31,634,988 | | | | $26,633,333 | |
25
MFS Research Bond Series
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/12 | | | | |
| Cost of investments | | | $2,619,878,147 | |
| Gross appreciation | | | 65,534,253 | |
| Gross depreciation | | | (4,241,812 | ) |
| Net unrealized appreciation (depreciation) | | | $61,292,441 | |
| Undistributed ordinary income | | | 40,363,291 | |
| Undistributed long-term capital gain | | | 3,375,776 | |
| Other temporary differences | | | (147,750 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | | | | | | | | | |
| | | From net investment
income | | | From net realized gain on
investments | |
| | | Year ended
12/31/12 | | | Year ended
12/31/11 | | | Year ended
12/31/12 | | | Year ended
12/31/11 | |
| Initial Class | | | $10,286,289 | | | | $9,511,956 | | | | $2,460,677 | | | | $4,094,590 | |
| Service Class | | | 15,088,817 | | | | 9,013,393 | | | | 3,799,205 | | | | 4,013,394 | |
| Total | | | $25,375,106 | | | | $18,525,349 | | | | $6,259,882 | | | | $8,107,984 | |
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at an annual rate of 0.50% of the fund’s average daily net assets.
The investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses, such that total annual operating expenses do not exceed 0.70% of average daily net assets for the Initial Class shares and 0.95% of average daily net assets for the Service Class shares. This written agreement will continue until April 30, 2013. For the year ended December 31, 2012, the fund’s actual operating expenses did not exceed the limit and therefore, the investment adviser did not pay any portion of the fund’s expenses related to this agreement.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2012, the fee was $88,891, which equated to 0.0088% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2012, these costs amounted to $644.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.0150% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
26
MFS Research Bond Series
Notes to Financial Statements – continued
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended December 31, 2012, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $7,361 and are included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $3,072, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
Purchases and sales of investments, other than short-term obligations, were as follows:
| | | | | | | | |
| | | Purchases | | | Sales | |
| U.S. Government securities | | | $574,807,350 | | | | $313,648,284 | |
| Investments (non-U.S. Government securities) | | | $803,695,755 | | | | $713,881,973 | |
Purchases exclude the value of securities acquired in connection with the Sun Capital Investment Grade Bond Fund and SC PIMCO Total Return Fund mergers. (See Note 8.)
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 4,329,547 | | | | $57,444,729 | | | | 5,485,570 | | | | $70,722,201 | |
Service Class | | | 22,342,590 | | | | 294,271,747 | | | | 17,888,039 | | | | 228,414,619 | |
| | | 26,672,137 | | | | $351,716,476 | | | | 23,373,609 | | | | $299,136,820 | |
| Shares issued in connection with the acquisition of Sun Capital Investment Grade Bond Fund | | | | | | | | | | | | | | | | |
Initial Class | | | 17,749,996 | | | | $239,447,454 | | | | | | | | | |
Service Class | | | 14,383,246 | | | | 191,297,167 | | | | | | | | — | |
| | | 32,133,242 | | | | $430,744,621 | | | | | | | | | |
| Shares issued in connection with the acquisition of SC PIMCO Total Return Fund | | | | | | | | | | | | | | | | |
Initial Class | | | 17,168,406 | | | | $231,601,801 | | | | | | | | | |
Service Class | | | 58,945,677 | | | | 783,977,506 | | | | | | | | — | |
| | | 76,114,083 | | | | $1,015,579,307 | | | | | | | | | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 968,614 | | | | $12,746,966 | | | | 1,058,875 | | | | $13,606,546 | |
Service Class | | | 1,454,043 | | | | 18,888,022 | | | | 1,024,924 | | | | 13,026,787 | |
| | | 2,422,657 | | | | $31,634,988 | | | | 2,083,799 | | | | $26,633,333 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (5,409,472 | ) | | | $(72,146,580 | ) | | | (7,675,364 | ) | | | $(98,873,980 | ) |
Service Class | | | (4,950,913 | ) | | | (65,429,192 | ) | | | (4,145,419 | ) | | | (52,896,432 | ) |
| | | (10,360,385 | ) | | | $(137,575,772 | ) | | | (11,820,783 | ) | | | $(151,770,412 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | 34,807,091 | | | | $469,094,370 | | | | (1,130,919 | ) | | | $(14,545,233 | ) |
Service Class | | | 92,174,643 | | | | 1,223,005,250 | | | | 14,767,544 | | | | 188,544,974 | |
| | | 126,981,734 | | | | $1,692,099,620 | | | | 13,636,625 | | | | $173,999,741 | |
27
MFS Research Bond Series
Notes to Financial Statements – continued
The fund is one of several mutual funds in which the MFS funds-of-funds may invest. The MFS funds-of-funds do not invest in the underlying MFS funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio, the MFS Conservative Allocation Portfolio, and the MFS Growth Allocation Portfolio were the owners of record of approximately 9%, 7%, and 1%, respectively, of the value of outstanding voting shares of the fund.
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2012, the fund’s commitment fee and interest expense were $5,804 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 27,904,931 | | | | 659,097,450 | | | | (462,970,521 | ) | | | 224,031,860 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $3,750 | | | | $224,031,860 | |
At close of business on December 7, 2012, the fund with net assets of approximately $1,048,429,345, acquired all of the assets and liabilities of Sun Capital Investment Grade Bond Fund and SC PIMCO Total Return Fund, each a series of Sun Capital Advisers Trust. The purpose of the transaction was to provide shareholders of both Sun Capital Investment Grade Bond Fund and SC PIMCO Total Return Fund the opportunity to participate in a larger combined portfolio with similar investment policies and strategies. The acquisition was accomplished by a tax-free exchange of approximately 32,133,242 shares of the fund to Sun Capital Investment Grade Bond Fund (valued at approximately $430,744,621) and approximately 76,114,083 shares of the fund to SC PIMCO Total Return Fund (valued at approximately $1,015,579,307) for all of the assets and liabilities of Sun Capital Investment Grade Bond Fund and SC PIMCO Total Return Fund. Sun Capital Investment Grade Bond Fund and SC PIMCO Total Return Fund then distributed the shares of the fund that they each received from the fund to their respective shareholders. Sun Capital Investment Grade Bond Fund’s investments on that date were valued at approximately $415,216,875 with a cost basis of approximately $406,114,379. SC PIMCO Total Return Fund’s investments on that date were valued at approximately $956,816,504 with a cost basis of approximately $948,823,374. For financial reporting purposes, assets received and shares issued by the fund were recorded at fair value; however, the cost basis of the investments received from Sun Capital Investment Grade Bond Fund and SC PIMCO Total Return Fund were carried forward to align ongoing reporting of the fund’s realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes. Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of Sun Capital Investment Grade Bond Fund and SC PIMCO Total Return Fund that have been included in the fund’s Statement of Operations since December 7, 2012.
Assuming the acquisitions had been completed on January 1, 2012, the fund’s pro forma results of operations for the year ended December 31, 2012 are as follows:
| | | | |
| Net investment income | | | $66,707,403 | |
| Net realized and unrealized gain (loss) on investments and foreign currency | | | (370,042,137 | ) |
| Change in net assets from operations | | | $(303,334,734 | ) |
28
MFS Research Bond Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of
MFS Research Bond Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Research Bond Series (the “Fund”) (one of the series comprising MFS Variable Insurance Trust) as of December 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Research Bond Series as of December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2013
29
MFS Research Bond Series
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 1, 2013, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES | | | | | | | | |
Robert J. Manning (k) (age 49) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Chief Executive Officer and Director; President (until December 2009); Chief Investment Officer (until July 2010) | | N/A |
| | | | |
| INDEPENDENT TRUSTEES | | | | | | | | |
David H. Gunning (age 70) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman; Portman Limited (mining), Director (until 2008) |
| | | | |
Robert E. Butler (age 71) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 57) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 71) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 68) | | Trustee | | December 2004 | | Private investor; Rouse Properties Inc. (real estate), Director | | N/A |
| | | | |
John P. Kavanaugh (age 58) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
J. Dale Sherratt (age 74) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner | | N/A |
| | | | |
Laurie J. Thomsen
(age 55) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 71) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
John M. Corcoran (k) (age 47) | | President | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) | | N/A |
| | | | |
| Christopher R. Bohane (k) (age 39) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kino Clark (k) (age 44) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 53) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
| | | | |
Ethan D. Corey (k) (age 49) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
30
MFS Research Bond Series
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
David L. DiLorenzo (k) (age 44) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Robyn L. Griffin (age 37) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 39) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 62) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 42) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 42) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 60) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Frank L. Tarantino (age 68) | | Independent
Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 52) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. For the period October 2008, until January 2012, Mr. Corcoran served as Treasurer of the Funds. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2013, the Trustees served as board members of 143 funds within the MFS Family of Funds.
31
MFS Research Bond Series
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston MA, 02199-7618 | | Custodian State Street Bank and Trust 1 Lincoln Street Boston MA, 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston MA, 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston MA, 02116 |
Portfolio Managers Joshua Marston Robert Persons Jeffrey Wakelin | | |
32
MFS Research Bond Series
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2012 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2011 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2011, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 2nd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 3rd quintile for the one-year period and the 2nd quintile for the five-year period ended December 31, 2011 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
33
MFS Research Bond Series
Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate was approximately at the Lipper expense group median, and the Fund’s total expense ratio was lower than the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to institutional accounts, if any. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund is likely to benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund. They noted that the Fund’s advisory fee rate schedule is not subject to any breakpoints. Taking into account that the Fund’s effective advisory fee rate was approximately at the Lipper expense group median described above, the Trustees determined not to recommend any advisory fee breakpoints for the Fund at this time.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2012.
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of the MFS Web site (mfs.com).
34
MFS Research Bond Series
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling
1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $4,443,000 as capital gain dividends paid during the fiscal year.
35
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
36
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
37
ANNUAL REPORT
December 31, 2012
MFS® STRATEGIC INCOME SERIES
MFS® Variable Insurance Trust
VWG-ANN
MFS® STRATEGIC INCOME SERIES
CONTENTS
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ NO BANK OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Strategic Income Series
LETTER FROM THE CHAIRMAN AND CEO
Dear Contract Owners:
The global market outlook for 2013 is one of cautious optimism. While we are seeing some positive economic trends in the United States, Europe and China, the overall environment remains challenging. In the United States, the recent fiscal cliff agreement was received positively by investors, even though it mostly addressed pressing taxation issues and did not resolve additional concerns, including the need for spending cuts and a large-scale reduction of the federal debt. These issues will be front and center again in the spring. Despite the ongoing uncertainty, economic tailwinds are gathering strength as the U.S. housing and job markets are improving and consumer confidence is rising.
Overseas, the debt crisis continues to weigh heavily on eurozone markets, with even Germany — long an economic stalwart — experiencing some contraction. These ongoing challenges could be a drag on global market performance this year. In Asia, manufacturing activity has accelerated in emerging markets such as China and India, and we are seeing signs of stabilized loan growth in China, a leading indicator of that country’s economic health. In contrast, Japan’s economy is contracting sharply under deflationary pressures. Nevertheless, Japanese markets have responded favorably to early actions by the new government, which appears determined to act aggressively, along with the Bank of Japan, to stimulate growth.
As always, managing risk in the face of uncertainty remains a top priority for investors. At MFS®, our uniquely collaborative investment process revolves around global research and our disciplined risk management approach. Our global team of investment professionals shares ideas and evaluates opportunities across continents, investment disciplines and asset classes — all with a goal of building better insights, and ultimately better results, for our clients.
We remain mindful of the many economic challenges investors face today, and believe it is more important than ever to maintain a long-term view, employ time-tested principles, such as asset allocation and diversification, and work closely with investment advisors to identify and pursue the most suitable opportunities.
Respectfully,
Robert J. Manning
Chairman and Chief Executive Officer
MFS Investment Management®
February 15, 2013
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
MFS Strategic Income Series
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | | | |
| Fixed income sectors (i) | | | | |
| High Grade Corporates | | | 48.6% | |
| High Yield Corporates | | | 30.8% | |
| Non-U.S. Government Bonds | | | 10.8% | |
| Emerging Markets Bonds | | | 3.2% | |
| U.S. Government Agencies | | | 1.5% | |
| Mortgage-Backed Securities | | | 1.2% | |
| Commercial Mortgage-Backed Securities | | | 0.8% | |
| Asset-Backed Securities | | | 0.5% | |
| Collateralized Debt Obligations | | | 0.2% | |
Floating Rate Loans (o) | | | 0.0% | |
| U.S. Treasury Securities | | | (3.0)% | |
| | | | |
| Composition including fixed income credit quality (a)(i) | |
| AAA | | | 3.8% | |
| AA | | | 5.0% | |
| A | | | 18.6% | |
| BBB | | | 33.8% | |
| BB | | | 13.5% | |
| B | | | 15.3% | |
| CCC | | | 4.6% | |
| CC (o) | | | 0.0% | |
| C | | | 0.3% | |
| Federal Agencies | | | 2.7% | |
| Not Rated | | | (3.0)% | |
| Non-Fixed Income | | | 0.5% | |
| Cash & Other | | | 4.9% | |
| |
| Portfolio facts (i) | | | | |
| Average Duration (d) | | | 4.7 | |
| Average Effective Maturity (m) | | | 7.5 yrs. | |
| |
| Issuer country weightings (i)(x) | | | | |
| United States | | | 70.4% | |
| United Kingdom | | | 4.9% | |
| France | | | 3.3% | |
| Japan | | | 2.4% | |
| Canada | | | 2.4% | |
| Netherlands | | | 2.0% | |
| Germany | | | 1.8% | |
| Australia | | | 1.7% | |
| Italy | | | 1.5% | |
| Other Countries | | | 9.6% | |
| (a) | | For all securities other than those specifically described below, ratings are assigned to underlying securities utilizing ratings from Moody’s, Fitch, and Standard & Poor’s rating agencies and applying the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). Securities rated BBB or higher are considered investment grade. All ratings are subject to change. Federal Agencies includes rated and unrated U.S. Agency fixed-income securities, U.S. Agency mortgage-backed securities, and collateralized mortgage obligations of U.S. Agency mortgage-backed securities. Not Rated includes fixed income securities, including fixed income futures contracts, which have not been rated by any rating agency. Non-Fixed Income includes equity securities (including convertible bonds and equity derivatives) and commodities. Cash & Other includes cash, other assets less liabilities, offsets to derivative positions, and short-term securities. The fund may not hold all of these instruments. The fund is not rated by these agencies. |
| (d) | | Duration is a measure of how much a bond’s price is likely to fluctuate with general changes in interest rates, e.g., if rates rise 1.00%, a bond with a 5-year duration is likely to lose about 5.00% of its value due to the interest rate move. |
| (i) | | For purposes of this presentation, the components include the market value of securities, and reflect the impact of the equivalent exposure of derivative positions, if any. These amounts may be negative from time to time. The bond component will include any accrued interest amounts. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than market value. Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio. |
| (m) | | In determining an instrument’s effective maturity for purposes of calculating the fund’s dollar-weighted average effective maturity, MFS uses the instrument’s stated maturity or, if applicable, an earlier date on which MFS believes it is probable that a maturity-shortening device (such as a put, pre-refunding or prepayment) will cause the instrument to be repaid. Such an earlier date can be substantially shorter than the instrument’s stated maturity. |
2
MFS Strategic Income Series
Portfolio Composition – continued
| (x) | | Represents the portfolio’s exposure to issuer countries as a percentage of a portfolio’s net assets. |
Percentages are based on net assets as of 12/31/12.
The portfolio is actively managed and current holdings may be different.
3
MFS Strategic Income Series
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2012, Initial Class shares of the MFS Strategic Income Series (“fund”) provided a total return of 10.86%, while Service Class shares of the fund provided a total return of 10.60%. These compare with a return of 15.78% over the same period for the fund’s benchmark, the Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index. Effective April 29, 2012, the Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index replaced the Barclays U.S. High-Yield Corporate Bond Index as the fund’s primary benchmark. The Barclays U.S. High-Yield Corporate Bond Index generated a return of 15.81% over the reporting period. For the same period, the fund’s other benchmark, the MFS Strategic Income Blended Index – Current (“Blended Index”), generated a return of 9.76%. The Blended Index reflects the blended returns of various fixed income market indices, with percentage allocations to each index designed to resemble the fixed income allocations of the fund. The market indices and related percentage allocations used to compile the Blended Index are set forth in the Performance Summary.
Market Environment
The beginning of the period was characterized by a risk-on sentiment as a result of additional liquidity measures by the Federal Reserve Bank (“Fed”) and the European Central Bank (“ECB”) as well as a commensurate improvement in macroeconomic conditions. During this time, global equity valuations rose, credit spreads contracted, and high-quality sovereign yields increased modestly.
During the middle of the period, however, conditions worsened, driven by broadly weaker global macroeconomic indicators, as well as renewed concerns over the eurozone’s capacity and determination to address its ongoing crisis. Despite this deterioration, broad market sentiment remained relatively resilient as equity markets generally maintained gains and credit spreads did not indicate deterioration.
However, this renewed weakness in the fundamentals precipitated a further round of monetary easing by both the Fed (through a third round of quantitative easing) and the ECB (through a new bond purchase facility) in the second half of the period, which soon instilled additional confidence in risk markets. Nonetheless, towards the end of the period, weaker equity earnings reports and declining forward guidance caused market sentiment to soften. In addition, as we moved toward year end, the fiscal cliff negotiations between the Republicans in the U.S. Congress and President Obama were a particular source of market attention, where uncertainty surrounding the fiscal negotiations continued right up to the end-of-year deadline.
Detractors from Performance
Relative to the Blended Index, the fund’s lack of exposure to emerging markets debt securities of Turkey, Venezuela, Russia, and the Philippines hindered relative results. Currency exposure, particularly an overweight exposure to the euro, was another negative factor for relative returns.
Contributors to Performance
Credit quality, primarily the fund’s greater exposure to “BBB” (r) and “A” rated securities, was a primary contributor to performance relative to the Blended Index. The portion of the fund’s return derived from yield, which was greater than that of the benchmark, was another positive factor for relative results.
A greater relative exposure to the financial, banking, and industrial sectors benefited relative results as these market sectors performed well during the reporting period. Yield curve (y) positioning in the U.S., particularly the fund’s greater exposure to shifts in the middle portion of the yield curve (centered around maturities of 7 years), was another positive factor for the fund’s relative results as this portion of the yield curve performed well over the reporting period. Additionally, security selection further supported positive relative returns.
Respectfully,
| | | | |
| William Adams | | James Calmas | | David Cole |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| | |
| Robert Persons | | Matthew Ryan | | Erik Weisman |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| (r) | Bonds rated “BBB”, “Baa”, or higher are considered investment grade; bonds rated “BB”, “Ba”, or below are considered non-investment grade. The source for bond quality ratings is Moody’s Investors Service, Standard & Poor’s and Fitch, Inc. and are applied using the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). For securities which are not rated by any of the three agencies, the security is considered Not Rated. |
| (y) | A yield curve graphically depicts the yields of different maturity bonds of the same credit quality and type; a normal yield curve is upward sloping, with short-term rates lower than long-term rates. |
4
MFS Strategic Income Series
Management Review – continued
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
5
MFS Strategic Income Series
PERFORMANCE SUMMARY THROUGH 12/31/12
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/12
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 6/14/94 | | 10.86% | | 6.90% | | 6.47% | | |
| | | Service Class | | 5/01/00 | | 10.60% | | 6.65% | | 6.21% | | |
| | | | |
| Comparative benchmarks | | | | | | | | |
| | | Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index (f)(z) | | 15.78% | | 10.45% | | 10.60% | | |
| | | Barclays U.S. High-Yield Corporate Bond Index (f)(z) | | 15.81% | | 10.34% | | 10.62% | | |
| | | MFS Strategic Income Blended Index – Current (f)(s)(z) | | 9.76% | | 8.03% | | 7.97% | | |
| | | MFS Strategic Income Blended Index – Prior (f)(y)(z) | | 9.77% | | 8.00% | | 7.98% | | |
| | | Barclays U.S. Government/Mortgage Bond Index (f) | | 2.27% | | 5.46% | | 4.87% | | |
| | | Barclays U.S. Credit Bond Index (f) | | 9.37% | | 7.65% | | 6.23% | | |
| | | Citigroup World Government Bond Non-Dollar Index (f) | | 1.51% | | 5.24% | | 6.38% | | |
| | | Citigroup World Government Bond Non-Dollar Hedged Index (f) | | 5.51% | | 4.47% | | 4.30% | | |
| | | JPMorgan Emerging Markets Bond Index Global (f) | | 18.54% | | 10.47% | | 11.56% | | |
| (f) | Source: FactSet Research Systems Inc. |
| (s) | MFS Strategic Income Blended Index – Current is at a point in time and allocations during the period can change. As of December 31, 2012 the blended index was comprised of 10% Barclays U.S. Credit Bond Index, 26% Barclays U.S. Government/Mortgage Bond Index, 33% Barclays U.S. |
6
MFS Strategic Income Series
Performance Summary – continued
| | High-Yield Corporate Bond 2% Issuer Capped Index, 8.5% Citigroup World Government Bond Non-Dollar Hedged Index, 8.5% Citigroup World Government Bond Non-Dollar Index, and 14% JPMorgan Emerging Markets Bond Index Global. |
| (y) | MFS Strategic Income Blended Index – Prior is at a point in time and allocations during the period can change. As of December 31, 2012 the blended index was comprised of 10% Barclays U.S. Credit Bond Index, 26% Barclays U.S. Government/Mortgage Bond Index, 33% Barclays U.S. High-Yield Corporate Bond Index, 8.5% Citigroup World Government Bond Non-Dollar Hedged Index, 8.5% Citigroup World Government Bond Non-Dollar Index, and 14% JPMorgan Emerging Markets Bond Index Global. |
| (z) | Effective April 29, 2012, the Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index replaced the Barclays U.S. High-Yield Corporate Bond Index as the fund’s primary benchmark. Also, MFS Strategic Income Blended Index – Current replaced the MFS Strategic Income Blended Index – Prior as a secondary fund benchmark. The fund’s investment adviser believes the Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index and the MFS Strategic Income Blended Index – Current better reflect the investment policies and strategies of the fund. |
Benchmark Definitions
Barclays U.S. Credit Bond Index – a market capitalization-weighted index that measures the performance of publicly issued, SEC-registered, U.S. corporate and specified foreign debentures and secured notes that meet specified maturity, liquidity, and quality requirements.
Barclays U.S. Government/Mortgage Bond Index – measures debt issued by the U.S. Government, and its agencies, as well as mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index – a component of the Barclays U.S. High-Yield Corporate Bond Index, which measures performance of non-investment grade, fixed rate debt. The index limits the maximum exposure to any one issuer to 2%.
Barclays U.S. High-Yield Corporate Bond Index – a market capitalization-weighted index that measures the performance of non-investment grade, fixed rate debt. Eurobonds and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded.
Citigroup World Government Bond Non-Dollar Hedged Index – a market capitalization-weighted index that is designed to represent the currency-hedged performance of the international developed government bond markets, excluding the United States.
Citigroup World Government Bond Non-Dollar Index – a market capitalization-weighted index that is designed to represent the performance of the international developed government bond markets, excluding the United States.
JPMorgan Emerging Markets Bond Index Global – measures the performance of U.S.-dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans, Eurobonds.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
7
MFS Strategic Income Series
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2012 through December 31, 2012
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2012 through December 31, 2012.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | | Beginning
Account Value
7/01/12 | | | Ending Account Value
12/31/12 | | | Expenses Paid
During Period (p)
7/01/12-12/31/12 | |
| Initial Class | | Actual | | | 0.80% | | | | $1,000.00 | | | | $1,056.05 | | | | $4.13 | |
| | Hypothetical (h) | | | 0.80% | | | | $1,000.00 | | | | $1,021.11 | | | | $4.06 | |
| Service Class | | Actual | | | 1.05% | | | | $1,000.00 | | | | $1,054.75 | | | | $5.42 | |
| | Hypothetical (h) | | | 1.05% | | | | $1,000.00 | | | | $1,019.86 | | | | $5.33 | |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
8
MFS Strategic Income Series
PORTFOLIO OF INVESTMENTS – 12/31/12
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – 96.3% | | | | | | | | |
| Aerospace – 0.8% | | | | | | | | |
| Bombardier, Inc., 7.5%, 2018 (n) | | $ | 55,000 | | | $ | 61,256 | |
| Bombardier, Inc., 7.75%, 2020 (n) | | | 25,000 | | | | 28,375 | |
| CPI International, Inc., 8%, 2018 | | | 35,000 | | | | 34,165 | |
| Huntington Ingalls Industries, Inc., 7.125%, 2021 | | | 60,000 | | | | 65,250 | |
| Kratos Defense & Security Solutions, Inc., 10%, 2017 | | | 45,000 | | | | 49,388 | |
| | | | | | | | |
| | | | | | $ | 238,434 | |
| | | | | | | | |
| Airlines – 0.3% | | | | | | | | |
| Continental Airlines, Inc., FRN, 0.66%, 2013 | | $ | 94,866 | | | $ | 92,968 | |
| | | | | | | | |
| Apparel Manufacturers – 0.4% | | | | | |
| Hanesbrands, Inc., 8%, 2016 | | $ | 10,000 | | | $ | 10,976 | |
| Hanesbrands, Inc., 6.375%, 2020 | | | 20,000 | | | | 22,000 | |
| Jones Group, Inc., 6.875%, 2019 | | | 25,000 | | | | 26,000 | |
| Levi Strauss & Co., 6.875%, 2022 | | | 5,000 | | | | 5,363 | |
| PVH Corp., 7.375%, 2020 | | | 35,000 | | | | 39,244 | |
| PVH Corp., 4.5%, 2022 | | | 15,000 | | | | 15,150 | |
| | | | | | | | |
| | | | | | $ | 118,733 | |
| | | | | | | | |
| Asset-Backed & Securitized – 1.5% | | | | | |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.809%, 2040 (z) | | $ | 163,081 | | | $ | 103,089 | |
| Capital Trust Realty Ltd., CDO, 5.16%, 2035 (n) | | | 52,440 | | | | 52,944 | |
| Crest Ltd., “A1” CDO, FRN, 0.79%, 2018 (z) | | | 16,443 | | | | 16,197 | |
| Crest Ltd., CDO, 7%, 2040 (a)(p) | | | 162,954 | | | | 8,148 | |
| Falcon Franchise Loan LLC, FRN, 6.447%, 2025 (i)(z) | | | 104,507 | | | | 16,429 | |
| First Union National Bank Commercial Mortgage Trust, FRN, 1.583%, 2043 (i)(z) | | | 58,379 | | | | 77 | |
| First Union-Lehman Brothers Bank of America, FRN, 0.444%, 2035 (i) | | | 756,972 | | | | 14,478 | |
| Hertz Global Holdings, Inc., 4.26%, 2014 (n) | | | 50,000 | | | | 50,278 | |
| Lehman Brothers Commercial Conduit Mortgage Trust, FRN, 1.067%, 2030 (i) | | | 141,903 | | | | 2,604 | |
Morgan Stanley Capital I, Inc.,
FRN, 1.383%, 2039 (i)(z) | | | 395,668 | | | | 7,716 | |
| Prudential Securities Secured Financing Corp., FRN, 7.167%, 2013 (z) | | | 171,000 | | | | 170,871 | |
| Salomon Brothers Mortgage Securities, Inc., FRN, 7.155%, 2032 (z) | | | 17,296 | | | | 17,292 | |
| | | | | | | | |
| | | | | | $ | 460,123 | |
| | | | | | | | |
| Automotive – 1.6% | | | | | | | | |
| Accuride Corp., 9.5%, 2018 | | $ | 45,000 | | | $ | 43,425 | |
| Allison Transmission, Inc., 7.125%, 2019 (n) | | | 55,000 | | | | 58,713 | |
| Ford Motor Co., 7.45%, 2031 | | | 15,000 | | | | 19,050 | |
| Ford Motor Credit Co. LLC, 12%, 2015 | | | 100,000 | | | | 122,750 | |
| General Motors Financial Co., Inc., 4.75%, 2017 (n) | | | 10,000 | | | | 10,515 | |
| General Motors Financial Co., Inc., 6.75%, 2018 | | | 30,000 | | | | 34,415 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Automotive – continued | | | | | | | | |
| Goodyear Tire & Rubber Co., 8.25%, 2020 | | $ | 10,000 | | | $ | 10,975 | |
| Goodyear Tire & Rubber Co., 7%, 2022 | | | 15,000 | | | | 16,088 | |
| Harley-Davidson Financial Services, 3.875%, 2016 (n) | | | 130,000 | | | | 139,542 | |
| Lear Corp., 8.125%, 2020 | | | 18,000 | | | | 20,295 | |
| | | | | | | | |
| | | | | | $ | 475,768 | |
| | | | | | | | |
| Biotechnology – 0.3% | | | | | | | | |
| Life Technologies Corp., 6%, 2020 | | $ | 90,000 | | | $ | 106,667 | |
| | | | | | | | |
| Broadcasting – 3.2% | | | | | | | | |
| Allbritton Communications Co., 8%, 2018 | | $ | 20,000 | | | $ | 21,700 | |
| AMC Networks, Inc., 7.75%, 2021 | | | 31,000 | | | | 35,495 | |
| CBS Corp., 5.75%, 2020 | | | 20,000 | | | | 23,955 | |
| CBS Corp., 3.375%, 2022 | | | 94,000 | | | | 97,739 | |
| Clear Channel Communications, Inc., 9%, 2021 | | | 32,000 | | | | 28,560 | |
| Clear Channel Worldwide Holdings, Inc., 6.5%, 2022 (n) | | | 10,000 | | | | 10,275 | |
| Clear Channel Worldwide Holdings, Inc., 6.5%, 2022 (n) | | | 20,000 | | | | 20,750 | |
| Clear Channel Worldwide Holdings, Inc., “B”, 7.625%, 2020 | | | 15,000 | | | | 15,113 | |
Hughes Network Systems LLC,
7.625%, 2021 | | | 20,000 | | | | 22,750 | |
| IAC/InterActiveCorp, 4.75%, 2022 (z) | | | 5,000 | | | | 4,975 | |
| Intelsat Bermuda Ltd., 11.25%, 2017 | | | 55,000 | | | | 58,163 | |
| Intelsat Bermuda Ltd., 11.5%, 2017 (p) | | | 50,000 | | | | 53,125 | |
| Intelsat Jackson Holdings Ltd., 6.625%, 2022 (n) | | | 25,000 | | | | 25,813 | |
| LBI Media, Inc., 13.5% to 2015, 11.5% to 2020 (p)(z) | | | 19,000 | | | | 7,980 | |
| Liberty Media Corp., 8.5%, 2029 | | | 35,000 | | | | 37,888 | |
| Liberty Media Corp., 8.25%, 2030 | | | 10,000 | | | | 10,900 | |
| Local TV Finance LLC, 9.25%, 2015 (p)(z) | | | 26,074 | | | | 26,367 | |
| NBCUniversal Media LLC, 5.95%, 2041 | | | 113,000 | | | | 138,542 | |
| News America, Inc., 8.5%, 2025 | | | 10,000 | | | | 13,578 | |
| Nexstar Broadcasting Group, Inc., 8.875%, 2017 | | | 15,000 | | | | 16,463 | |
| Nexstar Broadcasting Group, Inc., 6.875%, 2020 (n) | | | 5,000 | | | | 5,131 | |
| Sinclair Broadcast Group, Inc., 9.25%, 2017 (n) | | | 15,000 | | | | 16,500 | |
Sinclair Broadcast Group, Inc.,
8.375%, 2018 | | | 5,000 | | | | 5,588 | |
| SIRIUS XM Radio, Inc., 8.75%, 2015 (n) | | | 20,000 | | | | 22,650 | |
| SIRIUS XM Radio, Inc., 7.625%, 2018 (n) | | | 25,000 | | | | 27,875 | |
| SIRIUS XM Radio, Inc., 5.25%, 2022 (n) | | | 15,000 | | | | 15,150 | |
| Starz LLC/Starz Finance Corp., 5%, 2019 (n) | | | 10,000 | | | | 10,250 | |
| Townsquare Radio LLC, 9%, 2019 (z) | | | 10,000 | | | | 10,975 | |
| Univision Communications, Inc., 6.875%, 2019 (n) | | | 45,000 | | | | 46,800 | |
9
MFS Strategic Income Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Broadcasting – continued | | | | | | | | |
| Univision Communications, Inc., 7.875%, 2020 (n) | | $ | 15,000 | | | $ | 16,238 | |
| Univision Communications, Inc., 8.5%, 2021 (n) | | | 30,000 | | | | 30,975 | |
| Vivendi S.A., 4.75%, 2022 (n) | | | 100,000 | | | | 103,893 | |
| | | | | | | | |
| | | | | | $ | 982,156 | |
| | | | | | | | |
| Brokerage & Asset Managers – 1.1% | | | | | | | | |
| Blackstone Holdings Finance Co. LLC, 4.75%, 2023 (n) | | $ | 92,000 | | | $ | 97,801 | |
| E*TRADE Financial Corp., 6.375%, 2019 | | | 35,000 | | | | 35,875 | |
| Invesco Finance PLC, 3.125%, 2022 | | | 66,000 | | | | 66,666 | |
| TD Ameritrade Holding Corp., 5.6%, 2019 | | | 110,000 | | | | 130,550 | |
| | | | | | | | |
| | | | | | $ | 330,892 | |
| | | | | | | | |
| Building – 1.3% | | | | | | | | |
| Boise Cascade LLC/Finance Corp., 6.375%, 2020 (n) | | $ | 5,000 | | | $ | 5,150 | |
| Building Materials Holding Corp., 6.875%, 2018 (n) | | | 15,000 | | | | 16,200 | |
| Building Materials Holding Corp., 7%, 2020 (n) | | | 15,000 | | | | 16,350 | |
| Building Materials Holding Corp., 6.75%, 2021 (n) | | | 10,000 | | | | 11,050 | |
| CRH PLC, 8.125%, 2018 | | | 80,000 | | | | 96,604 | |
| HD Supply, Inc., 13.5%, 2015 | | | 20,000 | | | | 20,500 | |
| HD Supply, Inc., 8.125%, 2019 (n) | | | 15,000 | | | | 17,100 | |
| HD Supply, Inc., 11.5%, 2020 (n) | | | 10,000 | | | | 11,263 | |
| Masonite International Corp., 8.25%, 2021 (n) | | | 35,000 | | | | 37,450 | |
| Nortek, Inc., 8.5%, 2021 | | | 55,000 | | | | 61,050 | |
| Owens Corning, Inc., 4.2%, 2022 | | | 40,000 | | | | 40,679 | |
| Roofing Supply Group LLC/Roofing Supply Finance, Inc., 10%, 2020 (n) | | | 10,000 | | | | 11,200 | |
| USG Corp., 6.3%, 2016 | | | 28,000 | | | | 28,980 | |
| USG Corp., 7.875%, 2020 (n) | | | 15,000 | | | | 16,688 | |
| | | | | | | | |
| | | | | | $ | 390,264 | |
| | | | | | | | |
| Business Services – 0.6% | | | | | | | | |
| Ceridian Corp., 12.25%, 2015 (p) | | $ | 15,000 | | | $ | 15,038 | |
| Ceridian Corp., 8.875%, 2019 (n) | | | 5,000 | | | | 5,425 | |
| Fidelity National Information Services, Inc., 7.625%, 2017 | | | 15,000 | | | | 16,313 | |
| Fidelity National Information Services, Inc., 5%, 2022 | | | 20,000 | | | | 21,450 | |
| iGate Corp., 9%, 2016 | | | 40,000 | | | | 43,350 | |
| Iron Mountain, Inc., 8.375%, 2021 | | | 40,000 | | | | 44,400 | |
| Legend Acquisition Sub, Inc., 10.75%, 2020 (n) | | | 25,000 | | | | 22,625 | |
Lender Processing Services, Inc.,
5.75%, 2023 | | | 15,000 | | | | 15,563 | |
| SunGard Data Systems, Inc., 7.375%, 2018 | | | 10,000 | | | | 10,713 | |
| | | | | | | | |
| | | | | | $ | 194,877 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Cable TV – 2.5% | | | | | | | | |
| Bresnan Broadband Holdings LLC, 8%, 2018 (n) | | $ | 5,000 | | | $ | 5,400 | |
| CCO Holdings LLC, 7.875%, 2018 | | | 55,000 | | | | 59,194 | |
| CCO Holdings LLC, 8.125%, 2020 | | | 35,000 | | | | 39,200 | |
| CCO Holdings LLC, 7.375%, 2020 | | | 15,000 | | | | 16,650 | |
| CCO Holdings LLC, 5.125%, 2023 | | | 10,000 | | | | 9,975 | |
| Cequel Communications Holdings, 6.375%, 2020 (z) | | | 20,000 | | | | 20,825 | |
Cox Communications, Inc.,
3.25%, 2022 (n) | | | 113,000 | | | | 116,532 | |
| DIRECTV Holdings LLC, 5.875%, 2019 | | | 40,000 | | | | 47,275 | |
| DIRECTV Holdings LLC, 3.8%, 2022 | | | 140,000 | | | | 144,432 | |
| DISH DBS Corp., 6.75%, 2021 | | | 15,000 | | | | 17,100 | |
| DISH DBS Corp., 5%, 2023 (z) | | | 20,000 | | | | 20,000 | |
| EchoStar Corp., 7.125%, 2016 | | | 20,000 | | | | 22,400 | |
| Time Warner Cable, Inc., 8.25%, 2019 | | | 120,000 | | | | 159,688 | |
| Ziggo Bond Co. B.V., 8%, 2018 (n) | | EUR | 50,000 | | | | 72,597 | |
| | | | | | | | |
| | | | | | $ | 751,268 | |
| | | | | | | | |
| Chemicals – 1.3% | | | | | | | | |
Celanese U.S. Holdings LLC,
6.625%, 2018 | | $ | 55,000 | | | $ | 60,500 | |
| Dow Chemical Co., 8.55%, 2019 | | | 170,000 | | | | 229,513 | |
| Hexion U.S. Finance Corp./Hexion Nova Scotia Finance, 8.875%, 2018 | | | 40,000 | | | | 41,100 | |
| Hexion U.S. Finance Corp./Hexion Nova Scotia Finance, 9%, 2020 | | | 5,000 | | | | 4,563 | |
Huntsman International LLC,
8.625%, 2021 | | | 35,000 | | | | 39,988 | |
| Momentive Performance Materials, Inc., 11.5%, 2016 | | | 14,000 | | | | 8,190 | |
| Polypore International, Inc., 7.5%, 2017 | | | 20,000 | | | | 21,800 | |
| | | | | | | | |
| | | | | | $ | 405,654 | |
| | | | | | | | |
| Computer Software – 0.7% | | | | | | | | |
| Infor U.S., Inc., 11.5%, 2018 | | $ | 35,000 | | | $ | 40,950 | |
| Nuance Communications, Inc., 5.375%, 2020 (n) | | | 20,000 | | | | 20,900 | |
| Oracle Corp., 5.375%, 2040 | | | 66,000 | | | | 82,291 | |
| Seagate HDD Cayman, 6.875%, 2020 | | | 20,000 | | | | 21,275 | |
| Syniverse Holdings, Inc., 9.125%, 2019 | | | 40,000 | | | | 42,700 | |
TransUnion Holding Co., Inc.,
9.625%, 2018 | | | 10,000 | | | | 10,575 | |
| TransUnion LLC/TransUnion Financing Corp., 11.375%, 2018 | | | 5,000 | | | | 5,825 | |
| | | | | | | | |
| | | | | | $ | 224,516 | |
| | | | | | | | |
| Computer Software – Systems – 0.4% | |
| Audatex North America, Inc., 6.75%, 2018 (n) | | $ | 10,000 | | | $ | 10,700 | |
| CDW LLC/CDW Finance Corp., 12.535%, 2017 | | | 22,000 | | | | 23,513 | |
10
MFS Strategic Income Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Computer Software – Systems – continued | |
CDW LLC/CDW Finance Corp.,
8.5%, 2019 | | $ | 40,000 | | | $ | 43,300 | |
| DuPont Fabros Technology, Inc., REIT, 8.5%, 2017 | | | 30,000 | | | | 32,775 | |
| | | | | | | | |
| | | | | | $ | 110,288 | |
| | | | | | | | |
| Conglomerates – 0.6% | | | | | | | | |
| Amsted Industries, Inc., 8.125%, 2018 (n) | | $ | 55,000 | | | $ | 58,850 | |
| Dynacast International LLC, 9.25%, 2019 | | | 20,000 | | | | 21,400 | |
| Griffon Corp., 7.125%, 2018 | | | 45,000 | | | | 47,700 | |
| Ingersoll-Rand Global Holding Co. Ltd., 9.5%, 2014 | | | 38,000 | | | | 42,055 | |
| | | | | | | | |
| | | | | | $ | 170,005 | |
| | | | | | | | |
| Consumer Products – 0.8% | | | | | |
| Easton-Bell Sports, Inc., 9.75%, 2016 | | $ | 30,000 | | | $ | 32,253 | |
| Elizabeth Arden, Inc., 7.375%, 2021 | | | 30,000 | | | | 33,525 | |
| FGI Operating Co./FGI Finance, Inc., 7.875%, 2020 (n) | | | 5,000 | | | | 5,150 | |
| Libbey Glass, Inc., 6.875%, 2020 | | | 5,000 | | | | 5,375 | |
| Mattel, Inc., 5.45%, 2041 | | | 53,000 | | | | 59,871 | |
| Newell Rubbermaid, Inc., 2.05%, 2017 | | | 43,000 | | | | 43,572 | |
| Newell Rubbermaid, Inc., 4.7%, 2020 | | | 60,000 | | | | 66,269 | |
| Spectrum Brands Escrow Corp., 6.375%, 2020 (n) | | | 10,000 | | | | 10,500 | |
| | | | | | | | |
| | | | | | $ | 256,515 | |
| | | | | | | | |
| Consumer Services – 1.0% | | | | | | | | |
| Experian Finance PLC, 2.375%, 2017 (n) | | $ | 200,000 | | | $ | 203,468 | |
| QVC, Inc., 7.375%, 2020 (n) | | | 25,000 | | | | 27,816 | |
| Service Corp. International, 7%, 2017 | | | 60,000 | | | | 69,000 | |
| | | | | | | | |
| | | | | | $ | 300,284 | |
| | | | | | | | |
| Containers – 0.7% | | | | | | | | |
| Ball Corp., 5%, 2022 | | $ | 16,000 | | | $ | 17,120 | |
| Greif, Inc., 6.75%, 2017 | | | 50,000 | | | | 55,745 | |
| Reynolds Group, 7.125%, 2019 | | | 110,000 | | | | 118,250 | |
| Reynolds Group, 5.75%, 2020 (n) | | | 15,000 | | | | 15,488 | |
| | | | | | | | |
| | | | | | $ | 206,603 | |
| | | | | | | | |
| Defense Electronics – 1.0% | | | | | | | | |
| BAE Systems Holdings, Inc., 5.2%, 2015 (n) | | $ | 169,000 | | | $ | 185,070 | |
BAE Systems Holdings, Inc.,
6.375%, 2019 (n) | | | 40,000 | | | | 47,752 | |
| Ducommun, Inc., 9.75%, 2018 | | | 30,000 | | | | 32,250 | |
| MOOG, Inc., 7.25%, 2018 | | | 25,000 | | | | 26,281 | |
| | | | | | | | |
| | | | | | $ | 291,353 | |
| | | | | | | | |
| Electrical Equipment – 0.3% | | | | | | | | |
| Avaya, Inc., 9.75%, 2015 | | $ | 25,000 | | | $ | 22,250 | |
| Avaya, Inc., 7%, 2019 (n) | | | 10,000 | | | | 9,350 | |
| Ericsson, Inc., 4.125%, 2022 | | | 73,000 | | | | 75,869 | |
| | | | | | | | |
| | | | | | $ | 107,469 | |
| | | | | | | | |
| Electronics – 0.4% | | | | | | | | |
| Freescale Semiconductor, Inc., 9.25%, 2018 (n) | | $ | 45,000 | | | $ | 49,163 | |
| Nokia Corp., 5.375%, 2019 | | | 10,000 | | | | 9,525 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Electronics – continued | | | | | | | | |
| Nokia Corp., 6.625%, 2039 | | $ | 5,000 | | | $ | 4,488 | |
| Sensata Technologies B.V., 6.5%, 2019 (n) | | | 40,000 | | | | 42,600 | |
| Tyco Electronics Group S.A., 3.5%, 2022 | | | 31,000 | | | | 31,861 | |
| | | | | | | | |
| | | | | | $ | 137,637 | |
| | | | | | | | |
| Emerging Market Quasi-Sovereign – 1.3% | |
| IIRSA Norte Finance Ltd., 8.75%, 2024 | | $ | 99,766 | | | $ | 122,093 | |
| Petrobras International Finance Co., 7.875%, 2019 | | | 51,000 | | | | 63,700 | |
| Petrobras International Finance Co., 6.75%, 2041 | | | 48,000 | | | | 60,820 | |
| Petroleos Mexicanos, 5.5%, 2021 | | | 100,000 | | | | 116,850 | |
| Petroleos Mexicanos, 4.875%, 2022 | | | 10,000 | | | | 11,285 | |
| Petroleos Mexicanos, 6.5%, 2041 | | | 31,000 | | | | 38,905 | |
| | | | | | | | |
| | | | | | $ | 413,653 | |
| | | | | | | | |
| Emerging Market Sovereign – 0.1% | | | | | |
| Republic of Poland, 5%, 2022 | | $ | 14,000 | | | $ | 16,534 | |
| | | | | | | | |
| Energy – Independent – 3.4% | | | | | | | | |
| BreitBurn Energy Partners LP, 8.625%, 2020 | | $ | 15,000 | | | $ | 16,350 | |
| BreitBurn Energy Partners LP, 7.875%, 2022 (n) | | | 30,000 | | | | 31,125 | |
| Carrizo Oil & Gas, Inc., 8.625%, 2018 | | | 20,000 | | | | 21,600 | |
| Chaparral Energy, Inc., 7.625%, 2022 | | | 20,000 | | | | 21,000 | |
| Chesapeake Energy Corp., 6.875%, 2020 | | | 25,000 | | | | 27,094 | |
| Concho Resources, Inc., 8.625%, 2017 | | | 20,000 | | | | 21,775 | |
| Concho Resources, Inc., 6.5%, 2022 | | | 40,000 | | | | 44,000 | |
| Continental Resources, Inc., 8.25%, 2019 | | | 30,000 | | | | 33,600 | |
| Denbury Resources, Inc., 8.25%, 2020 | | | 55,000 | | | | 61,875 | |
| Energy XXI Gulf Coast, Inc., 9.25%, 2017 | | | 50,000 | | | | 57,125 | |
| EP Energy LLC, 9.375%, 2020 | | | 80,000 | | | | 90,200 | |
| EPL Oil & Gas, Inc., 8.25%, 2018 (n) | | | 20,000 | | | | 20,550 | |
| EQT Corp., 4.875%, 2021 | | | 48,000 | | | | 51,530 | |
| EXCO Resources, Inc., 7.5%, 2018 | | | 20,000 | | | | 19,400 | |
| Harvest Operations Corp., 6.875%, 2017 | | | 50,000 | | | | 55,500 | |
| Hess Corp., 8.125%, 2019 | | | 30,000 | | | | 39,483 | |
| Hilcorp Energy I/Hilcorp Finance Co., 8%, 2020 (n) | | | 15,000 | | | | 16,425 | |
| Laredo Petroleum, Inc., 9.5%, 2019 | | | 20,000 | | | | 22,350 | |
| LINN Energy LLC, 6.5%, 2019 | | | 10,000 | | | | 10,100 | |
| LINN Energy LLC, 8.625%, 2020 | | | 20,000 | | | | 21,800 | |
| LINN Energy LLC, 7.75%, 2021 | | | 23,000 | | | | 24,495 | |
| MEG Energy Corp., 6.5%, 2021 (n) | | | 10,000 | | | | 10,525 | |
| Newfield Exploration Co., 6.875%, 2020 | | | 30,000 | | | | 32,100 | |
| Plains Exploration & Production Co., 8.625%, 2019 | | | 35,000 | | | | 39,813 | |
| Plains Exploration & Production Co., 6.5%, 2020 | | | 10,000 | | | | 11,075 | |
| Plains Exploration & Production Co., 6.75%, 2022 | | | 15,000 | | | | 16,838 | |
| QEP Resources, Inc., 6.875%, 2021 | | | 60,000 | | | | 69,150 | |
| Range Resources Corp., 8%, 2019 | | | 25,000 | | | | 27,688 | |
| Range Resources Corp., 5%, 2022 | | | 10,000 | | | | 10,450 | |
| Samson Investment Co., 9.75%, 2020 (n) | | | 15,000 | | | | 15,863 | |
| SandRidge Energy, Inc., 8%, 2018 (n) | | | 55,000 | | | | 58,300 | |
11
MFS Strategic Income Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Energy – Independent – continued | | | | | |
| SM Energy Co., 6.5%, 2021 | | $ | 30,000 | | | $ | 32,100 | |
| Whiting Petroleum Corp., 6.5%, 2018 | | | 15,000 | | | | 16,125 | |
| | | | | | | | |
| | | | | | $ | 1,047,404 | |
| | | | | | | | |
| Energy – Integrated – 0.9% | | | | | | | | |
| BP Capital Markets PLC, 4.5%, 2020 | | $ | 29,000 | | | $ | 33,421 | |
| BP Capital Markets PLC, 4.742%, 2021 | | | 90,000 | | | | 105,390 | |
| Cenovus Energy, Inc., 4.5%, 2014 | | | 30,000 | | | | 31,828 | |
| Petro-Canada Financial Partnership, 5%, 2014 | | | 110,000 | | | | 118,326 | |
| | | | | | | | |
| | | | | | $ | 288,965 | |
| | | | | | | | |
| Engineering – Construction – 0.1% | | | | | | | | |
| BakerCorp International, Inc., 8.25%, 2019 | | $ | 25,000 | | | $ | 25,000 | |
| | | | | | | | |
| Entertainment – 0.6% | | | | | | | | |
| AMC Entertainment, Inc., 8.75%, 2019 | | $ | 55,000 | | | $ | 60,910 | |
| AMC Entertainment, Inc., 9.75%, 2020 | | | 30,000 | | | | 34,650 | |
| Cedar Fair LP, 9.125%, 2018 | | | 20,000 | | | | 22,500 | |
| Cinemark USA, Inc., 8.625%, 2019 | | | 45,000 | | | | 49,838 | |
| Cinemark USA, Inc., 5.125%, 2022 (z) | | | 5,000 | | | | 5,063 | |
| NAI Entertainment Holdings LLC, 8.25%, 2017 (n) | | | 10,000 | | | | 11,013 | |
| Six Flags Entertainment Corp., 5.25%, 2021 (z) | | | 15,000 | | | | 15,000 | |
| | | | | | | | |
| | | | | | $ | 198,974 | |
| | | | | | | | |
| Financial Institutions – 2.9% | | | | | | | | |
| Ally Financial, Inc., 5.5%, 2017 | | $ | 70,000 | | | $ | 74,883 | |
| CIT Group, Inc., 5.25%, 2014 (n) | | | 45,000 | | | | 46,575 | |
| CIT Group, Inc., 5.25%, 2018 | | | 20,000 | | | | 21,400 | |
| CIT Group, Inc., 6.625%, 2018 (n) | | | 45,000 | | | | 50,850 | |
| CIT Group, Inc., 5.5%, 2019 (n) | | | 36,000 | | | | 39,240 | |
| Credit Acceptance Corp., 9.125%, 2017 | | | 25,000 | | | | 27,313 | |
| General Electric Capital Corp., 6%, 2019 | | | 30,000 | | | | 36,497 | |
| General Electric Capital Corp., 5.5%, 2020 | | | 95,000 | | | | 112,453 | |
| General Electric Capital Corp., 3.15%, 2022 | | | 49,000 | | | | 50,063 | |
| GMAC, Inc., 8%, 2031 | | | 5,000 | | | | 6,331 | |
| Icahn Enterprises LP, 8%, 2018 | | | 39,000 | | | | 41,876 | |
| International Lease Finance Corp., 4.875%, 2015 | | | 10,000 | | | | 10,351 | |
| International Lease Finance Corp., 8.625%, 2015 | | | 15,000 | | | | 16,856 | |
| International Lease Finance Corp., 7.125%, 2018 (n) | | | 47,000 | | | | 54,520 | |
| Nationstar Mortgage LLC/Capital Corp., 10.875%, 2015 | | | 45,000 | | | | 48,150 | |
| Nationstar Mortgage LLC/Capital Corp., 9.625%, 2019 (n) | | | 10,000 | | | | 11,250 | |
| Nationstar Mortgage LLC/Capital Corp., 7.875%, 2020 (n) | | | 5,000 | | | | 5,275 | |
| NYSE Euronext, 2%, 2017 | | | 54,000 | | | | 54,895 | |
| PHH Corp., 9.25%, 2016 | | | 30,000 | | | | 35,025 | |
| PHH Corp., 7.375%, 2019 | | | 20,000 | | | | 22,200 | |
| SLM Corp., 8.45%, 2018 | | | 25,000 | | | | 29,250 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Financial Institutions – continued | | | | | | | | |
| SLM Corp., 8%, 2020 | | $ | 70,000 | | | $ | 79,975 | |
| SLM Corp., 7.25%, 2022 | | | 5,000 | | | | 5,513 | |
| | | | | | | | |
| | | | | | $ | 880,741 | |
| | | | | | | | |
| Food & Beverages – 2.5% | | | | | | | | |
| Anheuser-Busch InBev S.A., 7.75%, 2019 | | $ | 140,000 | | | $ | 186,986 | |
| ARAMARK Corp., 8.5%, 2015 | | | 30,000 | | | | 30,150 | |
| B&G Foods, Inc., 7.625%, 2018 | | | 39,000 | | | | 41,925 | |
| Campbell Soup Co., 2.5%, 2022 | | | 40,000 | | | | 39,642 | |
| JBS USA LLC/JBS USA Finance, 8.25%, 2020 (n) | | | 15,000 | | | | 15,900 | |
| Kraft Foods Group, Inc., 6.125%, 2018 (n) | | | 80,000 | | | | 98,010 | |
| Mead Johnson Nutrition Co., “A”, 4.9%, 2019 | | | 26,000 | | | | 29,673 | |
| Pernod-Ricard S.A., 2.95%, 2017 (n) | | | 150,000 | | | | 157,759 | |
| Pinnacle Foods Finance LLC, 8.25%, 2017 | | | 10,000 | | | | 10,650 | |
| TreeHouse Foods, Inc., 7.75%, 2018 | | | 30,000 | | | | 32,550 | |
| Tyson Foods, Inc., 6.6%, 2016 | | | 70,000 | | | | 80,216 | |
| Tyson Foods, Inc., 4.5%, 2022 | | | 49,000 | | | | 53,043 | |
| | | | | | | | |
| | | | | | $ | 776,504 | |
| | | | | | | | |
| Food & Drug Stores – 0.4% | | | | | | | | |
| CVS Caremark Corp., 5.75%, 2041 | | $ | 110,000 | | | $ | 136,956 | |
| | | | | | | | |
| Forest & Paper Products – 0.7% | | | | | | | | |
| Ainsworth Lumber Co. Ltd., 7.5%, 2017 (n) | | $ | 5,000 | | | $ | 5,238 | |
| Boise, Inc., 8%, 2020 | | | 30,000 | | | | 33,150 | |
| Georgia-Pacific Corp., 8%, 2024 | | | 5,000 | | | | 6,991 | |
| Graphic Packaging Holding Co., 7.875%, 2018 | | | 20,000 | | | | 22,100 | |
| Tembec Industries, Inc., 11.25%, 2018 | | | 10,000 | | | | 10,600 | |
| Votorantim Participacoes S.A., 6.75%, 2021 (n) | | | 100,000 | | | | 117,250 | |
| Xerium Technologies, Inc., 8.875%, 2018 | | | 10,000 | | | | 9,000 | |
| | | | | | | | |
| | | | | | $ | 204,329 | |
| | | | | | | | |
| Gaming & Lodging – 1.8% | | | | | | | | |
| Boyd Gaming Corp., 9%, 2020 (z) | | $ | 10,000 | | | $ | 9,850 | |
| Caesars Entertainment Operating Co., Inc., 8.5%, 2020 | | | 30,000 | | | | 29,775 | |
| Choice Hotels International, Inc., 5.75%, 2022 | | | 5,000 | | | | 5,538 | |
| CityCenter Holdings LLC, 10.75%, 2017 (p) | | | 10,000 | | | | 10,850 | |
| FelCor Lodging LP, 5.625%, 2023 (z) | | | 5,000 | | | | 4,975 | |
| Fontainebleau Las Vegas Holdings LLC, 10.25%, 2015 (a)(d)(n) | | | 65,000 | | | | 41 | |
| GWR Operating Partnership LLP, 10.875%, 2017 | | | 20,000 | | | | 22,750 | |
| Host Hotels & Resorts, Inc., REIT, 5.25%, 2022 | | | 20,000 | | | | 21,900 | |
| Isle of Capri Casinos, Inc., 8.875%, 2020 | | | 25,000 | | | | 27,250 | |
| Marriott International, Inc., 5.625%, 2013 | | | 80,000 | | | | 80,430 | |
| MGM Mirage, 6.625%, 2015 | | | 10,000 | | | | 10,725 | |
| MGM Resorts International, 11.375%, 2018 | | | 35,000 | | | | 42,350 | |
| MGM Resorts International, 6.625%, 2021 | | | 10,000 | | | | 10,000 | |
| Penn National Gaming, Inc., 8.75%, 2019 | | | 50,000 | | | | 57,000 | |
| Pinnacle Entertainment, Inc., 8.75%, 2020 | | | 15,000 | | | | 16,200 | |
12
MFS Strategic Income Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Gaming & Lodging – continued | | | | | |
| Rivers Pittsburgh Borrower LP/Rivers Pittsburgh Finance Corp., 9.5%, 2019 (n) | | $ | 5,000 | | | $ | 5,425 | |
| Seven Seas Cruises S. DE R.L., 9.125%, 2019 | | | 35,000 | | | | 37,013 | |
| Viking Cruises Ltd., 8.5%, 2022 (n) | | | 15,000 | | | | 16,200 | |
Wyndham Worldwide Corp.,
5.75%, 2018 | | | 90,000 | | | | 100,603 | |
Wyndham Worldwide Corp.,
7.375%, 2020 | | | 20,000 | | | | 24,074 | |
| Wynn Las Vegas LLC, 7.75%, 2020 | | | 30,000 | | | | 34,200 | |
| | | | | | | | |
| | | | | | $ | 567,149 | |
| | | | | | | | |
| Industrial – 0.2% | | | | | | | | |
| Dematic S.A., 7.75%, 2020 (z) | | $ | 15,000 | | | $ | 15,000 | |
Mueller Water Products, Inc.,
8.75%, 2020 | | | 23,000 | | | | 26,220 | |
SPL Logistics Escrow LLC,
8.875%, 2020 (n) | | | 10,000 | | | | 10,600 | |
| | | | | | | | |
| | | | | | $ | 51,820 | |
| | | | | | | | |
| Insurance – 2.1% | | | | | | | | |
| Allianz AG, 5.5% to 2014, FRN to 2049 | | EUR | 105,000 | | | $ | 142,048 | |
| American International Group, Inc., 3%, 2015 | | $ | 40,000 | | | | 41,621 | |
| American International Group, Inc., 8.175% to 2038, FRN to 2068 | | | 80,000 | | | | 104,200 | |
| Metlife, Inc., 1.756%, 2017 | | | 20,000 | | | | 20,315 | |
| Metropolitan Life Global Funding I, 5.125%, 2014 (n) | | | 40,000 | | | | 42,524 | |
Principal Financial Group, Inc.,
8.875%, 2019 | | | 80,000 | | | | 107,348 | |
| Prudential Financial, Inc., 6.2%, 2015 | | | 80,000 | | | | 88,350 | |
| Unum Group, 7.125%, 2016 | | | 90,000 | | | | 106,025 | |
| | | | | | | | |
| | | | | | $ | 652,431 | |
| | | | | | | | |
| Insurance – Health – 0.0% | | | | | | | | |
| AMERIGROUP Corp., 7.5%, 2019 | | $ | 10,000 | | | $ | 12,000 | |
| | | | | | | | |
| Insurance – Property & Casualty – 2.7% | |
| Aon Corp., 3.5%, 2015 | | $ | 130,000 | | | $ | 136,917 | |
| AXIS Capital Holdings Ltd., 5.75%, 2014 | | | 130,000 | | | | 139,421 | |
| AXIS Capital Holdings Ltd., 5.875%, 2020 | | | 40,000 | | | | 45,410 | |
| CNA Financial Corp., 5.875%, 2020 | | | 100,000 | | | | 117,981 | |
Liberty Mutual Group, Inc.,
4.95%, 2022 (n) | | | 73,000 | | | | 79,562 | |
Liberty Mutual Group, Inc.,
10.75% to 2038, FRN to 2088 (n) | | | 45,000 | | | | 67,050 | |
| PartnerRe Ltd., 5.5%, 2020 | | | 66,000 | | | | 73,655 | |
| Travelers Cos., Inc., 3.9%, 2020 | | | 150,000 | | | | 169,439 | |
| | | | | | | | |
| | | | | | $ | 829,435 | |
| | | | | | | | |
| International Market Quasi-Sovereign – 2.1% | |
| EDF Energies Nouvelles S.A., 6.5%, 2019 (n) | | $ | 120,000 | | | $ | 146,902 | |
| Irish Life & Permanent PLC, 3.6%, 2013 (e)(n) | | | 400,000 | | | | 400,003 | |
| Westpac Banking Corp., 3.45%, 2014 (n) | | | 100,000 | | | | 104,696 | |
| | | | | | | | |
| | | | | | $ | 651,601 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| International Market Sovereign – 8.2% | |
| Commonwealth of Australia, 5.75%, 2021 | | AUD | 23,000 | | | $ | 28,452 | |
| Federal Republic of Germany, 3.75%, 2015 | | EUR | 130,000 | | | | 184,515 | |
| Federal Republic of Germany, 4.25%, 2018 | | EUR | 52,000 | | | | 82,882 | |
| Federal Republic of Germany, 6.25%, 2030 | | EUR | 44,000 | | | | 93,804 | |
| Government of Canada, 4.5%, 2015 | | CAD | 46,000 | | | | 49,903 | |
| Government of Canada, 4.25%, 2018 | | CAD | 24,000 | | | | 27,650 | |
| Government of Canada, 5.75%, 2033 | | CAD | 9,000 | | | | 14,048 | |
| Government of Japan, 1.7%, 2017 | | JPY | 18,000,000 | | | | 221,256 | |
| Government of Japan, 1.1%, 2020 | | JPY | 9,100,000 | | | | 109,802 | |
| Government of Japan, 2.1%, 2024 | | JPY | 4,250,000 | | | | 55,155 | |
| Government of Japan, 2.2%, 2027 | | JPY | 10,350,000 | | | | 133,698 | |
| Government of Japan, 2.4%, 2037 | | JPY | 10,900,000 | | | | 138,694 | |
| Kingdom of Belgium, 5.5%, 2017 | | EUR | 61,000 | | | | 98,178 | |
| Kingdom of Denmark, 3%, 2021 | | DKK | 130,000 | | | | 26,754 | |
| Kingdom of Spain, 4.6%, 2019 | | EUR | 91,000 | | | | 119,982 | |
| Kingdom of Sweden, 5%, 2020 | | SEK | 95,000 | | | | 18,508 | |
| Kingdom of the Netherlands, 3.75%, 2014 | | EUR | 101,000 | | | | 140,848 | |
| Kingdom of the Netherlands, 5.5%, 2028 | | EUR | 14,000 | | | | 26,886 | |
| Republic of Austria, 4.65%, 2018 | | EUR | 47,000 | | | | 74,141 | |
| Republic of Finland, 3.875%, 2017 | | EUR | 13,000 | | | | 19,889 | |
| Republic of France, 6%, 2025 | | EUR | 29,000 | | | | 53,957 | |
| Republic of France, 4.75%, 2035 | | EUR | 61,000 | | | | 105,477 | |
| Republic of Ireland, 4.6%, 2016 | | EUR | 26,000 | | | | 36,350 | |
| Republic of Italy, 4.25%, 2015 | | EUR | 48,000 | | | | 66,082 | |
| Republic of Italy, 5.25%, 2017 | | EUR | 144,000 | | | | 206,693 | |
| Republic of Italy, 3.75%, 2021 | | EUR | 56,000 | | | | 72,675 | |
| United Kingdom Treasury, 8%, 2015 | | GBP | 57,000 | | | | 113,213 | |
| United Kingdom Treasury, 8%, 2021 | | GBP | 42,000 | | | | 103,567 | |
| United Kingdom Treasury, 4.25%, 2036 | | GBP | 39,000 | | | | 77,574 | |
| | | | | | | | |
| | | | | | $ | 2,500,633 | |
| | | | | | | | |
| Local Authorities – 0.7% | | | | | | | | |
| Louisiana Gas & Fuels Tax Rev. (Build America Bonds), FRN, 3%, 2043 | | $ | 100,000 | | | $ | 100,203 | |
| Province of Ontario, 5.45%, 2016 | | | 95,000 | | | | 109,662 | |
| | | | | | | | |
| | | | | | $ | 209,865 | |
| | | | | | | | |
| Machinery & Tools – 1.3% | | | | | | | | |
| Atlas Copco AB, 5.6%, 2017 (n) | | $ | 135,000 | | | $ | 157,433 | |
| Case New Holland, Inc., 7.875%, 2017 | | | 85,000 | | | | 100,513 | |
| CNH America LLC, 7.25%, 2016 | | | 15,000 | | | | 16,875 | |
| CNH Capital LLC, 3.875%, 2015 (n) | | | 5,000 | | | | 5,156 | |
| CNH Capital LLC, 6.25%, 2016 | | | 5,000 | | | | 5,513 | |
H&E Equipment Services LLC,
7%, 2022 (n) | | | 20,000 | | | | 21,300 | |
| NESCO LLC/NESCO Holdings Corp., 11.75%, 2017 (n) | | | 30,000 | | | | 32,250 | |
| RSC Equipment Rental, Inc., 8.25%, 2021 | | | 30,000 | | | | 33,825 | |
UR Financing Escrow Corp.,
5.75%, 2018 (n) | | | 15,000 | | | | 16,163 | |
13
MFS Strategic Income Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Machinery & Tools – continued | | | | | | | | |
| UR Financing Escrow Corp., 7.625%, 2022 (n) | | $ | 14,000 | | | $ | 15,645 | |
| | | | | | | | |
| | | | | | $ | 404,673 | |
| | | | | | | | |
| Major Banks – 7.9% | | | | | | | | |
| Bank of America Corp., 7.375%, 2014 | | $ | 50,000 | | | $ | 54,142 | |
| Bank of America Corp., 6.5%, 2016 | | | 170,000 | | | | 196,309 | |
| Barclays Bank PLC, 5.125%, 2020 | | | 100,000 | | | | 113,894 | |
BNP Paribas, 7.195% to 2037,
FRN to 2049 (n) | | | 100,000 | | | | 102,500 | |
| BNP Paribas, FRN, 3.059%, 2014 | | | 18,000 | | | | 18,609 | |
| Commonwealth Bank of Australia, 5%, 2019 (n) | | | 80,000 | | | | 92,968 | |
| DBS Bank Ltd., 2.35%, 2017 (n) | | | 200,000 | | | | 207,509 | |
| Goldman Sachs Group, Inc., 6%, 2014 | | | 50,000 | | | | 53,212 | |
| Goldman Sachs Group, Inc., 5.75%, 2022 | | | 133,000 | | | | 157,234 | |
| HSBC Holdings PLC, 4%, 2022 | | | 110,000 | | | | 120,435 | |
| Intesa Sanpaolo S.p.A., FRN, 2.711%, 2014 (n) | | | 100,000 | | | | 99,888 | |
| JPMorgan Chase & Co., 4.625%, 2021 | | | 90,000 | | | | 102,615 | |
| Macquarie Bank Ltd., 5%, 2017 (n) | | | 79,000 | | | | 86,402 | |
| Macquarie Group Ltd., 6%, 2020 (n) | | | 48,000 | | | | 51,940 | |
| Merrill Lynch & Co., Inc., 6.4%, 2017 | | | 30,000 | | | | 35,231 | |
| Morgan Stanley, 6%, 2014 | | | 100,000 | | | | 105,897 | |
| Morgan Stanley, 5.625%, 2019 | | | 100,000 | | | | 113,098 | |
Royal Bank of Scotland Group PLC,
7.648% to 2031, FRN to 2049 | | | 55,000 | | | | 55,550 | |
| Royal Bank of Scotland PLC, 2.55%, 2015 | | | 53,000 | | | | 54,241 | |
| Santander International Debt S.A., 2.991%, 2013 (n) | | | 200,000 | | | | 200,338 | |
| Standard Chartered PLC, 3.85%, 2015 (n) | | | 100,000 | | | | 105,461 | |
| UFJ Finance Aruba AEC, 6.75%, 2013 | | | 70,000 | | | | 72,211 | |
| Wells Fargo & Co., 7.98% to 2018, FRN to 2049 | | | 49,000 | | | | 56,228 | |
| Westpac Banking Corp., 2%, 2017 | | | 150,000 | | | | 154,509 | |
| | | | | | | | |
| | | | | | $ | 2,410,421 | |
| | | | | | | | |
| Medical & Health Technology & Services – 3.1% | |
| AmSurg Corp., 5.625%, 2020 (n) | | $ | 5,000 | | | $ | 5,200 | |
| Aristotle Holding, Inc., 3.9%, 2022 (n) | | | 49,000 | | | | 52,834 | |
| Biomet, Inc., 6.5%, 2020 (n) | | | 20,000 | | | | 21,250 | |
| Cardinal Health, Inc., 5.8%, 2016 | | | 94,000 | | | | 108,938 | |
| CDRT Holding Corp., 9.25%, 2017 (p)(z) | | | 5,000 | | | | 5,100 | |
| Davita, Inc., 6.375%, 2018 | | | 55,000 | | | | 58,988 | |
| Davita, Inc., 6.625%, 2020 | | | 30,000 | | | | 32,625 | |
| Fresenius Medical Care AG & Co. KGaA, 9%, 2015 (n) | | | 20,000 | | | | 23,050 | |
| Fresenius Medical Care Capital Trust III, 5.625%, 2019 (n) | | | 25,000 | | | | 26,844 | |
| HCA, Inc., 8.5%, 2019 | | | 80,000 | | | | 89,200 | |
| HCA, Inc., 7.5%, 2022 | | | 50,000 | | | | 57,250 | |
| HCA, Inc., 5.875%, 2022 | | | 25,000 | | | | 27,188 | |
| HealthSouth Corp., 8.125%, 2020 | | | 55,000 | | | | 60,569 | |
| Hologic, Inc., 6.25%, 2020 (n) | | | 5,000 | | | | 5,388 | |
| IASIS Healthcare LLC/IASIS Capital Corp., 8.375%, 2019 | | | 40,000 | | | | 37,800 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Medical & Health Technology & Services – continued | |
| McKesson Corp., 5.7%, 2017 | | $ | 40,000 | | | $ | 47,255 | |
| Owens & Minor, Inc., 6.35%, 2016 | | | 70,000 | | | | 76,780 | |
| Physio-Control International, Inc., 9.875%, 2019 (n) | | | 20,000 | | | | 21,950 | |
| Select Medical Corp., 7.625%, 2015 | | | 5,000 | | | | 5,006 | |
| Tenet Healthcare Corp., 9.25%, 2015 | | | 20,000 | | | | 22,450 | |
| Tenet Healthcare Corp., 8%, 2020 | | | 10,000 | | | | 10,769 | |
| Thermo Fisher Scientific, Inc., 3.15%, 2023 | | | 84,000 | | | | 85,846 | |
| Universal Health Services, Inc., 7%, 2018 | | | 25,000 | | | | 27,563 | |
| Universal Hospital Services, Inc., 7.625%, 2020 (n) | | | 20,000 | | | | 21,075 | |
| Universal Hospital Services, Inc., FRN, 3.902%, 2015 | | | 10,000 | | | | 9,956 | |
| | | | | | | | |
| | | | | | $ | 940,874 | |
| | | | | | | | |
| Metals & Mining – 1.1% | | | | | | | | |
| Arch Coal, Inc., 7.25%, 2020 | | $ | 20,000 | | | $ | 18,550 | |
| Cloud Peak Energy, Inc., 8.25%, 2017 | | | 45,000 | | | | 48,150 | |
| Cloud Peak Energy, Inc., 8.5%, 2019 | | | 15,000 | | | | 16,463 | |
| Consol Energy, Inc., 8%, 2017 | | | 20,000 | | | | 21,650 | |
| Consol Energy, Inc., 8.25%, 2020 | | | 20,000 | | | | 21,650 | |
Fortescue Metals Group Ltd.,
8.25%, 2019 (n) | | | 15,000 | | | | 15,975 | |
| Peabody Energy Corp., 6%, 2018 | | | 10,000 | | | | 10,625 | |
| Peabody Energy Corp., 6.25%, 2021 | | | 10,000 | | | | 10,625 | |
| Southern Copper Corp., 6.75%, 2040 | | | 100,000 | | | | 120,388 | |
| Vale Overseas Ltd., 4.375%, 2022 | | | 45,000 | | | | 48,038 | |
| | | | | | | | |
| | | | | | $ | 332,114 | |
| | | | | | | | |
| Mortgage-Backed – 1.2% | | | | | | | | |
| Fannie Mae, 6%, 2017 | | $ | 27,497 | | | $ | 29,576 | |
| Fannie Mae, 5.5%, 2020 (f) | | | 133,761 | | | | 144,914 | |
| Fannie Mae, 5.5%, 2034 | | | 63,786 | | | | 70,103 | |
| Freddie Mac, 4.224%, 2020 | | | 94,792 | | | | 110,106 | |
| | | | | | | | |
| | | | | | $ | 354,699 | |
| | | | | | | | |
| Natural Gas – Distribution – 0.5% | | | | | |
| AmeriGas Finance LLC, 6.75%, 2020 | | $ | 25,000 | | | $ | 27,438 | |
| Ferrellgas LP/Ferrellgas Finance Corp., 6.5%, 2021 | | | 15,000 | | | | 14,850 | |
| GDF Suez, 1.625%, 2017 (n) | | | 120,000 | | | | 119,972 | |
| | | | | | | | |
| | | | | | $ | 162,260 | |
| | | | | | | | |
| Natural Gas – Pipeline – 2.8% | | | | | | | | |
| Access Midstream Partners Co., 4.875%, 2023 | | $ | 10,000 | | | $ | 10,150 | |
| Atlas Pipeline Partners LP, 8.75%, 2018 | | | 50,000 | | | | 53,250 | |
| Crosstex Energy, Inc., 8.875%, 2018 | | | 45,000 | | | | 48,600 | |
| El Paso Corp., 7%, 2017 | | | 45,000 | | | | 51,405 | |
| El Paso Corp., 7.75%, 2032 | | | 50,000 | | | | 58,750 | |
| Energy Transfer Equity LP, 7.5%, 2020 | | | 45,000 | | | | 51,975 | |
| Energy Transfer Partners LP, 6.5%, 2042 | | | 87,000 | | | | 106,517 | |
| Enterprise Products Partners LP, 6.3%, 2017 | | | 90,000 | | | | 108,867 | |
Enterprise Products Partners LP,
8.375% to 2016, FRN to 2066 | | | 20,000 | | | | 22,825 | |
14
MFS Strategic Income Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Natural Gas – Pipeline – continued | | | | | | | | |
Enterprise Products Partners LP,
7.034% to 2018, FRN to 2068 | | $ | 12,000 | | | $ | 13,740 | |
| Inergy Midstream LP, 6%, 2020 (n) | | | 15,000 | | | | 15,488 | |
| Kinder Morgan Energy Partners LP, 6.375%, 2041 | | | 130,000 | | | | 160,868 | |
| MarkWest Energy Partners LP, 5.5%, 2023 | | | 20,000 | | | | 21,700 | |
| Rockies Express Pipeline LLC, 5.625%, 2020 (n) | | | 16,000 | | | | 15,720 | |
| Spectra Energy Capital LLC, 8%, 2019 | | | 66,000 | | | | 87,165 | |
| Williams Cos., Inc., 3.7%, 2023 | | | 27,000 | | | | 27,234 | |
| | | | | | | | |
| | | | | | $ | 854,254 | |
| | | | | | | | |
| Network & Telecom – 2.1% | | | | | | | | |
| AT&T, Inc., 5.5%, 2018 | | $ | 70,000 | | | $ | 83,390 | |
| AT&T, Inc., 3.875%, 2021 | | | 80,000 | | | | 89,161 | |
| Centurylink, Inc., 7.65%, 2042 | | | 89,000 | | | | 93,015 | |
| Cincinnati Bell, Inc., 8.25%, 2017 | | | 10,000 | | | | 10,775 | |
| Citizens Communications Co., 9%, 2031 | | | 25,000 | | | | 27,500 | |
| France Telecom, 4.375%, 2014 | | | 80,000 | | | | 84,194 | |
| Frontier Communications Corp., 8.125%, 2018 | | | 30,000 | | | | 34,500 | |
| Qwest Communications International, Inc., 7.125%, 2018 (n) | | | 35,000 | | | | 36,519 | |
| Qwest Corp., 7.5%, 2014 | | | 65,000 | | | | 71,142 | |
TW Telecom Holdings, Inc.,
5.375%, 2022 (n) | | | 5,000 | | | | 5,238 | |
| Verizon Communications, Inc., 8.75%, 2018 | | | 52,000 | | | | 72,200 | |
| Windstream Corp., 8.125%, 2018 | | | 5,000 | | | | 5,463 | |
| Windstream Corp., 7.75%, 2020 | | | 30,000 | | | | 32,400 | |
| | | | | | | | |
| | | | | | $ | 645,497 | |
| | | | | | | | |
| Oil Services – 0.9% | | | | | | | | |
| Bristow Group, Inc., 6.25%, 2022 | | $ | 10,000 | | | $ | 10,700 | |
| Chesapeake Energy Corp., 6.625%, 2019 (n) | | | 10,000 | | | | 9,425 | |
| Dresser-Rand Group, Inc., 6.5%, 2021 | | | 15,000 | | | | 15,900 | |
| Edgen Murray Corp., 8.75%, 2020 (n) | | | 25,000 | | | | 25,250 | |
Pioneer Energy Services Corp.,
9.875%, 2018 | | | 25,000 | | | | 27,188 | |
| Shale-Inland Holdings LLC/Finance Co., 8.75%, 2019 (n) | | | 25,000 | | | | 26,188 | |
| Transocean, Inc., 2.5%, 2017 | | | 33,000 | | | | 33,347 | |
| Transocean, Inc., 6%, 2018 | | | 70,000 | | | | 81,185 | |
| Unit Corp., 6.625%, 2021 | | | 20,000 | | | | 20,525 | |
| Unit Corp., 6.625%, 2021 (n) | | | 15,000 | | | | 15,394 | |
| | | | | | | | |
| | | | | | $ | 265,102 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 3.6% | |
| Bancolombia S.A., 5.125%, 2022 | | $ | 2,000 | | | $ | 2,080 | |
| Citigroup, Inc., 6.375%, 2014 | | | 80,000 | | | | 86,452 | |
| Citigroup, Inc., 6.01%, 2015 | | | 60,000 | | | | 65,563 | |
| Citigroup, Inc., 8.5%, 2019 | | | 44,000 | | | | 59,164 | |
| Groupe BPCE S.A., 12.5% to 2019, FRN to 2049 (n) | | | 102,000 | | | | 118,211 | |
| Lloyds TSB Bank PLC, 5.8%, 2020 (n) | | | 110,000 | | | | 128,731 | |
| Rabobank Nederland N.V., 3.375%, 2017 | | | 59,000 | | | | 63,383 | |
| Rabobank Nederland N.V., 3.95%, 2022 | | | 250,000 | | | | 256,009 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Other Banks & Diversified Financials – continued | |
| Santander Holdings USA, Inc., 4.625%, 2016 | | $ | 10,000 | | | $ | 10,455 | |
| Santander UK PLC, 8.963% to 2030, FRN to 2049 | | | 68,000 | | | | 77,095 | |
| SunTrust Banks, Inc., 3.5%, 2017 | | | 69,000 | | | | 74,101 | |
| Svenska Handelsbanken AB, 4.875%, 2014 (n) | | | 110,000 | | | | 116,244 | |
| U.S. Bancorp, 2.95%, 2022 | | | 46,000 | | | | 46,470 | |
| | | | | | | | |
| | | | | | $ | 1,103,958 | |
| | | | | | | | |
| Personal Computers & Peripherals – 0.2% | | | | | |
| Equifax, Inc., 3.3%, 2022 | | $ | 62,000 | | | $ | 61,500 | |
| | | | | | | | |
| Pharmaceuticals – 1.4% | | | | | | | | |
| AbbVie, Inc., 2.9%, 2022 (n) | | $ | 100,000 | | | $ | 101,838 | |
| Celgene Corp., 3.95%, 2020 | | | 130,000 | | | | 141,087 | |
| Hospira, Inc., 6.05%, 2017 | | | 60,000 | | | | 69,654 | |
| Teva Pharmaceutical Finance LLC, 5.55%, 2016 | | | 39,000 | | | | 44,141 | |
| Teva Pharmaceutical Finance LLC, 2.25%, 2020 | | | 25,000 | | | | 25,223 | |
| Valeant Pharmaceuticals International, Inc., 7%, 2020 (n) | | | 30,000 | | | | 32,625 | |
| Valeant Pharmaceuticals International, Inc., 7.25%, 2022 (n) | | | 15,000 | | | | 16,388 | |
| | | | | | | | |
| | | | | | $ | 430,956 | |
| | | | | | | | |
| Pollution Control – 0.4% | | | | | | | | |
| Heckmann Corp., 9.875%, 2018 | | $ | 20,000 | | | $ | 20,650 | |
| Heckmann Corp., 9.875%, 2018 | | | 5,000 | | | | 5,125 | |
| Republic Services, Inc., 5.25%, 2021 | | | 80,000 | | | | 94,288 | |
| | | | | | | | |
| | | | | | $ | 120,063 | |
| | | | | | | | |
| Precious Metals & Minerals – 0.1% | | | | | | | | |
| Eldorado Gold Corp., 6.125%, 2020 (z) | | $ | 15,000 | | | $ | 15,263 | |
| IAMGOLD Corp., 6.75%, 2020 (n) | | | 21,000 | | | | 20,475 | |
| | | | | | | | |
| | | | | | $ | 35,738 | |
| | | | | | | | |
| Printing & Publishing – 0.1% | | | | | | | | |
| American Media, Inc., 13.5%, 2018 (z) | | $ | 3,347 | | | $ | 2,945 | |
| Nielsen Finance LLC, 7.75%, 2018 | | | 30,000 | | | | 33,525 | |
| Nielsen Finance LLC, 4.5%, 2020 (n) | | | 5,000 | | | | 4,975 | |
| | | | | | | | |
| | | | | | $ | 41,445 | |
| | | | | | | | |
| Railroad & Shipping – 0.9% | | | | | | | | |
| CSX Corp., 4.1%, 2044 | | $ | 186,000 | | | $ | 183,608 | |
| Kansas City Southern de Mexico S.A. de C.V., 6.125%, 2021 | | | 15,000 | | | | 16,950 | |
| Panama Canal Railway Co., 7%, 2026 (n) | | | 89,000 | | | | 83,660 | |
| | | | | | | | |
| | | | | | $ | 284,218 | |
| | | | | | | | |
| Real Estate – 1.6% | | | | | | | | |
| Boston Properties LP, REIT, 3.7%, 2018 | | $ | 47,000 | | | $ | 51,055 | |
| CNL Lifestyle Properties, Inc., REIT, 7.25%, 2019 | | | 15,000 | | | | 14,325 | |
| DDR Corp., REIT, 4.625%, 2022 | | | 87,000 | | | | 94,948 | |
| Entertainment Properties Trust, REIT, 7.75%, 2020 | | | 30,000 | | | | 34,672 | |
15
MFS Strategic Income Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Real Estate – continued | | | | | | | | |
| HCP, Inc., REIT, 5.375%, 2021 | | $ | 95,000 | | | $ | 108,182 | |
| Health Care REIT, Inc., 2.25%, 2018 | | | 30,000 | | | | 29,975 | |
| Kennedy Wilson, Inc., 8.75%, 2019 | | | 15,000 | | | | 15,975 | |
| Kimco Realty Corp., REIT, 6.875%, 2019 | | | 22,000 | | | | 27,175 | |
| MPT Operating Partnership LP, REIT, 6.875%, 2021 | | | 25,000 | | | | 27,125 | |
| MPT Operating Partnership LP, REIT, 6.375%, 2022 | | | 20,000 | | | | 21,000 | |
| WEA Finance LLC, REIT, 6.75%, 2019 (n) | | | 60,000 | | | | 74,330 | |
| | | | | | | | |
| | | | | | $ | 498,762 | |
| | | | | | | | |
| Retailers – 2.6% | | | | | | | | |
| Academy Ltd., 9.25%, 2019 (n) | | $ | 20,000 | | | $ | 22,200 | |
| Burlington Coat Factory Warehouse Corp., 10%, 2019 | | | 30,000 | | | | 32,400 | |
| Dollar General Corp., 4.125%, 2017 | | | 73,000 | | | | 76,650 | |
| Gap, Inc., 5.95%, 2021 | | | 117,000 | | | | 133,852 | |
| J. Crew Group, Inc., 8.125%, 2019 | | | 25,000 | | | | 26,438 | |
| Kohl’s Corp., 3.25%, 2023 | | | 96,000 | | | | 93,212 | |
| Limited Brands, Inc., 5.25%, 2014 | | | 25,000 | | | | 26,250 | |
| Limited Brands, Inc., 6.9%, 2017 | | | 25,000 | | | | 28,688 | |
| Limited Brands, Inc., 7%, 2020 | | | 10,000 | | | | 11,500 | |
| Limited Brands, Inc., 6.95%, 2033 | | | 15,000 | | | | 15,263 | |
| Macy’s, Inc., 7.875%, 2015 | | | 120,000 | | | | 139,792 | |
| Pantry, Inc., 8.375%, 2020 (n) | | | 10,000 | | | | 10,450 | |
| Rite Aid Corp., 9.25%, 2020 | | | 20,000 | | | | 21,300 | |
| Sally Beauty Holdings, Inc., 6.875%, 2019 | | | 10,000 | | | | 11,050 | |
| Staples, Inc., 9.75%, 2014 | | | 80,000 | | | | 86,976 | |
| Toys “R” Us Property Co. II LLC, 8.5%, 2017 | | | 15,000 | | | | 15,900 | |
| Toys “R” Us, Inc., 10.75%, 2017 | | | 30,000 | | | | 32,325 | |
| YCC Holdings LLC/Yankee Finance, Inc., 10.25%, 2016 (p) | | | 15,000 | | | | 15,489 | |
| | | | | | | | |
| | | | | | $ | 799,735 | |
| | | | | | | | |
| Specialty Chemicals – 0.0% | | | | | | | | |
| Koppers, Inc., 7.875%, 2019 | | $ | 10,000 | | | $ | 11,000 | |
| | | | | | | | |
| Specialty Stores – 0.2% | | | | | | | | |
| Gymboree Corp., 9.125%, 2018 | | $ | 15,000 | | | $ | 13,350 | |
| Michaels Stores, Inc., 11.375%, 2016 | | | 25,000 | | | | 26,125 | |
| Michaels Stores, Inc., 7.75%, 2018 | | | 15,000 | | | | 16,463 | |
| | | | | | | | |
| | | | | | $ | 55,938 | |
| | | | | | | | |
| Supermarkets – 0.0% | | | | | | | | |
| SUPERVALU, Inc., 7.5%, 2014 | | $ | 10,000 | | | $ | 9,700 | |
| | | | | | | | |
| Supranational – 0.5% | | | | | | | | |
| Corporacion Andina de Fomento, 4.375%, 2022 | | $ | 130,000 | | | $ | 140,759 | |
| | | | | | | | |
| Telecommunications – Wireless – 2.3% | | | | | |
| American Tower Corp., REIT, 4.625%, 2015 | | $ | 40,000 | | | $ | 42,518 | |
| American Tower Corp., REIT, 4.7%, 2022 | | | 82,000 | | | | 90,726 | |
| Clearwire Corp., 12%, 2015 (n) | | | 30,000 | | | | 32,250 | |
| Cricket Communications, Inc., 7.75%, 2020 | | | 30,000 | | | | 30,600 | |
| Crown Castle International Corp., 7.125%, 2019 | | | 85,000 | | | | 93,925 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Telecommunications – Wireless – continued | | | | | |
| Crown Castle International Corp., 5.25%, 2023 (n) | | $ | 15,000 | | | $ | 16,050 | |
| Crown Castle Towers LLC, 6.113%, 2020 (n) | | | 104,000 | | | | 125,266 | |
| MetroPCS Wireless, Inc., 7.875%, 2018 | | | 20,000 | | | | 21,650 | |
| Rogers Cable, Inc., 5.5%, 2014 | | | 79,000 | | | | 83,571 | |
| Sprint Capital Corp., 6.875%, 2028 | | | 30,000 | | | | 31,200 | |
| Sprint Nextel Corp., 6%, 2016 | | | 40,000 | | | | 43,500 | |
| Sprint Nextel Corp., 8.375%, 2017 | | | 35,000 | | | | 40,688 | |
| Sprint Nextel Corp., 9%, 2018 (n) | | | 5,000 | | | | 6,175 | |
| Sprint Nextel Corp., 6%, 2022 | | | 35,000 | | | | 35,963 | |
| | | | | | | | |
| | | | | | $ | 694,082 | |
| | | | | | | | |
| Telephone Services – 0.2% | | | | | | | | |
| Cogent Communications Group, Inc., 8.375%, 2018 (n) | | $ | 10,000 | | | $ | 10,975 | |
| Level 3 Financing, Inc., 9.375%, 2019 | | | 10,000 | | | | 11,175 | |
| Level 3 Financing, Inc., 7%, 2020 (n) | | | 10,000 | | | | 10,450 | |
| Level 3 Financing, Inc., 8.625%, 2020 | | | 20,000 | | | | 22,200 | |
| | | | | | | | |
| | | | | | $ | 54,800 | |
| | | | | | | | |
| Tobacco – 2.3% | | | | | | | | |
| Altria Group, Inc., 9.25%, 2019 | | $ | 44,000 | | | $ | 61,210 | |
| B.A.T. International Finance PLC, 3.25%, 2022 (n) | | | 194,000 | | | | 202,214 | |
| Lorillard Tobacco Co., 8.125%, 2019 | | | 61,000 | | | | 77,838 | |
| Lorillard Tobacco Co., 6.875%, 2020 | | | 50,000 | | | | 60,944 | |
| Reynolds American, Inc., 6.75%, 2017 | | | 135,000 | | | | 163,028 | |
| Reynolds American, Inc., 4.75%, 2042 | | | 124,000 | | | | 125,101 | |
| | | | | | | | |
| | | | | | $ | 690,335 | |
| | | | | | | | |
| Transportation – 0.1% | | | | | | | | |
| Navios South American Logistics, Inc., 9.25%, 2019 | | $ | 26,000 | | | $ | 25,513 | |
| | | | | | | | |
| Transportation – Services – 1.3% | | | | | | | | |
| ACL I Corp., 10.625%, 2016 (p) | | $ | 41,038 | | | $ | 39,646 | |
| Avis Budget Car Rental LLC, 8.25%, 2019 | | | 20,000 | | | | 22,100 | |
| Avis Budget Car Rental LLC, 9.75%, 2020 | | | 10,000 | | | | 11,550 | |
| Commercial Barge Line Co., 12.5%, 2017 | | | 65,000 | | | | 71,663 | |
| ERAC USA Finance Co., 6.375%, 2017 (n) | | | 110,000 | | | | 133,041 | |
| HDTFS, Inc., 5.875%, 2020 (n) | | | 5,000 | | | | 5,225 | |
| Navios Maritime Acquisition Corp., 8.625%, 2017 | | | 40,000 | | | | 37,500 | |
| Navios Maritime Holdings, Inc., 8.875%, 2017 | | | 30,000 | | | | 29,925 | |
| Swift Services Holdings, Inc., 10%, 2018 | | | 45,000 | | | | 49,388 | |
| | | | | | | | |
| | | | | | $ | 400,038 | |
| | | | | | | | |
| U.S. Government Agencies and Equivalents – 1.5% | |
| National Credit Union Administration Guaranteed Note, 2.9%, 2020 | | $ | 20,000 | | | $ | 21,319 | |
| Small Business Administration, 6.35%, 2021 | | | 29,820 | | | | 33,307 | |
| Small Business Administration, 4.34%, 2024 | | | 77,822 | | | | 85,552 | |
| Small Business Administration, 4.99%, 2024 | | | 94,507 | | | | 106,653 | |
| Small Business Administration, 4.86%, 2025 | | | 110,941 | | | | 123,933 | |
Small Business Administration,
4.625%, 2025 | | | 44,330 | | | | 49,564 | |
16
MFS Strategic Income Series
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| U.S. Government Agencies and Equivalents – continued | |
| Small Business Administration, 5.11%, 2025 | | $ | 40,074 | | | $ | 44,938 | |
| | | | | | | | |
| | | | | | $ | 465,266 | |
| | | | | | | | |
| Utilities – Electric Power – 4.6% | | | | | |
| AES Corp., 8%, 2017 | | $ | 55,000 | | | $ | 63,525 | |
| Allegheny Energy, Inc., 5.75%, 2019 (n) | | | 90,000 | | | | 98,732 | |
| Atlantic Power Corp., 9%, 2018 | | | 2,000 | | | | 2,090 | |
| Calpine Corp., 8%, 2016 (n) | | | 35,000 | | | | 37,188 | |
| Calpine Corp., 7.875%, 2020 (n) | | | 41,000 | | | | 46,023 | |
| CMS Energy Corp., 4.25%, 2015 | | | 90,000 | | | | 95,495 | |
| CMS Energy Corp., 5.05%, 2022 | | | 64,000 | | | | 71,326 | |
| Covanta Holding Corp., 7.25%, 2020 | | | 20,000 | | | | 22,036 | |
| Covanta Holding Corp., 6.375%, 2022 | | | 5,000 | | | | 5,430 | |
| DPL, Inc., 7.25%, 2021 | | | 15,000 | | | | 16,050 | |
| Duke Energy Corp., 3.35%, 2015 | | | 140,000 | | | | 147,921 | |
| Energy Future Holdings Corp., 10%, 2020 | | | 35,000 | | | | 39,113 | |
| Energy Future Holdings Corp., 10%, 2020 | | | 95,000 | | | | 107,113 | |
| Energy Future Holdings Corp., 11.75%, 2022 (n) | | | 15,000 | | | | 16,650 | |
| Exelon Generation Co. LLC, 5.35%, 2014 | | | 40,000 | | | | 41,840 | |
| Exelon Generation Co. LLC, 5.2%, 2019 | | | 65,000 | | | | 73,687 | |
| GenOn Energy, Inc., 9.875%, 2020 | | | 50,000 | | | | 57,750 | |
| NRG Energy, Inc., 8.25%, 2020 | | | 80,000 | | | | 89,600 | |
| Oncor Electric Delivery Co., 4.1%, 2022 | | | 95,000 | | | | 103,544 | |
| PPL WEM Holdings PLC, 3.9%, 2016 (n) | | | 110,000 | | | | 115,836 | |
| Progress Energy, Inc., 3.15%, 2022 | | | 127,000 | | | | 128,565 | |
| Texas Competitive Electric Holdings Co. LLC, 11.5%, 2020 (n) | | | 20,000 | | | | 15,650 | |
| | | | | | | | |
| | | | | | $ | 1,395,164 | |
| | | | | | | | |
Total Bonds
(Identified Cost, $27,513,850) | | | | | | $ | 29,505,332 | |
| | | | | | | | |
| |
| PREFERRED STOCKS – 0.2% | | | | | |
| Other Banks & Diversified Financials – 0.2% | |
| Ally Financial, Inc., 7% (z) | | | 20 | | | $ | 19,643 | |
| GMAC Capital Trust I, 8.125% | | | 1,075 | | | | 28,649 | |
| | | | | | | | |
Total Preferred Stocks
(Identified Cost, $46,093) | | | | | | $ | 48,292 | |
| | | | | | | | |
| |
| CONVERTIBLE BONDS – 0.1% | | | | | |
| Network & Telecom – 0.1% | | | | | | | | |
| Nortel Networks Corp., 2.125%, 2014 (Identified Cost, $34,544) (a)(d) | | $ | 35,000 | | | $ | 35,481 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| CONVERTIBLE PREFERRED STOCKS – 0.1% | |
| Automotive – 0.1% | | | | | | | | |
General Motors Co., 4.75%
(Identified Cost, $26,855) | | | 540 | | | $ | 23,830 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | Strike
Price | | | First
Exercise | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | |
| WARRANTS – 0.1% | | | | | | | | | | | | | |
| Broadcasting – 0.1% | | | | | | | | | | | | | |
| New Young Broadcasting Holding Co., Inc. (1 share for 1 warrant) (Identified Cost, $9,004) (a) | | $ | 0.01 | | | | 7/14/10 | | | | 4 | | | $ | 15,000 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | |
| |
| FLOATING RATE LOANS (g)(r) – 0.0% | | | | | |
| Financial Institutions – 0.0% | | | | | | | | |
| Springleaf Financial Funding Co., Term Loan, 5.5%, 2017 (Identified Cost, $14,569) | | $ | 14,622 | | | $ | 14,526 | |
| | | | | | | | |
| | |
| COMMON STOCKS – 0.0% | | | | | | | | |
| Automotive – 0.0% | | | | | | | | |
| Accuride Corp. (a) | | | 791 | | | $ | 2,539 | |
| | | | | | | | |
| Broadcasting – 0.0% | | | | | | | | |
| New Young Broadcasting Holding Co., Inc. (a) | | | 1 | | | $ | 3,750 | |
| | | | | | | | |
| Printing & Publishing – 0.0% | | | | | | | | |
| American Media Operations, Inc. (a) | | | 858 | | | $ | 4,076 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $26,395) | | | | | | $ | 10,365 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 1.7% | | | | | |
| MFS Institutional Money Market Portfolio, 0.16%, at Cost and Net Asset Value (v) | | | 523,656 | | | $ | 523,656 | |
| | | | | | | | |
Total Investments
(Identified Cost, $28,194,966) | | | | | | $ | 30,176,482 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 1.5% | | | | | | | 464,747 | |
| | | | | | | | |
| Net Assets – 100.0% | | | | | | $ | 30,641,229 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (d) | | In default. Interest and/or scheduled principal payment(s) have been missed. |
| (e) | | Guaranteed by Minister for Finance of Ireland. |
| (f) | | All or a portion of the security has been segregated as collateral for open futures contracts. |
| (g) | | The rate shown represents a weighted average coupon rate on settled positions at period end, unless otherwise indicated. |
| (i) | | Interest only security for which the fund receives interest on notional principal (Par amount). Par amount shown is the notional principal and does not reflect the cost of the security. |
| (n) | | Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. At period end, the aggregate value of these securities was $6,801,797 representing 22.2% of net assets. |
17
MFS Strategic Income Series
Portfolio of Investments – continued
| (p) | | Payment-in-kind security. |
| (r) | | Remaining maturities of floating rate loans may be less than stated maturities shown as a result of contractual or optional prepayments by the borrower. Such prepayments cannot be predicted with certainty. These loans may be subject to restrictions on resale. Floating rate loans generally have rates of interest which are determined periodically by reference to a base lending rate plus a premium. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
| (z) | | Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The fund holds the following restricted securities: |
| | | | | | | | | | |
| Restricted Securities | | Acquisition
Date | | Cost | | | Value | |
| Ally Financial, Inc., 7% (Preferred Stock) | | 4/13/11 | | | $18,750 | | | | $19,643 | |
| American Media, Inc., 13.5%, 2018 | | 12/22/10 | | | 3,391 | | | | 2,945 | |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.809%, 2040 | | 3/01/06 | | | 163,081 | | | | 103,089 | |
| Boyd Gaming Corp., 9%, 2020 | | 12/19/12-12/21/12 | | | 9,994 | | | | 9,850 | |
| CDRT Holding Corp., 9.25%, 2017 | | 12/13/12 | | | 5,149 | | | | 5,100 | |
| Cequel Communications Holdings, 6.375%, 2020 | | 12/13/12-12/24/12 | | | 20,824 | | | | 20,825 | |
| Cinemark USA, Inc., 5.125%, 2022 | | 12/04/12 | | | 5,000 | | | | 5,063 | |
| Crest Ltd., “A1” CDO, FRN, 0.79%, 2018 | | 1/21/10 | | | 13,300 | | | | 16,197 | |
| DISH DBS Corp., 5%, 2023 | | 12/19/12 | | | 20,000 | | | | 20,000 | |
| Dematic S.A., 7.75%, 2020 | | 12/13/12 | | | 15,000 | | | | 15,000 | |
| Eldorado Gold Corp., 6.125%, 2020 | | 12/10/12-12/11/12 | | | 15,211 | | | | 15,263 | |
| Falcon Franchise Loan LLC, FRN, 6.447%, 2025 | | 1/29/03 | | | 8,311 | | | | 16,429 | |
| FelCor Lodging LP, 5.625%, 2023 | | 12/12/12 | | | 5,000 | | | | 4,975 | |
| First Union National Bank Commercial Mortgage Trust, FRN, 1.583%, 2043 | | 12/11/03 | | | 68 | | | | 77 | |
| IAC/InterActiveCorp, 4.75%, 2022 | | 12/18/12 | | | 5,000 | | | | 4,975 | |
| LBI Media, Inc., 13.5% to 2015, 11.5% to 2020 | | 12/26/12 | | | 9,043 | | | | 7,980 | |
| Local TV Finance LLC, 9.25%, 2015 | | 12/10/07-11/30/10 | | | 25,889 | | | | 26,367 | |
| Morgan Stanley Capital I, Inc., FRN, 1.383%, 2039 | | 7/20/04 | | | 10,875 | | | | 7,716 | |
| Prudential Securities Secured Financing Corp., FRN, 7.167%, 2013 | | 12/06/04 | | | 171,959 | | | | 170,871 | |
| Salomon Brothers Mortgage Securities, Inc., FRN, 7.155%, 2032 | | 1/07/05 | | | 19,035 | | | | 17,292 | |
| Six Flags Entertainment Corp., 5.25%, 2021 | | 12/11/12 | | | 15,000 | | | | 15,000 | |
| Townsquare Radio LLC, 9%, 2019 | | 3/30/12 | | | 9,908 | | | | 10,975 | |
| Total Restricted Securities | | | | | | | | | $515,632 | |
| % of Net assets | | | | | | | | | 1.7% | |
The following abbreviations are used in this report and are defined:
| CDO | | Collateralized Debt Obligation |
| FRN | | Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end. |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
Abbreviations indicate amounts shown in currencies other than the U.S. dollar. All amounts are stated in U.S. dollars unless otherwise indicated. A list of abbreviations is shown below:
18
MFS Strategic Income Series
Portfolio of Investments – continued
Derivative Contracts at 12/31/12
Forward Foreign Currency Exchange Contracts at 12/31/12
| | | | | | | | | | | | | | | | | | | | |
| Type | | Currency | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | | Contracts
at Value | | | Net Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives | | | | | | | | | | | | | | | | |
| SELL | | CAD | | Merrill Lynch International Bank | | 98,773 | | 1/11/13 | | $ | 100,697 | | | $ | 99,281 | | | $ | 1,416 | |
| BUY | | EUR | | Barclays Bank PLC | | 49,486 | | 1/11/13 | | | 64,250 | | | | 65,324 | | | | 1,074 | |
| BUY | | EUR | | JPMorgan Chase Bank N.A. | | 24,477 | | 1/11/13 | | | 32,004 | | | | 32,311 | | | | 307 | |
| BUY | | GBP | | Deutsche Bank AG | | 22,452 | | 1/11/13 | | | 36,155 | | | | 36,471 | | | | 316 | |
| SELL | | JPY | | UBS AG | | 3,287,000 | | 1/11/13 | | | 40,190 | | | | 37,942 | | | | 2,248 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | $ | 5,361 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
| Liability Derivatives | | | | | | | | | | | | | | | | |
| SELL | | AUD | | Westpac Banking Corp. | | 25,866 | | 1/11/13 | | $ | 26,237 | | | $ | 26,845 | | | $ | (608 | ) |
| BUY | | CAD | | Citibank N.A. | | 10,447 | | 1/11/13 | | | 10,520 | | | | 10,501 | | | | (19 | ) |
| SELL | | DKK | | Citibank N.A. | | 142,358 | | 1/11/13 | | | 24,969 | | | | 25,189 | | | | (220 | ) |
| SELL | | EUR | | Deutsche Bank AG | | 52,987 | | 1/11/13 | | | 68,275 | | | | 69,945 | | | | (1,670 | ) |
| SELL | | EUR | | UBS AG | | 237,020 | | 1/11/13 | | | 305,632 | | | | 312,876 | | | | (7,244 | ) |
| SELL | | GBP | | Barclays Bank PLC | | 105,074 | | 1/11/13 | | | 167,982 | | | | 170,683 | | | | (2,701 | ) |
| SELL | | GBP | | Deutsche Bank AG | | 105,074 | | 1/11/13 | | | 167,951 | | | | 170,683 | | | | (2,732 | ) |
| BUY | | JPY | | Credit Suisse Group | | 11,137,752 | | 1/11/13 | | | 142,476 | | | | 128,564 | | | | (13,912 | ) |
| BUY | | JPY | | Goldman Sachs International | | 2,493,410 | | 1/11/13 | | | 30,353 | | | | 28,782 | | | | (1,571 | ) |
| BUY | | JPY | | JPMorgan Chase Bank N.A. | | 3,248,033 | | 1/11/13 | | | 39,400 | | | | 37,492 | | | | (1,908 | ) |
| BUY | | JPY | | Merrill Lynch International Bank | | 11,137,753 | | 1/11/13 | | | 142,400 | | | | 128,564 | | | | (13,836 | ) |
| SELL | | SEK | | Deutsche Bank AG | | 82,691 | | 1/11/13 | | | 12,376 | | | | 12,713 | | | | (337 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | $ | (46,758 | ) |
| | | | | | | | | | | | | | | | | | | | |
Futures Contracts Outstanding at 12/31/12
| | | | | | | | | | | | | | | | | | |
| Description | | Currency | | | Contracts | | | Value | | Expiration
Date | | | Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives | | | | | | | | | | | | | | | | | | |
| Interest Rate Futures | | | | | | | | | | | | | | | | | | |
| U.S. Treasury Note 10 yr (Short) | | | USD | | | | 7 | | | $929,469 | | | March - 2013 | | | | $4,831 | |
| | | | | | | | | | | | | | | | | | |
At December 31, 2012, the fund had liquid securities with an aggregate value of $8,237 to cover any commitments for certain derivative contracts.
See Notes to Financial Statements
19
MFS Strategic Income Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | | | | |
At 12/31/12 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $27,671,310) | | | $29,652,826 | | | | | |
Underlying affiliated funds, at cost and value | | | 523,656 | | | | | |
Total investments, at value (identified cost, $28,194,966) | | | $30,176,482 | | | | | |
Cash | | | 20,348 | | | | | |
Receivables for | | | | | | | | |
Forward foreign currency exchange contracts | | | 5,361 | | | | | |
Daily variation margin on open futures contracts | | | 1,203 | | | | | |
Investments sold | | | 156,229 | | | | | |
Fund shares sold | | | 10,229 | | | | | |
Interest | | | 420,873 | | | | | |
Receivable from investment adviser | | | 18,429 | | | | | |
Other assets | | | 499 | | | | | |
Total assets | | | | | | | $30,809,653 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Forward foreign currency exchange contracts | | | $46,758 | | | | | |
Investments purchased | | | 33,751 | | | | | |
Fund shares reacquired | | | 38,103 | | | | | |
Payable to affiliates | | | | | | | | |
Shareholder servicing costs | | | 122 | | | | | |
Distribution and/or service fees | | | 145 | | | | | |
Payable for independent Trustees’ compensation | | | 29 | | | | | |
Accrued expenses and other liabilities | | | 49,516 | | | | | |
Total liabilities | | | | | | | $168,424 | |
Net assets | | | | | | | $30,641,229 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $28,749,751 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 1,945,742 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (1,490,727 | ) | | | | |
Undistributed net investment income | | | 1,436,463 | | | | | |
Net assets | | | | | | | $30,641,229 | |
Shares of beneficial interest outstanding | | | | | | | 2,930,673 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $25,349,445 | | | | 2,417,196 | | | | $10.49 | |
Service Class | | | 5,291,784 | | | | 513,477 | | | | 10.31 | |
See Notes to Financial Statements
20
MFS Strategic Income Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | | | | | | |
Year ended 12/31/12 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Interest | | | $1,651,859 | | | | | |
Dividends | | | 7,831 | | | | | |
Dividends from underlying affiliated funds | | | 693 | | | | | |
Total investment income | | | | | | | $1,660,383 | |
Expenses | | | | | | | | |
Management fee | | | $221,362 | | | | | |
Distribution and/or service fees | | | 14,241 | | | | | |
Shareholder servicing costs | | | 3,452 | | | | | |
Administrative services fee | | | 17,500 | | | | | |
Independent Trustees’ compensation | | | 1,403 | | | | | |
Custodian fee | | | 19,674 | | | | | |
Shareholder communications | | | 10,743 | | | | | |
Audit and tax fees | | | 66,497 | | | | | |
Legal fees | | | 4,156 | | | | | |
Pricing service fee | | | 26,335 | | | | | |
Miscellaneous | | | 21,395 | | | | | |
Total expenses | | | | | | | $406,758 | |
Fees paid indirectly | | | (19 | ) | | | | |
Reduction of expenses by investment adviser | | | (139,299 | ) | | | | |
Net expenses | | | | | | | $267,440 | |
Net investment income | | | | | | | $1,392,943 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $800,090 | | | | | |
Futures contracts | | | (36,298 | ) | | | | |
Swap agreements | | | 2,744 | | | | | |
Foreign currency | | | 21,899 | | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $788,435 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $1,134,212 | | | | | |
Futures contracts | | | 4,831 | | | | | |
Swap agreements | | | (2,263 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | (60,451 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $1,076,329 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $1,864,764 | |
Change in net assets from operations | | | | | | | $3,257,707 | |
See Notes to Financial Statements
21
MFS Strategic Income Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | | | |
For years ended 12/31 | | | 2012 | | | | 2011 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $1,392,943 | | | | $1,534,249 | |
Net realized gain (loss) on investments and foreign currency | | | 788,435 | | | | 192,275 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | 1,076,329 | | | | (203,039 | ) |
Change in net assets from operations | | | $3,257,707 | | | | $1,523,485 | |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(1,790,008 | ) | | | $(1,781,713 | ) |
Change in net assets from fund share transactions | | | $(2,171,745 | ) | | | $(3,257,529 | ) |
Total change in net assets | | | $(704,046 | ) | | | $(3,515,757 | ) |
| Net assets | | | | | | | | |
At beginning of period | | | 31,345,275 | | | | 34,861,032 | |
At end of period (including undistributed net investment income of $1,436,463 and
$1,497,994, respectively) | | | $30,641,229 | | | | $31,345,275 | |
See Notes to Financial Statements
22
MFS Strategic Income Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $10.04 | | | | $10.14 | | | | $9.68 | | | | $8.72 | | | | $10.55 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.46 | | | | $0.48 | | | | $0.50 | | | | $0.51 | | | | $0.56 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | 0.61 | | | | (0.01 | ) | | | 0.45 | | | | 1.41 | | | | (1.76 | ) |
Total from investment operations | | | $1.07 | | | | $0.47 | | | | $0.95 | | | | $1.92 | | | | $(1.20 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.62 | ) | | | $(0.57 | ) | | | $(0.49 | ) | | | $(0.96 | ) | | | $(0.63 | ) |
Net asset value, end of period (x) | | | $10.49 | | | | $10.04 | | | | $10.14 | | | | $9.68 | | | | $8.72 | |
Total return (%) (k)(r)(s)(x) | | | 10.86 | | | | 4.74 | | | | 10.11 | | | | 24.25 | | | | (12.12 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.24 | | | | 1.12 | | | | 1.14 | | | | 1.18 | | | | 1.21 | |
Expenses after expense reductions (f) | | | 0.80 | | | | 0.80 | | | | 0.82 | | | | 0.85 | | | | 0.85 | |
Net investment income | | | 4.45 | | | | 4.69 | | | | 5.07 | | | | 5.63 | | | | 5.66 | |
Portfolio turnover | | | 40 | | | | 30 | | | | 46 | | | | 52 | | | | 41 | |
Net assets at end of period (000 omitted) | | | $25,349 | | | | $25,048 | | | | $28,120 | | | | $27,652 | | | | $20,331 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net asset value, beginning of period | | | $9.87 | | | | $9.97 | | | | $9.53 | | | | $8.60 | | | | $10.40 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.43 | | | | $0.45 | | | | $0.47 | | | | $0.48 | | | | $0.53 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | 0.60 | | | | (0.00 | )(w) | | | 0.44 | | | | 1.39 | | | | (1.73 | ) |
Total from investment operations | | | $1.03 | | | | $0.45 | | | | $0.91 | | | | $1.87 | | | | $(1.20 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.59 | ) | | | $(0.55 | ) | | | $(0.47 | ) | | | $(0.94 | ) | | | $(0.60 | ) |
Net asset value, end of period (x) | | | $10.31 | | | | $9.87 | | | | $9.97 | | | | $9.53 | | | | $8.60 | |
Total return (%) (k)(r)(s)(x) | | | 10.60 | | | | 4.53 | | | | 9.79 | | | | 23.88 | | | | (12.26 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.49 | | | | 1.37 | | | | 1.39 | | | | 1.43 | | | | 1.47 | |
Expenses after expense reductions (f) | | | 1.05 | | | | 1.05 | | | | 1.07 | | | | 1.10 | | | | 1.10 | |
Net investment income | | | 4.20 | | | | 4.44 | | | | 4.83 | | | | 5.40 | | | | 5.46 | |
Portfolio turnover | | | 40 | | | | 30 | | | | 46 | | | | 52 | | | | 41 | |
Net assets at end of period (000 omitted) | | | $5,292 | | | | $6,298 | | | | $6,741 | | | | $6,749 | | | | $5,834 | |
| (d) | | Per share data is based on average shares outstanding. |
| (f) | | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (r) | | Certain expenses have been reduced without which performance would have been lower. |
| (s) | | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (w) | | Per share amount was less than $0.01. |
| (x) | | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
23
MFS Strategic Income Series
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Strategic Income Series (the fund) is a series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests in high-yield securities rated below investment grade. Investments in high-yield securities involve greater degrees of credit and market risk than investments in higher-rated securities and tend to be more sensitive to economic conditions. The fund invests in foreign securities. Investments in foreign securities are vulnerable to the effects of changes in the relative values of the local currency and the U.S. dollar and to the effects of changes in each country’s legal, political, and economic environment.
In this reporting period the fund adopted Financial Accounting Standards Board (FASB) Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 seeks to improve the comparability of fair value measurements as presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) by providing common requirements for fair value measurement and disclosure.
In December 2011, the FASB issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods, ASU 2011-11 is intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. Although still evaluating the potential impacts of ASU 2011-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures.
Investment Valuations – Debt instruments and floating rate loans (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as provided by a third-party pricing service. Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Futures contracts are generally valued at last posted settlement price as provided by a third-party pricing service on the market on which they are primarily traded. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation as provided by a third-party pricing service on the market on which such futures contracts are primarily traded. Forward foreign currency exchange contracts are generally valued at the mean of bid and asked prices for the time period interpolated from rates provided by a third-party pricing service for proximate time periods. Swap agreements are generally valued at valuations provided by a third-party pricing service. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. The adviser generally relies on third-party pricing services or other information (such as the correlation with price
24
MFS Strategic Income Series
Notes to Financial Statements – continued
movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. Other financial instruments are derivative instruments not reflected in total investments, such as futures contracts and forward foreign currency exchange contracts. The following is a summary of the levels used as of December 31, 2012 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities | | | $55,018 | | | | $38,393 | | | | $4,076 | | | | $97,487 | |
U.S. Treasury Bonds & U.S. Government
Agency & Equivalents | | | — | | | | 465,266 | | | | — | | | | 465,266 | |
| Non-U.S. Sovereign Debt | | | — | | | | 3,723,180 | | | | — | | | | 3,723,180 | |
| U.S. Corporate Bonds | | | — | | | | 19,345,394 | | | | — | | | | 19,345,394 | |
| Residential Mortgage-Backed Securities | | | — | | | | 354,699 | | | | — | | | | 354,699 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 229,467 | | | | — | | | | 229,467 | |
| Asset-Backed Securities (including CDOs) | | | — | | | | 230,656 | | | | — | | | | 230,656 | |
| Foreign Bonds | | | — | | | | 5,192,151 | | | | — | | | | 5,192,151 | |
| Floating Rate Loans | | | — | | | | 14,526 | | | | — | | | | 14,526 | |
| Mutual Funds | | | 523,656 | | | | — | | | | — | | | | 523,656 | |
| Total Investments | | | $578,674 | | | | $29,593,732 | | | | $4,076 | | | | $30,176,482 | |
| | | | |
| Other Financial Instruments | | | | | | | | | | | | |
| Futures Contracts | | | $4,831 | | | | $— | | | | $— | | | | $4,831 | |
| Forward Foreign Currency Exchange Contracts | | | — | | | | (41,397 | ) | | | — | | | | (41,397 | ) |
For further information regarding security characteristics, see the Portfolio of Investments.
The following is a reconciliation of level 3 assets for which significant unobservable inputs were used to determine fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period. The table presents the activity of level 3 securities held at the beginning and the end of the period.
| | | | |
| | | Equity Securities | |
| Balance as of 12/31/11 | | | $10,202 | |
Change in unrealized appreciation (depreciation) | | | (6,126 | ) |
| Balance as of 12/31/12 | | | $4,076 | |
The net change in unrealized appreciation (depreciation) from investments still held as level 3 at December 31, 2012 is $(6,126).
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Derivatives – The fund uses derivatives for different purposes, primarily to increase or decrease exposure to a particular market or segment of the market, or security, to increase or decrease interest rate or currency exposure, or as alternatives to direct investments. Derivatives are used for hedging or non-hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. When the fund uses derivatives as an investment to increase market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative’s original cost.
25
MFS Strategic Income Series
Notes to Financial Statements – continued
The derivative instruments used by the fund were futures contracts, forward foreign currency exchange contracts, and swap agreements. The fund’s period end derivatives, as presented in the Portfolio of Investments and the associated Derivative Contract tables, generally are indicative of the volume of its derivative activity during the period.
The following table presents, by major type of derivative contract, the fair value, on a gross basis, of the asset and liability components of derivatives held by the fund at December 31, 2012 as reported in the Statement of Assets and Liabilities:
| | | | | | | | | | |
| | | | | Fair Value (a) | |
| Risk | | Derivative Contracts | | Asset Derivatives | | | Liability Derivatives | |
| Interest Rate | | Interest Rate Futures | | | $4,831 | | | | $— | |
| Foreign Exchange | | Forward Foreign Currency Exchange | | | 5,361 | | | | (46,758 | ) |
| Total | | | | | $10,192 | | | | $(46,758 | ) |
| (a) | The value of futures contracts outstanding includes cumulative appreciation (depreciation) as reported in the fund’s Portfolio of Investments. Only the current day variation margin for futures contracts is separately reported within the fund’s Statement of Assets and Liabilities. |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2012 as reported in the Statement of Operations:
| | | | | | | | | | | | |
| Risk | | Futures Contracts | | | Swap Agreements | | | Foreign Currency | |
| Interest Rate | | | $(36,298 | ) | | | $— | | | | $— | |
| Foreign Exchange | | | — | | | | — | | | | 28,270 | |
| Credit | | | — | | | | 2,744 | | | | — | |
| Total | | | $(36,298 | ) | | | $2,744 | | | | $28,270 | |
The following table presents, by major type of derivative contract, the change in unrealized appreciation (depreciation) on derivatives held by the fund for the year ended December 31, 2012 as reported in the Statement of Operations:
| | | | | | | | | | | | |
| Risk | | Futures Contracts | | | Swap Agreements | | | Translation of
Assets and
Liabilities in
Foreign Currencies | |
| Interest Rate | | | $4,831 | | | | $— | | | | $— | |
| Foreign Exchange | | | — | | | | — | | | | (65,363 | ) |
| Credit | | | — | | | | (2,263 | ) | | | — | |
| Total | | | $4,831 | | | | $(2,263 | ) | | | $(65,363 | ) |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an International Swaps and Derivatives Association (ISDA) Master Agreement on a bilateral basis with each of the counterparties with whom it undertakes a significant volume of transactions. The ISDA Master Agreement gives each party to the agreement the right to terminate all transactions traded under such agreement if there is a certain deterioration in the credit quality of the other party. The ISDA Master Agreement gives the fund the right, upon an event of default by the applicable counterparty or a termination of the agreement, to close out all transactions traded under such agreement and to net amounts owed under each transaction to one net amount payable by one party to the other. This right to close out and net payments across all transactions traded under the ISDA Master Agreement could result in a reduction of the fund’s credit risk to such counterparty equal to any amounts payable by the fund under the applicable transactions, if any. However, absent an event of default by the counterparty or a termination of the agreement, the ISDA Master Agreement does not result in an offset of reported amounts of assets and liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearing house for exchange traded derivatives (i.e., futures contracts and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forward foreign currency exchange contracts, swap agreements and over-the-counter options). For derivatives traded under an ISDA Master Agreement, the collateral requirements are netted across all transactions traded under such agreement and one amount is posted from one party to the other to collateralize such obligations. Cash collateral that has been pledged to cover obligations of the fund under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as restricted cash. Securities collateral pledged for the same purpose, if any, is noted in the Portfolio of Investments.
Futures Contracts – The fund entered into futures contracts which may be used to hedge against or obtain broad market exposure, interest rate exposure, currency exposure, or to manage duration. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
26
MFS Strategic Income Series
Notes to Financial Statements – continued
Upon entering into a futures contract, the fund is required to deposit with the broker, either in cash or securities, an initial margin in an amount equal to a certain percentage of the notional amount of the contract. Subsequent payments (variation margin) are made or received by the fund each day, depending on the daily fluctuations in the value of the contract, and are recorded for financial statement purposes as unrealized gain or loss by the fund until the contract is closed or expires at which point the gain or loss on futures contracts is realized.
The fund bears the risk of interest rates, exchange rates or securities prices moving unexpectedly, in which case, the fund may not achieve the anticipated benefits of the futures contracts and may realize a loss. While futures contracts may present less counterparty risk to the fund since the contracts are exchange traded and the exchange’s clearinghouse guarantees payments to the broker, there is still counterparty credit risk due to the insolvency of the broker. The fund’s maximum risk of loss due to counterparty credit risk is equal to the margin posted by the fund to the broker plus any gains or minus any losses on the outstanding futures contracts.
Forward Foreign Currency Exchange Contracts – The fund entered into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. These contracts may be used to hedge the fund’s currency risk or for non-hedging purposes. For hedging purposes, the fund may enter into contracts to deliver or receive foreign currency that the fund will receive from or use in its normal investment activities. The fund may also use contracts to hedge against declines in the value of foreign currency denominated securities due to unfavorable exchange rate movements. For non-hedging purposes, the fund may enter into contracts with the intent of changing the relative exposure of the fund’s portfolio of securities to different currencies to take advantage of anticipated exchange rate changes.
Forward foreign currency exchange contracts are adjusted by the daily exchange rate of the underlying currency and any unrealized gains or losses are recorded as a receivable or payable for forward foreign currency exchange contracts until the contract settlement date. On contract settlement date, any gain or loss on the contract is recorded as realized gains or losses on foreign currency.
Risks may arise upon entering into these contracts from unanticipated movements in the value of the contract and from the potential inability of counterparties to meet the terms of their contracts. Generally, the fund’s maximum risk due to counterparty credit risk is the unrealized gain on the contract due to the use of Continuous Linked Settlement, an industry accepted settlement system. This risk is mitigated in cases where there is an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and for posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.
Swap Agreements – The fund entered into swap agreements. A swap agreement is generally an exchange of cash payments, at specified intervals or upon the occurrence of specified events, between the fund and a counterparty. The net cash payments exchanged are recorded as a realized gain or loss on swap agreements in the Statement of Operations. The value of the swap agreement, which is adjusted daily and includes any related interest accruals to be paid or received by the fund, is recorded in the Statement of Assets and Liabilities. The daily change in value, including any related interest accruals to be paid or received, is recorded as unrealized appreciation or depreciation on swap agreements in the Statement of Operations. Amounts paid or received at the inception of the swap agreement are reflected as premiums paid or received in the Statement of Assets and Liabilities and are amortized using the effective interest method over the term of the agreement. A liquidation payment received or made upon early termination is recorded as a realized gain or loss on swap agreements in the Statement of Operations.
Risks related to swap agreements include the possible lack of a liquid market, unfavorable market and interest rate movements of the underlying instrument and the failure of the counterparty to perform under the terms of the agreements. To address counterparty risk, swap agreements are limited to only highly-rated counterparties. The risk is further mitigated by having an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and by the posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.
The fund entered into credit default swap agreements in order to manage its exposure to the market or certain sectors of the market, to reduce its credit risk exposure to defaults of corporate and sovereign issuers or to create exposure to corporate or sovereign issuers to which it is not otherwise exposed. In a credit default swap agreement, the protection buyer can make an upfront payment and will make a stream of payments based on a fixed percentage applied to the agreement notional amount to the protection seller in exchange for the right to receive a specified return upon the occurrence of a defined credit event on the reference obligation (which may be either a single security or a basket of securities issued by corporate or sovereign issuers) and, with respect to the rare cases where physical settlement applies, the delivery by the buyer to the seller of a defined deliverable obligation. Although agreement-specific, credit events generally consist of a combination of the following: bankruptcy, failure to pay, restructuring, obligation acceleration, obligation default, or repudiation/moratorium, each as defined in the 2003 ISDA Credit Derivatives Definitions as amended by the relevant agreement. Restructuring is generally not applicable when the reference obligation is issued by a North American corporation and obligation acceleration, obligation default, or repudiation/moratorium are generally only applicable when the reference obligation is issued by a sovereign entity or an entity in an emerging country. Upon
27
MFS Strategic Income Series
Notes to Financial Statements – continued
determination of the final price for the deliverable obligation (or upon delivery of the deliverable obligation in the case of physical settlement), the difference between the value of the deliverable obligation and the swap agreement’s notional amount is recorded as realized gain or loss on swap agreements in the Statement of Operations.
The fund’s maximum risk of loss from counterparty risk, either as the protection seller or as the protection buyer, is the fair value of the agreement. This risk is mitigated by having an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and by the posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.
Loans and Other Direct Debt Instruments – The fund invests in loans and loan participations or other receivables. These investments may include standby financing commitments, including revolving credit facilities, which obligate the fund to supply additional cash to the borrower on demand. Loan participations involve a risk of insolvency of the lending bank or other financial intermediary.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles. The fund earns certain fees in connection with its floating rate loan purchasing activities. These fees are in addition to interest payments earned and may include amendment fees, commitment fees, facility fees, consent fees, and prepayment fees. Commitment fees are recorded on an accrual basis as income in the accompanying financial statements. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date. Debt obligations may be placed on non-accrual status or set to accrue at a rate of interest less than the contractual coupon when the collection of all or a portion of interest has become doubtful. Interest income for those debt obligations may be further reduced by the write-off of the related interest receivables when deemed uncollectible.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount, for the year ended December 31, 2012, is shown as a reduction of total expenses in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to amortization and accretion of debt securities, straddle loss deferrals and derivative transactions.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/12 | | | 12/31/11 | |
| Ordinary income (including any short-term capital gains) | | | $1,790,008 | | | | $1,781,713 | |
28
MFS Strategic Income Series
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/12 | | | | |
| Cost of investments | | | $28,379,878 | |
| Gross appreciation | | | 2,288,343 | |
| Gross depreciation | | | (491,739 | ) |
| Net unrealized appreciation (depreciation) | | | $1,796,604 | |
| Undistributed ordinary income | | | 1,514,729 | |
| Capital loss carryforwards | | | (1,277,691 | ) |
| Other temporary differences | | | (142,164 | ) |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized after December 31, 2010 may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
As of December 31, 2012, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | | |
| Pre-enactment losses: | | | |
| 12/31/16 | | | $(327,441 | ) |
| 12/31/17 | | | (950,250 | ) |
| Total | | | $(1,277,691 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/12 | | | Year ended
12/31/11 | |
| Initial Class | | | $1,490,845 | | | | $1,441,082 | |
| Service Class | | | 299,163 | | | | 340,631 | |
| Total | | | $1,790,008 | | | | $1,781,713 | |
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
| | | | |
| First $1 billion of average daily net assets | | | 0.70% | |
| Average daily net assets in excess of $1 billion | | | 0.65% | |
The management fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.70% of the fund’s average daily net assets.
The investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, extraordinary expenses, brokerage and transaction costs and investment-related expenses, such that total annual operating expenses do not exceed 0.80% of average daily net assets for the Initial Class shares and 1.05% of average daily net assets for the Service Class shares. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2014. For the year ended December 31, 2012, this reduction amounted to $139,186 and is reflected as a reduction of total expenses in the Statement of Operations.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and
29
MFS Strategic Income Series
Notes to Financial Statements – continued
variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2012, the fee was $2,888, which equated to 0.0091% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2012, these costs amounted to $564.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2012 was equivalent to an annual effective rate of 0.0553% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended December 31, 2012, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $268 and are included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $113, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
Purchases and sales of investments, other than short-term obligations, were as follows:
| | | | | | | | |
| | | Purchases | | | Sales | |
| U.S. Government securities | | | $— | | | | $99,585 | |
| Investments (non-U.S. Government securities) | | | $12,420,931 | | | | $14,115,985 | |
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 396,729 | | | | $4,105,591 | | | | 327,891 | | | | $3,347,478 | |
Service Class | | | 54,317 | | | | 555,317 | | | | 159,197 | | | | 1,591,181 | |
| | | 451,046 | | | | $4,660,908 | | | | 487,088 | | | | $4,938,659 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 147,171 | | | | $1,490,845 | | | | 145,124 | | | | $1,441,082 | |
Service Class | | | 30,006 | | | | 299,163 | | | | 34,865 | | | | 340,631 | |
| | | 177,177 | | | | $1,790,008 | | | | 179,989 | | | | $1,781,713 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (622,601 | ) | | | $(6,484,155 | ) | | | (750,775 | ) | | | $(7,657,569 | ) |
Service Class | | | (209,193 | ) | | | (2,138,506 | ) | | | (231,553 | ) | | | (2,320,332 | ) |
| | | (831,794 | ) | | | $(8,622,661 | ) | | | (982,328 | ) | | | $(9,977,901 | ) |
30
MFS Strategic Income Series
Notes to Financial Statements – continued
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/12 | | | Year ended 12/31/11 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (78,701 | ) | | | $(887,719 | ) | | | (277,760 | ) | | | $(2,869,009 | ) |
Service Class | | | (124,870 | ) | | | (1,284,026 | ) | | | (37,491 | ) | | | (388,520 | ) |
| | | (203,571 | ) | | | $(2,171,745 | ) | | | (315,251 | ) | | | $(3,257,529 | ) |
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2012, the fund’s commitment fee and interest expense were $201 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 1,191,135 | | | | 8,978,893 | | | | (9,646,372 | ) | | | 523,656 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $693 | | | | $523,656 | |
31
MFS Strategic Income Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of
MFS Strategic Income Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Strategic Income Series (the “Fund”) (one of the series comprising MFS Variable Insurance Trust) as of December 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Strategic Income Series as of December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2013
32
MFS Strategic Income Series
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 1, 2013, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES | | | | | | | | |
Robert J. Manning (k) (age 49) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Chief Executive Officer and Director; President (until December 2009); Chief Investment Officer (until July 2010) | | N/A |
| | | | |
| INDEPENDENT TRUSTEES | | | | | | | | |
David H. Gunning (age 70) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman; Portman Limited (mining), Director (until 2008) |
| | | | |
Robert E. Butler (age 71) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 57) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 71) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 68) | | Trustee | | December 2004 | | Private investor; Rouse Properties Inc. (real estate), Director | | N/A |
| | | | |
John P. Kavanaugh (age 58) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
J. Dale Sherratt (age 74) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner | | N/A |
| | | | |
Laurie J. Thomsen
(age 55) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 71) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
John M. Corcoran (k) (age 47) | | President | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) | | N/A |
| | | | |
| Christopher R. Bohane (k) (age 39) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kino Clark (k) (age 44) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 53) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
| | | | |
Ethan D. Corey (k) (age 49) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
33
MFS Strategic Income Series
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During the Past Five Years | | Other Directorships (j) |
David L. DiLorenzo (k) (age 44) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Robyn L. Griffin (age 37) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 39) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 62) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 42) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 42) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 60) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Frank L. Tarantino (age 68) | | Independent
Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 42) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 52) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. For the period October 2008, until January 2012, Mr. Corcoran served as Treasurer of the Funds. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2013, the Trustees served as board members of 143 funds within the MFS Family of Funds.
34
MFS Strategic Income Series
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers William Adams James Calmas David Cole Robert Persons Matthew Ryan Erik Weisman | | |
35
MFS Strategic Income Series
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2012 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2011 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2011, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 3rd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 3rd quintile for the one-year period and the 4th quintile for the five-year period ended December 31, 2011 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
36
MFS Strategic Income Series
Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each lower than the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to institutional accounts, if any. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund is likely to benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2012.
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of the MFS Web site (mfs.com).
37
MFS Strategic Income Series
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling
1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios – VIT” in the “Products” section of mfs.com.
38
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: •Social Security number and account balances •Account transactions and transaction history •Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
39
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you •open an account or provide account information •direct us to buy securities or direct us to sell your securities •make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only •sharing for affiliates’ everyday business purposes – information about your creditworthiness •affiliates from using your information to market to you •sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
40
The Registrant has adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act and as defined in Form N-CSR that applies to the Registrant’s principal executive officer and principal financial and accounting officer. During the period covered by this report, the Registrant has not amended any provision in its Code of Ethics (the “Code”) that relates to an element of the Code’s definitions enumerated in paragraph (b) of Item 2 of this Form N-CSR. During the period covered by this report, the Registrant did not grant a waiver, including an implicit waiver, from any provision of the Code.
A copy of the Code of Ethics is filed as an exhibit to this Form N-CSR.
| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
Messrs. Robert E. Butler, John P. Kavanaugh and Robert W. Uek and Ms. Laurie J. Thomsen, members of the Audit Committee, have been determined by the Board of Trustees in their reasonable business judgment to meet the definition of “audit committee financial expert” as such term is defined in Form N-CSR. In addition, Messrs. Butler, Kavanaugh and Uek and Ms. Thomsen are “independent” members of the Audit Committee (as such term has been defined by the Securities and Exchange Commission in regulations implementing Section 407 of the Sarbanes-Oxley Act of 2002). The Securities and Exchange Commission has stated that the designation of a person as an audit committee financial expert pursuant to this Item 3 on the Form N-CSR does not impose on such a person any duties, obligations or liability that are greater than the duties, obligations or liability imposed on such person as a member of the Audit Committee and the Board of Trustees in the absence of such designation or identification.
| ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
Items 4(a) through 4(d) and 4(g):
The Board of Trustees has appointed Deloitte & Touche LLP (“Deloitte”) to serve as independent accountants to each series of the Registrant (collectively, the “Funds”). The tables below set forth the audit fees billed to the Funds as well as fees for non-audit services provided to the Funds and/or to the Funds’ investment adviser, Massachusetts Financial Services Company (“MFS”) and to various entities either controlling, controlled by, or under common control with MFS that provide ongoing services to the Funds (“MFS Related Entities”).
For the fiscal years ended December 31, 2012 and 2011, audit fees billed to the Funds by Deloitte were as follows:
| | | | | | | | |
| | | Audit Fees | |
| | | 2012 | | | 2011 | |
| Fees billed by Deloitte: | | | | | | | | |
MFS Core Equity Series | | | 42,656 | | | | 40,995 | |
MFS Growth Series | | | 42,656 | | | | 40,995 | |
MFS Global Equity Series | | | 41,904 | | | | 40,271 | |
MFS High Income Series | | | 60,884 | | | | 58,539 | |
MFS Investors Growth Stock Series | | | 41,904 | | | | 40,271 | |
MFS Investors Trust Series | | | 41,904 | | | | 40,271 | |
MFS Mid Cap Growth Series | | | 41,904 | | | | 40,271 | |
MFS New Discovery Series | | | 41,904 | | | | 40,271 | |
MFS Research Bond Series | | | 57,020 | | | | 54,820 | |
MFS Research International Series | | | 41,895 | | | | 40,262 | |
MFS Research Series | | | 42,656 | | | | 40,995 | |
MFS Strategic Income Series | | | 57,203 | | | | 54,996 | |
MFS Total Return Series | | | 56,213 | | | | 54,043 | |
MFS Utilities Series | | | 41,904 | | | | 40,271 | |
MFS Value Series | | | 42,656 | | | | 40,995 | |
Total | | | 695,263 | | | | 668,266 | |
For the fiscal years ended December 31, 2012 and 2011, fees billed by Deloitte for audit-related, tax and other services provided to the Funds and for audit-related, tax and other services provided to MFS and MFS Related Entities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Audit-Related Fees1 | | | Tax Fees2 | | | All Other Fees3 | |
| | | 2012 | | | 2011 | | | 2012 | | | 2011 | | | 2012 | | | 2011 | |
Fees billed by Deloitte: | | | | | | | | | | | | | | | | | | | | | | | | |
To MFS Core Equity Series | | | 2,400 | | | | 2,400 | | | | 4,889 | | | | 4,715 | | | | 845 | | | | 1,331 | |
To MFS Growth Series | | | 6,950 | | | | 2,400 | | | | 4,889 | | | | 4,715 | | | | 845 | | | | 1,331 | |
To MFS Global Equity Series | | | 2,400 | | | | 2,400 | | | | 4,889 | | | | 4,715 | | | | 845 | | | | 1,331 | |
To MFS High Income Series | | | 2,400 | | | | 2,400 | | | | 4,889 | | | | 4,715 | | | | 845 | | | | 1,331 | |
To MFS Investors Growth Stock Series | | | 2,400 | | | | 2,400 | | | | 4,889 | | | | 4,715 | | | | 845 | | | | 1,331 | |
To MFS Investors Trust Series | | | 2,400 | | | | 2,400 | | | | 4,889 | | | | 4,715 | | | | 845 | | | | 1,331 | |
To MFS Mid Cap Growth Series | | | 6,950 | | | | 2,400 | | | | 4,889 | | | | 4,715 | | | | 845 | | | | 1,331 | |
To MFS New Discovery Series | | | 4,450 | | | | 2,400 | | | | 4,889 | | | | 4,715 | | | | 845 | | | | 1,331 | |
To MFS Research Bond Series | | | 6,500 | | | | 2,400 | | | | 4,889 | | | | 4,715 | | | | 845 | | | | 1,331 | |
To MFS Research International Series | | | 2,400 | | | | 2,400 | | | | 4,889 | | | | 4,715 | | | | 845 | | | | 1,331 | |
To MFS Research Series | | | 4,450 | | | | 2,400 | | | | 4,889 | | | | 4,715 | | | | 845 | | | | 1,331 | |
To MFS Strategic Income Series | | | 2,400 | | | | 2,400 | | | | 4,889 | | | | 4,715 | | | | 845 | | | | 1,331 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
To MFS Total Return Series | | | 2,400 | | | | 2,400 | | | | 4,889 | | | | 4,715 | | | | 845 | | | | 1,331 | |
To MFS Utilities Series | | | 2,400 | | | | 2,400 | | | | 4,889 | | | | 4,715 | | | | 845 | | | | 1,331 | |
To MFS Value Series | | | 4,450 | | | | 2,400 | | | | 4,889 | | | | 4,715 | | | | 845 | | | | 1,331 | |
Total fees billed by Deloitte To above Funds: | | | 55,350 | | | | 36,000 | | | | 73,335 | | | | 70,725 | | | | 12,675 | | | | 19,965 | |
| | | |
| | | Audit-Related Fees1 | | | Tax Fees2 | | | All Other Fees3 | |
| | | 2012 | | | 2011 | | | 2012 | | | 2011 | | | 2012 | | | 2011 | |
Fees billed by Deloitte: | | | | | | | | | | | | | | | | | | | | | | | | |
To MFS and MFS Related Entities of MFS Core Equity Series* | | | 1,135,274 | | | | 1,265,664 | | | | 0 | | | | 0 | | | | 0 | | | | 53,100 | |
To MFS and MFS Related Entities of MFS Growth Series* | | | 1,135,274 | | | | 1,265,664 | | | | 0 | | | | 0 | | | | 0 | | | | 53,100 | |
To MFS and MFS Related Entities of MFS Global Equity Series* | | | 1,135,274 | | | | 1,265,664 | | | | 0 | | | | 0 | | | | 0 | | | | 53,100 | |
To MFS and MFS Related Entities of MFS High Income Series* | | | 1,135,274 | | | | 1,265,664 | | | | 0 | | | | 0 | | | | 0 | | | | 53,100 | |
To MFS and MFS Related Entities of MFS Investors Growth Stock Series* | | | 1,135,274 | | | | 1,265,664 | | | | 0 | | | | 0 | | | | 0 | | | | 53,100 | |
To MFS and MFS Related Entities of MFS Investors Trust Series* | | | 1,135,274 | | | | 1,265,664 | | | | 0 | | | | 0 | | | | 0 | | | | 53,100 | |
To MFS and MFS Related Entities of MFS Mid Cap Growth Series* | | | 1,135,274 | | | | 1,265,664 | | | | 0 | | | | 0 | | | | 0 | | | | 53,100 | |
To MFS and MFS Related Entities of MFS New Discovery Series* | | | 1,135,274 | | | | 1,265,664 | | | | 0 | | | | 0 | | | | 0 | | | | 53,100 | |
To MFS and MFS Related Entities of MFS Research Bond Series* | | | 1,135,274 | | | | 1,265,664 | | | | 0 | | | | 0 | | | | 0 | | | | 53,100 | |
To MFS and MFS Related Entities of MFS Research International Series* | | | 1,135,274 | | | | 1,265,664 | | | | 0 | | | | 0 | | | | 0 | | | | 53,100 | |
To MFS and MFS Related Entities of MFS Research Series* | | | 1,135,274 | | | | 1,265,664 | | | | 0 | | | | 0 | | | | 0 | | | | 53,100 | |
To MFS and MFS Related Entities of MFS Strategic Income Series* | | | 1,135,274 | | | | 1,265,664 | | | | 0 | | | | 0 | | | | 0 | | | | 53,100 | |
To MFS and MFS Related Entities of MFS Total Return Series* | | | 1,135,274 | | | | 1,265,664 | | | | 0 | | | | 0 | | | | 0 | | | | 53,100 | |
To MFS and MFS Related Entities of MFS Utilities Series* | | | 1,135,274 | | | | 1,265,664 | | | | 0 | | | | 0 | | | | 0 | | | | 53,100 | |
To MFS and MFS Related Entities of MFS Value Series* | | | 1,135,274 | | | | 1,265,664 | | | | 0 | | | | 0 | | | | 0 | | | | 53,100 | |
| | | | | | | | |
| | | 2012 | | | 20114 | |
Aggregate fees for non-audit services: | | | | | | | | |
To MFS Core Equity Series, MFS and MFS Related Entities# | | | 1,366,478 | | | | 1,646,425 | |
To MFS Growth Series, MFS and MFS Related Entities# | | | 1,371,028 | | | | 1,646,425 | |
To MFS Global Equity Series, MFS and MFS Related Entities# | | | 1,366,478 | | | | 1,646,425 | |
To MFS High Income Series, MFS and MFS Related Entities# | | | 1,366,478 | | | | 1,646,425 | |
To MFS Investors Growth Stock Series, MFS and MFS Related Entities# | | | 1,366,478 | | | | 1,646,425 | |
To MFS Investors Trust Series, MFS and MFS Related Entities# | | | 1,366,478 | | | | 1,646,425 | |
To MFS Mid Cap Growth Series, MFS and MFS Related Entities# | | | 1,371,028 | | | | 1,646,425 | |
To MFS New Discovery Series, MFS and MFS Related Entities# | | | 1,368,528 | | | | 1,646,425 | |
To MFS Research Bond Series, MFS and MFS Related Entities# | | | 1,370,578 | | | | 1,646,425 | |
To MFS Research International Series, MFS and MFS Related Entities# | | | 1,366,478 | | | | 1,646,425 | |
To MFS Research Series, MFS and MFS Related Entities# | | | 1,368,528 | | | | 1,646,425 | |
To MFS Strategic Income Series, MFS and MFS Related Entities# | | | 1,366,478 | | | | 1,646,425 | |
To MFS Total Return Series, MFS and MFS Related Entities# | | | 1,366,478 | | | | 1,646,425 | |
To MFS Utilities Series, MFS and MFS Related Entities# | | | 1,366,478 | | | | 1,646,425 | |
To MFS Value Series, MFS and MFS Related Entities# | | | 1,368,528 | | | | 1,646,425 | |
| * | This amount reflects the fees billed to MFS and MFS Related Entities for non-audit services relating directly to the operations and financial reporting of the Funds (portions of which services also related to the operations and financial reporting of other funds within the MFS Funds complex). |
| # | This amount reflects the aggregate fees billed by Deloitte for non-audit services rendered to the Funds and for non-audit services rendered to MFS and the MFS Related Entities. |
| 1 | The fees included under “Audit-Related Fees” are fees related to assurance and related services that are reasonably related to the performance of the audit or review of financial statements, but not reported under ‘‘Audit Fees,’’ including accounting consultations, agreed-upon procedure reports, attestation reports, comfort letters and internal control reviews. |
| 2 | The fees included under “Tax Fees” are fees associated with tax compliance, tax advice and tax planning, including services relating to the filing or amendment of federal, state or local income tax returns, regulated investment company qualification reviews and tax distribution and analysis. |
| 3 | The fees included under “All Other Fees” are fees for products and services provided by Deloitte other than those reported under “Audit Fees,” “Audit-Related Fees” and “Tax Fees,” including fees for services related to review of internal controls and review of Rule 38a-1 compliance program. |
| 4 | Deloitte fees reported in 2011 have been restated in this filing from those reported in the Registrant’s filing for the reporting period ended December 31, 2011. |
Item 4(e)(1):
Set forth below are the policies and procedures established by the Audit Committee of the Board of Trustees relating to the pre-approval of audit and non-audit related services:
To the extent required by applicable law, pre-approval by the Audit Committee of the Board is needed for all audit and permissible non-audit services rendered to the Funds and all permissible non-audit services rendered to MFS or MFS Related Entities if the services relate directly to the operations and financial reporting of the Registrant. Pre-approval is currently on an engagement-by-engagement basis. In the event pre-approval of such services is necessary between regular meetings of the Audit Committee and it is not practical to wait to seek pre-approval at the next regular meeting of the Audit Committee, pre-approval of such services may be referred to the Chair of the Audit Committee for approval; provided that the Chair may not pre-approve any individual engagement for such services exceeding $50,000 or multiple engagements for such services in the aggregate exceeding $100,000 in each period between regular meetings of the Audit Committee. Any engagement pre-approved by the Chair between regular meetings of the Audit Committee shall be presented for ratification by the entire Audit Committee at its next regularly scheduled meeting.
Item 4(e)(2):
None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and All Other Fees paid by the Fund and MFS and MFS Related Entities relating directly to the operations and financial reporting of the Registrant disclosed above were approved by the audit committee pursuant to paragraphs (c)(7)(i)(C) of Rule 2-01 of Regulation S-X (which permits audit committee approval after the start of the engagement with respect to services other than audit, review or attest services, if certain conditions are satisfied).
Item 4(f): Not applicable.
Item 4(h): The Registrant’s Audit Committee has considered whether the provision by a Registrant’s independent registered public accounting firm of non-audit services to MFS and MFS Related Entities that were not pre-approved by the Committee (because such services did not relate directly to the operations and financial reporting of the Registrant) was compatible with maintaining the independence of the independent registered public accounting firm as the Registrant’s principal auditors.
| ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
Not applicable to the Registrant.
A schedule of investments of the Registrant is included as part of the report to shareholders of such series under Item 1 of this Form N-CSR.
| ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable to the Registrant.
| ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable to the Registrant.
| ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
Not applicable to the Registrant.
| ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
There were no material changes to the procedures by which shareholders may send recommendations to the Board for nominees to the Registrant’s Board since the Registrant last provided disclosure as to such procedures in response to the requirements of Item 407 (c)(2)(iv) of Regulation S-K or this Item.
| ITEM 11. | CONTROLS AND PROCEDURES. |
| (a) | Based upon their evaluation of the effectiveness of the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as conducted within 90 days of the filing date of this report on Form N-CSR, the registrant’s principal financial officer and principal executive officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. |
| (b) | There were no changes in the registrant’s internal controls over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of the period covered by the report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| (a) | File the exhibits listed below as part of this form. Letter or number the exhibits in the sequence indicated. |
| | (1) | Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit: Code of Ethics attached hereto. |
| | (2) | A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Act (17 CFR 270.30a-2): Attached hereto. |
| (b) | If the report is filed under Section 13(a) or 15(d) of the Exchange Act, provide the certifications required by Rule 30a-2(b) under the Act (17 CFR 270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) as an exhibit. A certification furnished pursuant to this paragraph will not be deemed “filed” for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference: Attached hereto. |
Notice
A copy of the Amended and Restated Declaration of Trust, as amended, of the Registrant is on file with the Secretary of State of The Commonwealth of Massachusetts and notice is hereby given that this instrument is executed on behalf of the Registrant by an officer of the Registrant as an officer and not individually and the obligations of or arising out of this instrument are not binding upon any of the Trustees or shareholders individually, but are binding only upon the assets and property of the respective constituent series of the Registrant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) MFS VARIABLE INSURANCE TRUST
| | |
| By (Signature and Title)* | | JOHN M. CORCORAN |
| | John M. Corcoran, President |
Date: February 15, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | |
| By (Signature and Title)* | | JOHN M. CORCORAN |
| | John M. Corcoran, President (Principal Executive Officer) |
|
| Date: February 15, 2013 |
| |
| By (Signature and Title)* | | DAVID L. DILORENZO |
| | David L. DiLorenzo, Treasurer (Principal Financial Officer and Accounting Officer) |
Date: February 15, 2013
| * | Print name and title of each signing officer under his or her signature. |
