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 811-10201
---------------------------------------------
Touchstone Variable Series Trust
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
221 East Fourth Street, Suite 300, Cincinnati, Ohio 45202
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Patrick T. Bannigan, 221 East Fourth Street, Suite 300, Cincinnati, Ohio 45202
- --------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (800) 669-2796
-----------------------------
Date of fiscal year end: 6/30
-----------
Date of reporting period: 6/30/03
-----------
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
TOUCHSTONE VARIABLE
- ------------------------------------------------------------- SERIES
TRUST
TOUCHSTONE VARIABLE SERIES TRUST
o Touchstone Baron Small Cap Fund
o Touchstone Large Cap Growth Fund
o Touchstone Third Avenue Value Fund
ANNUAL REPORT
JUNE 30, 2003
TOUCHSTONE VARIABLE SERIES TRUST
ANNUAL REPORT
JUNE 30, 2003
Contents
President's Letter ........................................................... 1
Report of Independent Auditors ................................................2
Financial Statements, Financial Highlights, and Schedules of
Investments:
Touchstone Baron Small Cap Fund .......................................... 3
Touchstone Large Cap Growth Fund.......................................... 9
Touchstone Third Avenue Value Fund........................................15
Notes to Financial Statements ................................................21
Portfolio Performance and Management Discussion and Analysis..................34
LETTER FROM THE PRESIDENT
Dear Touchstone Investor:
We are pleased to provide you with the Touchstone Variable Series Trust.s Annual
Report for the twelve months ended June 30, 2003. This update includes
investment activity and performance for the Touchstone Baron Small Cap Fund,
Touchstone Large Cap Growth Fund and Touchstone Third Avenue Value Fund, which
meet a variety of investment goals.
Earlier this year, a Plan of Reorganization was completed providing for the
acquisition of all assets from the Legends Fund, Inc. by the Touchstone Variable
Series Trust, which now includes 11 investment options.
Navigating the investment markets amid continued volatility proved to be
extremely challenging during the fiscal year. Geopolitical events, corporate
accounting scandals, profit woes and the threat of terrorism fostered equity
market volatility and eroded consumer confidence.
More recently, however, stronger equity market returns resulted from quick
resolution of military action, further interest rate cuts by the Federal Reserve
and more aggressive fiscal policy. Government and industry reports signal the
economy is gaining positive momentum, as rising corporate profits and cash flow
have begun to fuel consumer and business spending.
We at Touchstone remain optimistic about the resilience of both the economy and
the financial markets and are focused on positioning our Funds for success.
Mutual funds provide the diversification that can help keep your financial
strategy on course. We believe our fund managers. disciplined approach is well
suited to helping you attain your financial objectives.
Thank you for your confidence in Touchstone and the opportunity to work on your
behalf.
Best Regards,
/s/ Patrick Bannigan
Patrick Bannigan
President
Touchstone Variable Series Trust
Touchstone Variable Series Trust funds are distributed by Touchstone Securities,
Inc.*
*Member of NASD and SIPC.
1
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of
Touchstone Variable Series Trust
We have audited the accompanying statements of assets and liabilities of
Touchstone Baron Small Cap Fund, Touchstone Large Cap Growth Fund, and
Touchstone Third Avenue Value Fund, each a series of Touchstone Variable Series
Trust (formerly Baron Small Cap Portfolio, Harris Bretall Sullivan & Smith
Equity Growth Portfolio, and Third Avenue Value Portfolio, respectively, each
formerly a series of The Legends Fund, Inc.) (the .Funds.), including the
schedules of investments, as of June 30, 2003, and the related statements of
operations for the year then ended, the statements of changes in net assets for
each of the two years then ended, and financial highlights for each of the five
years then ended. These financial statements and financial highlights are the
responsibility of the Funds. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of June 30, 2003, by correspondence with the custodians and brokers or
by other appropriate auditing procedures where replies from brokers were not
received. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. 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
Touchstone Baron Small Cap Fund, Touchstone Large Cap Growth Fund, and
Touchstone Third Avenue Value Fund as of June 30, 2003, the results of their
operations for the year then ended, the changes in their net assets for each of
the two years then ended, and the financial highlights for each of the five
years then ended in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Cincinnati, Ohio
August 18, 2003
2
TOUCHSTONE BARON SMALL CAP FUND
Statement of Assets and Liabilities
June 30, 2003
ASSETS
Investments in securities, at value (cost $9,289,487) -
including $284,139 of securities loaned $ 11,570,139
Cash 393,075
Cash collateral for securities loaned 298,413
Dividends and interest receivable 964
Receivable for capital shares sold 5,493
------------
Total assets 12,268,084
------------
LIABILITIES
Payable upon return of securities loaned 298,413
Payable to affiliates 9,959
Payable for capital shares redeemed 9,873
Accrued expenses 24,194
------------
Total liabilities 342,439
------------
NET ASSETS $ 11,925,645
============
Net Assets consist of:
Paid-in capital $ 10,933,990
Accumulated net realized loss on investments (1,288,997)
Net unrealized appreciation on investments 2,280,652
------------
NET ASSETS, for 961,773 shares outstanding $ 11,925,645
============
NET ASSET VALUE, offering and redemption price per share $ 12.40
============
Statement of Operations
Year Ended June 30, 2003
INVESTMENT INCOME
Interest $ 2,448
Dividends 9,830
Income from securities loaned - net 71
------------
Total investment income 12,349
------------
EXPENSES
Investment advisory and management fees 107,252
Custody fees 45,407
Accounting fees 3,111
Professional fees 58,514
Trustees' fees and expenses 14,700
Printing expense 10,185
Administration fees 4,666
Sponsor fees 4,040
Other expenses 2,623
------------
Total expenses 250,498
Less: sponsor fees waived (4,040)
expense reimbursement (80,885)
------------
Total net expenses 165,573
------------
Net investment loss (153,224)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (716,709)
Net change in unrealized appreciation/
depreciation on investments 776,043
------------
Net realized and unrealized gain on investments 59,334
------------
Net decrease in net assets resulting from operations $ (93,890)
============
See accompanying notes.
3
TOUCHSTONE BARON SMALL CAP FUND
Statements of Changes in Net Assets
YEAR ENDED JUNE 30,
2003 2002
------------ ------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss $ (153,224) $ (119,842)
Net realized loss on investments (716,709) (443,543)
Net change in unrealized appreciation/depreciation
on investments 776,043 653,901
------------ ------------
Net increase (decrease) in net assets resulting from operations (93,890) 90,516
------------ ------------
Capital share transactions:
Proceeds from sales of shares 6,641,305 13,276,208
Cost of shares redeemed (6,599,659) (8,086,777)
------------ ------------
Net increase in net assets resulting from capital share transactions 41,646 5,189,431
------------ ------------
Total increase (decrease) in net assets (52,244) 5,279,947
NET ASSETS
Beginning of year 11,977,889 6,697,942
------------ ------------
End of year $ 11,925,645 $ 11,977,889
============ ============
OTHER INFORMATION
Shares:
Sold 597,276 1,094,751
Redeemed (591,765) (657,896)
------------ ------------
Net increase in shares outstanding 5,511 436,855
============ ============
See accompanying notes.
4
TOUCHSTONE BARON SMALL CAP FUND
Financial Highlights
Year Ended June 30,
2003 2002 2001 2000 1999
------------------------------------------------------------------
SELECTED PER-SHARE DATA
Net asset value, beginning
of year $ 12.53 $ 12.90 $ 11.64 $ 12.17 $ 17.58
------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (0.16) (0.13) (0.03) 0.21 0.10
Net realized and unrealized
gain (loss) on investments 0.03 (0.24) 1.51 (0.64) (1.80)
------------------------------------------------------------------
Total from investment operations (0.13) (0.37) 1.48 (0.43) (1.70)
------------------------------------------------------------------
Less distributions:
From net investment income -- -- (0.22) (0.10) (0.04)
From net realized gain -- -- -- -- (3.67)
------------------------------------------------------------------
Total distributions -- -- (0.22) (0.10) (3.71)
------------------------------------------------------------------
Net asset value, end of year $ 12.40 $ 12.53 $ 12.90 $ 11.64 $ 12.17
==================================================================
TOTAL RETURN (1.04%) (2.87%) 12.83% (3.52%) (9.24%)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year
(in thousands) $ 11,926 $ 11,978 $ 6,698 $ 5,917 $ 10,994
Ratio of net expenses to average
net assets 1.62% 1.55% 1.55% 1.55% 1.54%
Ratio of expenses to average net
assets before expense reimbursement 2.44% 2.32% 3.10% 2.25% 1.64%
Ratio of net investment income (loss)
to average net assets (1.49%) (1.33%) (0.33%) 1.33% 0.71%
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement (2.32%) (2.10%) (1.88%) 0.63% 0.61%
Portfolio turnover rate 29% 91% 221% 224% 76%
See accompanying notes.
5
TOUCHSTONE BARON SMALL CAP FUND
Schedule of Investments
June 30, 2003
SHARES VALUE
COMMON STOCKS-- 97.0%
ADVERTISING SERVICES -- 1.0%
3,000 Getty Images, Inc.* $ 123,900
------------
BUSINESS SERVICES -- 7.6%
8,000 Catalina Marketing Corp.* 141,200
12,000 ChoicePoint Inc.* 414,240
6,000 Fair Isaac Corp. 308,700
7,000 PRG-Schultz International, Inc.* 41,300
------------
905,440
------------
CHEMICALS -- 0.7%
5,000 Symyx Technologies, Inc.* 81,600
------------
CONSUMER SERVICES -- 1.6%
4,100 Sotheby's Holdings, Inc. - Class A* 30,504
3,400 Weight Watchers International, Inc.* 154,666
------------
185,170
------------
EDUCATION -- 10.4%
5,500 Apollo Group, Inc.* 339,680
4,700 DeVry, Inc.* 109,463
3,800 Education Management Corp.* 202,084
1,500 Strayer Education, Inc. 119,175
9,500 University of Phoenix Online* 481,650
------------
1,252,052
------------
ENERGY SERVICES -- 3.7%
3,000 Premcor, Inc.* 64,650
6,000 SEACOR SMIT, Inc.* 218,940
8,000 XTO Energy, Inc. 160,880
------------
444,470
------------
FINANCIAL -- 6.7%
8,500 Arch Capital Group Ltd.* 295,205
5,000 CheckFree Corp.* 139,200
4,000 Endurance Specialty Holdings Limited 119,400
5,000 Jefferies Group, Inc. 248,950
------------
802,755
------------
GOVERNMENT SERVICES -- 1.5%
6,600 Anteon International Corp.* 184,206
------------
HEALTHCARE FACILITIES -- 5.1%
13,500 Manor Care, Inc.* 337,635
12,000 United Surgical Partners International, Inc.* 271,080
------------
608,715
------------
HEALTHCARE SERVICES -- 7.1%
4,000 Centene Corp.* 155,600
6,600 Charles River Laboratiories International, Inc.* 212,388
8,000 Cobalt Corp.* 164,400
8,500 CTI Molecular Imaging, Inc.* 160,735
4,000 Odyssey Healthcare, Inc.* 148,000
------------
841,123
------------
6
TOUCHSTONE BARON SMALL CAP FUND
Schedule of Investments
June 30, 2003
SHARES VALUE
HOME BUILDING-- 0.6%
1,200 Hovnanian Enterprises, Inc. - Class A* $ 70,740
------------
HOTELS AND LODGING -- 7.2%
10,000 Choice Hotels International, Inc.* 273,100
17,500 Extended Stay America, Inc.* 236,075
8,000 Four Seasons Hotels Inc. 346,080
------------
855,255
------------
MEDIA -- 8.3%
4,000 Cox Radio, Inc. - Class A* 92,440
9,000 Gray Television, Inc. 111,600
12,000 Lin TV Corp. - Class A* 282,600
10,000 Radio One, Inc. - Class D* 177,700
5,000 Radio One, Inc.* 89,300
12,000 Saga Communications, Inc. - Class A* 233,400
------------
987,040
------------
PRINGING & PUBLISHING -- 1.8%
6,000 Arbitron, Inc.* 214,200
------------
REAL ESTATE -- 1.7%
1,500 Alexander's, Inc.* 125,235
2,000 LNR Property Corp. 74,800
------------
200,035
------------
RECREATION & RESORTS -- 10.2%
15,500 Kerzner International Ltd.* 499,255
7,000 Station Casinos, Inc.* 176,750
14,000 Vail Resorts, Inc.* 188,580
20,000 Wynn Resorts, Ltd.* 353,800
------------
1,218,385
------------
RESTAURANTS -- 6.9%
8,000 California Pizza Kitchen, Inc.* 172,000
10,000 Krispy Kreme Doughnuts, Inc.* 411,800
6,500 The Cheesecake Factory Inc.* 233,285
------------
817,085
------------
RETAIL STORES -- 8.9%
10,000 Chico's FAS, Inc.* 210,500
6,000 Dollar Tree Stores, Inc.* 190,380
6,500 Ethan Allen Interiors Inc. 228,540
6,000 PETCO Animal Supplies, Inc.* 130,440
8,000 Polo Ralph Lauren Corp. 206,320
20,000 Smart & Final Inc.* 92,600
------------
1,058,780
------------
SOFTWARE -- 1.2%
2,800 Kronos Inc.* 142,268
------------
TECHNOLOGY -- 0.0%
18 MicroStrategy Inc. - Class A* 655
88 MicroStrategy Inc. - WT07* 18
------------
673
------------
7
TOUCHSTONE BARON SMALL CAP FUND
Schedule of Investments
June 30, 2003
SHARES VALUE
TRANSPORTATION -- 2.7%
7,500 JetBlue Airways Corp.* $ 317,175
------------
UTILITY SERVICES -- 1.0%
7,000 Southern Union Company* 118,580
------------
WHOLESALE TRADE -- 1.1%
6,000 Libbey Inc. 136,200
------------
TOTAL COMMON STOCKS $ 11,565,847
------------
PRINCIPAL
AMOUNT
CORPORATE BONDS -- 0.0%
TECHNOLOGY -- 0.0%
$ 3,700 MicroStrategy, 7.50%, 6/24/07 $ 4,292
------------
TOTAL INVESTMENT SECURITIES -- 97.0%
(Cost $9,289,487) - including $284,139 of
securities loaned $ 11,570,139
OTHER ASSETS IN EXCESS OF LIABILITIES-- 3.0% 355,506
------------
NET ASSETS-- 100.0% $ 11,925,645
============
* Non-income producing security.
See accompanying notes.
8
TOUCHSTONE LARGE CAP GROWTH FUND
Statement of Assets and Liabilities
June 30, 2003
ASSETS
Investments in securities, at value (cost $26,527,373) $ 28,006,881
Cash 709,308
Dividends and interest receivable 17,578
------------
Total assets 28,733,767
------------
LIABILITIES
Payable to affiliates 17,514
Payable for capital shares redeemed 41,847
Accrued expenses 51,380
------------
Total liabilities 110,741
------------
NET ASSETS $ 28,623,026
============
Net Assets consist of:
Paid-in capital $ 43,044,492
Accumulated net realized loss on investments (15,900,974)
Net unrealized appreciation on investments 1,479,508
------------
NET ASSETS, for 2,910,606 shares outstanding $ 28,623,026
============
NET ASSET VALUE, offering and redemption price per share $ 9.83
============
Statement of Operations
Year Ended June 30, 2003
INVESTMENT INCOME
Dividends $ 171,727
Interest 2,977
------------
Total investment income 174,704
------------
EXPENSES
Investment advisory and management fees 126,615
Custody fees 37,170
Accounting fees 2,893
Professional fees 59,837
Trustees' fees and expenses 17,340
Printing expense 10,185
Administration fees 4,339
Sponsor fees 10,172
Other expenses 2,442
------------
Total expenses 270,993
Less: sponsor fees waived (10,172)
expense reimbursement (51,908)
------------
Total net expenses 208,913
------------
Net investment loss (34,209)
------------
REALIZED AND UNREALIZED GAINS (LOSS) ON INVESTMENTS
Net realized loss on investments (5,407,929)
Net change in unrealized appreciation/
depreciation on investments 5,855,636
------------
Net realized and unrealized gain on investments 447,707
------------
Net increase in net assets resulting from operations $ 413,498
============
See accompanying notes.
9
TOUCHSTONE LARGE CAP GROWTH FUND
Statements of Changes in Net Assets
YEAR ENDED JUNE 30,
2003 2002
------------ ------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss $ (34,209) $ (86,097)
Net realized loss on investments (5,407,929) (5,689,731)
Net change in unrealized appreciation/depreciation on investments 5,855,636 (3,883,419)
------------ ------------
Net increase (decrease) in net assets resulting from operations 413,498 (9,659,247)
------------ ------------
Distributions to shareholders from:
Net realized gain -- (2,554,047)
------------ ------------
Capital share transactions:
Proceeds from sales of shares 3,017,614 4,229,741
Proceeds from shares issued in connection with acquisitions (Note 4) 11,653,247 --
Proceeds from reinvested distributions -- 2,554,047
Cost of shares redeemed (6,770,667) (6,269,144)
------------ ------------
Net increase in net assets resulting from capital share transactions 7,900,194 514,644
------------ ------------
Total increase (decrease) in net assets 8,313,692 (11,698,650)
NET ASSETS
Beginning of year 20,309,334 32,007,984
------------ ------------
End of year $ 28,623,026 $ 20,309,334
============ ============
OTHER INFORMATION
Shares:
Sold 331,640 341,525
Shares issued in connection with acquisitions (Note 4) 1,279,171 --
Issued through reinvestment of distributions -- 239,965
Redeemed (762,045) (529,308)
------------ ------------
Net increase in shares outstanding 848,766 52,182
============ ============
See accompanying notes.
10
TOUCHSTONE LARGE CAP GROWTH FUND
Financial Highlights
YEAR ENDED JUNE 30,
2003 2002 2001 2000 1999
------------------------------------------------------------------
SELECTED PER-SHARE DATA
Net asset value, beginning
of year $ 9.85 $ 15.93 $ 30.25 $ 26.00 $ 21.11
------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss (0.01) (0.04) (0.10) (0.05) (0.06)
Net realized and unrealized
gains (loss) on investments (0.01) (4.73) (9.42) 4.83 7.17
------------------------------------------------------------------
Total from investment operations (0.02) (4.77) (9.52) 4.78 7.11
------------------------------------------------------------------
Less distributions:
From net realized gain -- (1.31) (4.80) (0.53) (2.22)
------------------------------------------------------------------
Net asset value, end of year $ 9.83 $ 9.85 $ 15.93 $ 30.25 $ 26.00
==================================================================
TOTAL RETURN (0.16%) (30.55%) (37.42%) 18.89% 35.19%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year
(in thousands) $ 28,623 $ 20,309 $ 32,008 $ 56,879 $ 55,428
Ratio of net expenses to average
net assets 1.16% 1.15% 1.07% 1.01% 0.96%
Ratio of expenses to average net
assets before expense reimbursement 1.51% 1.17% 1.07% 1.01% 0.96%
Ratio of net investment loss
to average net assets (0.19%) (0.33%) (0.45%) (0.39%) (0.29%)
Ratio of net investment loss
to average net assets before
voluntary expense reimbursement (0.54%) (0.35%) (0.45%) (0.39%) (0.29%)
Portfolio turnover rate 70% 31% 47% 40% 27%
See accompanying notes.
11
TOUCHSTONE LARGE CAP GROWTH FUND
Schedule of Investments
June 30, 2003
SHARES VALUE
COMMON STOCKS -- 97.8%
BANKS -- 1.5%
10,700 Bank of New York Inc. $ 307,625
2,300 Wells Fargo & Co. 115,920
------------
423,545
------------
BIOTECHNOLOGY -- 5.0%
12,050 Amgen Inc.* 800,602
7,000 Genentech, Inc.* 504,840
3,200 Genzyme Corp.* 133,760
------------
1,439,202
------------
CAPITAL GOODS -- 7.5%
4,250 3M Co. 548,165
45,630 General Electric Co. 1,308,668
4,600 Illinois Tool Works Inc. 302,910
------------
2,159,743
------------
CONSUMER CYCLICALS -- 7.2%
10,500 Bed Bath & Beyond Inc.* 407,505
17,000 Best Buy Co.* 746,640
6,800 Home Depot, Inc. 225,216
9,000 Kohls Corp.* 462,420
2,700 Lowe's Companies, Inc. 115,965
5,700 Staples, Inc.* 104,595
------------
2,062,341
------------
CONSUMER SERVICES -- 2.6%
2,300 Fedex Corp. 142,669
15,000 Robert Half International, Inc.* 284,100
5,000 United Parcel Service, Inc. - Class B 318,500
------------
745,269
------------
CONSUMER STAPLES -- 5.3%
10,900 Anheuser-Busch Cos Inc. 556,445
8,900 PepsiCo, Inc. 396,050
6,400 Procter & Gamble Co. 570,752
------------
1,523,247
------------
ENERGY -- 4.3%
2,500 BJ Services Co.* 93,400
11,400 ChevronTexaco Corp. 823,080
8,900 Exxon Mobil Corp. 319,599
------------
1,236,079
------------
FINANCIAL - DIVERSIFIED -- 3.5%
10,908 Citigroup Inc. 466,862
6,475 Goldman Sachs Group, Inc. 542,282
------------
1,009,144
------------
12
TOUCHSTONE LARGE CAP GROWTH FUND
Schedule of Investments
June 30, 2003
SHARES VALUE
GENERAL MERCHANDISE-- 6.0%
12,000 Costco Wholesale Corp.* $ 439,200
12,200 Target Corp. 461,648
15,000 Wal-Mart Stores, Inc. 805,050
------------
1,705,898
------------
HARDWARE & EQUIPMENT -- 8.9%
52,550 Cisco Systems, Inc.* 877,060
29,000 Dell Computer Corp.* 926,840
13,000 EMC Corp.* 136,110
24,500 Hewlett-Packard Co. 521,850
20,200 Sun Microsystems, Inc.* 92,920
------------
2,554,780
------------
HEALTHCARE SERVICES -- 2.8%
2,400 Cardinal Health, Inc. 154,320
12,700 United Health Group Inc. 638,175
------------
792,495
------------
INSURANCE -- 2.1%
4,500 American International Group, Inc. 248,310
6,750 Marsh & McLennan Companies, Inc. 344,723
------------
593,033
------------
LEISURE SERVICES -- 3.3%
39,500 Hilton Hotels Corp. 505,205
18,000 Starbucks Corp.* 441,360
------------
946,565
------------
MEDIA -- 4.7%
13,000 Clear Channel Communications, Inc.* 551,070
3,500 Comcast Corp. - Class A Special* 100,905
3,600 Fox Entertainment Group, Inc. - Class A* 103,608
4,300 Viacom, Inc. - Class A* 187,910
7,100 Viacom, Inc. - Class B* 309,986
5,200 Walt Disney Co. 102,700
------------
1,356,179
------------
MEDICAL DEVICES -- 3.9%
9,200 Becton, Dickinson & Company 357,420
3,800 Biomet, Inc.* 108,908
13,775 Medtronic, Inc. 660,787
------------
1,127,115
------------
PHARMACEUTICALS -- 11.4%
13,500 Abbott Laboratories 590,760
2,750 Forest Laboratories, Inc.* 150,563
14,500 Johnson & Johnson 749,649
9,900 Merck & Co. 599,445
33,750 Pfizer Inc. 1,152,562
------------
3,242,979
------------
13
TOUCHSTONE LARGE CAP GROWTH FUND
Schedule of Investments
June 30, 2003
SHARES VALUE
SEMICONDUCTORS & ELECTRONICS-- 9.3%
3,100 Analog Devices, Inc.* $ 107,942
19,200 Applied Materials, Inc.* 304,512
54,000 Intel Corp. 1,122,335
9,300 Linear Technology Corp. 299,553
8,000 Maxim Integrated Products, Inc. 273,520
15,000 Novellus Systems, Inc.* 549,315
------------
2,657,177
------------
SOFTWARE & SERVICES -- 8.5%
10,500 Intuit, Inc.* 467,565
48,000 Microsoft Corp. 1,229,280
19,700 Oracle Corp.* 236,794
1,200 Symantec Corp.* 52,632
15,550 Veritas Software Corp.* 445,819
------------
2,432,090
------------
TOTAL COMMON STOCKS-- 97.8% (Cost $26,527,373) $ 28,006,881
OTHER ASSETS IN EXCESS OF LIABILITIES-- 2.2% 616,145
------------
NET ASSETS-- 100.0% $ 28,623,026
============
* Non-income producing security.
See accompanying notes.
14
TOUCHSTONE THIRD AVENUE VALUE FUND
Statement of Assets and Liabilities
June 30, 2003
ASSETS
Investments in securities, at value (cost $45,658,984) $ 43,026,122
Cash 7,799,028
Foreign currency (cost $15,278) 15,472
Dividends and interest receivable 86,875
Foreign tax reclaims 11,531
Receivable for capital shares sold 703
------------
Total assets 50,939,731
------------
LIABILITIES
Payable to affiliates 38,350
Payable for investments purchased 319,728
Net unrealized depreciation on foreign exchange contracts 174
Payable for capital shares redeemed 31,881
Accrued expenses 50,240
------------
Total liabilities 440,373
------------
NET ASSETS $ 50,499,358
============
Net Assets consist of:
Paid-in capital $ 59,238,611
Undistributed net investment income 193
Accumulated net realized loss on investments (6,106,862)
Net unrealized depreciation on investments and and other
assets and liabilities denominated in foreign currency (2,632,584)
------------
NET ASSETS, for 3,447,298 shares outstanding $ 50,499,358
============
NET ASSET VALUE, offering and redemption price per share $ 14.65
============
Statement of Operations
Year Ended June 30, 2003
INVESTMENT INCOME
Dividends (net of foreign tax withheld of $13,631) $ 595,142
Interest 13,108
------------
Total investment income 608,250
------------
EXPENSES
Investment advisory and management fees 276,900
Custody fees 85,219
Accounting fees 3,761
Professional fees 45,083
Trustees' fees and expenses 17,996
Printing expense 10,005
Administration fees 5,739
Sponsor fees 17,665
Other expenses 3,486
------------
Total expenses 465,854
Less: sponsor fees waived (17,665)
expense reimbursement (1,188)
------------
Total net expenses 447,001
------------
Net investment income 161,249
------------
REALIZED AND UNREALIZED GAINS (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
Net realized loss on:
Investments (1,638,026)
Foreign currency transactions (193)
------------
Net realized loss (1,638,219)
------------
Net change in unrealized appreciation/depreciation on:
Investments (1,222,404)
Translation of assets and liabilities in foreign currency (4,781)
------------
Net change in unrealized appreciation/depreciation (1,227,185)
------------
Net realized and unrealized loss on investments
and foreign currency (2,865,404)
------------
Net decrease in net assets resulting from operations $ (2,704,155)
============
See accompanying notes.
15
TOUCHSTONE THIRD AVENUE VALUE FUND
Statements of Changes in Net Assets
YEAR ENDED JUNE 30,
2003 2002
------------ ------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 161,249 $ 98,218
Net realized gains (loss) on
investments and foreign currency transactions (1,638,219) 2,627,505
Net change in unrealized appreciation/depreciation
on investments and foreign currency transactions (1,227,185) (4,228,271)
------------ ------------
Net decrease in net assets resulting from operations (2,704,155) (1,502,548)
------------ ------------
Distributions to shareholders from:
Net investment income (256,766) (283,204)
Net realized gain (639,990) --
------------ ------------
Total distributions to shareholders (896,756) (283,204)
------------ ------------
Capital share transactions:
Proceeds from sales of shares 9,522,312 27,505,313
Proceeds from shares issued in connection with acquisition (Note 4) 7,548,716 --
Proceeds from reinvested distributions 896,756 283,204
Cost of shares redeemed (12,088,167) (12,847,707)
------------ ------------
Net increase in net assets resulting
from capital share transactions 5,879,617 14,940,810
------------ ------------
Total increase in net assets 2,278,706 13,155,058
NET ASSETS
Beginning of year 48,220,652 35,065,594
------------ ------------
End of year $ 50,499,358 $ 48,220,652
============ ============
OTHER INFORMATION
Shares:
Sold 696,191 1,677,834
Shares issued in connection with acquisition (Note 4) 574,921 --
Issued through reinvestment of distributions 66,393 18,965
Redeemed (889,272) (785,692)
------------ ------------
Net increase in shares outstanding 448,233 911,107
============ ============
See accompanying notes.
16
TOUCHSTONE THIRD AVENUE VALUE FUND
Financial Highlights
YEAR ENDED JUNE 30,
2003 2002 2001 2000 1999
------------------------------------------------------------------
SELECTED PER-SHARE DATA
Net asset value, beginning
of year $ 16.08 $ 16.79 $ 13.97 $ 22.06 $ 21.02
------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.05 0.02 0.15 0.39 0.33
Net realized and unrealized
gains (loss) on investments (1.17) (0.61) 4.31 (5.12) 3.22
------------------------------------------------------------------
Total from investment operations (1.12) (0.59) 4.46 (4.73) 3.55
------------------------------------------------------------------
Less distributions:
From net investment income (0.09) (0.12) (0.40) (0.33) (0.28)
From net realized gain (0.22) -- (1.24) (3.03) (2.23)
------------------------------------------------------------------
Total distributions (0.31) (0.12) (1.64) (3.36) (2.51)
------------------------------------------------------------------
Net asset value, end of year $ 14.65 $ 16.08 $ 16.79 $ 13.97 $ 22.06
==================================================================
TOTAL RETURN (6.78%) (3.45%) 35.66% (23.88%) 18.09%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in thousands) $ 50,499 $ 48,221 $ 35,066 $ 20,994 $ 50,169
Ratio of net expenses to average
net assets 1.10% 1.08% 1.15% 1.08% 0.96%
Ratio of expenses to average net
assets before expense reimbursement 1.15% 1.08% 1.21% 1.08% 0.96%
Ratio of net investment income
to average net assets 0.41% 0.23% 1.15% 1.80% 1.56%
Ratio of net investment income
to average net assets before
voluntary expense reimbursement 0.36% 0.23% 1.09% 1.80% 1.56%
Portfolio turnover rate 23% 23% 128% 42% 50%
See accompanying notes.
17
TOUCHSTONE THIRD AVENUE VALUE FUND
Schedule of Investments
June 30, 2003
SHARES VALUE
COMMON STOCKS -- 69.9%
BANKING -- 0.3%
5,000 Astoria Financial Corp. $ 139,650
------------
COMPUTERS - HARDWARE -- 0.2%
9,300 Advanced Digital Information Corp.* 92,907
------------
CONSUMER PRODUCTS -- 0.3%
11,600 Callaway Golf Company 153,352
------------
ELECTRONICS -- 10.9%
107,800 American Power Conversion Corp. 1,680,602
127,700 AVX Corp. 1,403,423
24,600 Bel Fuse Inc. - Class B 563,340
115,800 KEMET Corp.* 1,169,580
167,300 TriQuint Semiconductor, Inc.* 695,968
------------
5,512,913
------------
ENERGY -- 0.8%
21,000 Fording Canadian Coal Trust 380,520
------------
FINANCIAL SERVICES -- 7.9%
10,000 CIT Group Inc. 246,500
217,200 Instinet Group, Inc. 1,012,152
25,500 Legg Mason, Inc. 1,656,225
33,100 SWS Group, Inc. 666,965
21,275 Westwood Holdings Group, Inc. 404,651
------------
3,986,493
------------
HEALTHCARE PRODUCTS & SERVICES -- 1.1%
13,700 Orthodontic Centers of America, Inc.* 109,737
30,400 PAREXEL International Corp.* 424,080
------------
533,817
------------
INDUSTRIAL -- 2.2%
23,000 Agrium Inc. 252,080
51,300 Alamo Group Inc. 626,886
6,700 Dycom Industries, Inc.* 109,210
20,700 Quanta Services, Inc.* 146,970
------------
1,135,146
------------
INSURANCE -- 15.0%
50,000 Arch Capital Group Ltd.* 1,736,500
16,900 First American Corp. 445,315
54,500 Millea Holdings, Inc. - ADR 2,094,979
33,000 Radian Group Inc. 1,209,450
53,200 The MONY Group Inc. 1,433,740
60,000 The Phoenix Companies, Inc. 541,800
3,400 The PMI Group, Inc. 91,256
------------
7,553,040
------------
INVESTMENT COMPANIES -- 5.1%
81,800 Brascan Corp. - Class A 2,009,008
9,500 Capital Southwest Corp. 545,395
------------
2,554,403
------------
18
TOUCHSTONE THIRD AVENUE VALUE FUND
Schedule of Investments
June 30, 2003
SHARES VALUE
MOBILE HOMES-- 0.5%
28,000 Modtech Holdings, Inc.* $ 257,320
------------
OIL & GAS SERVICES -- 0.5%
25,000 Willbros Group, Inc.* 259,750
------------
REAL ESTATE -- 12.3%
58,300 Catellus Development Corp.* 1,282,600
42,000 Forest City Enterprises, Inc. - Class A 1,740,900
40,000 Koger Equity, Inc. 689,200
19,200 LNR Property Corp. 718,080
20,000 Prime Group Realty Trust - REIT* 116,000
5,753 ProLogis 157,057
34,700 The St. Joe Company 1,082,640
40,000 Trammell Crow Co.* 424,400
------------
6,210,877
------------
RESTAURANTS -- 0.1%
2,600 Jack in the Box Inc.* 57,980
------------
SEMI-CONDUCTOR EQUIPMENT -- 6.9%
30,000 Applied Materials, Inc.* 475,800
132,200 Credence Systems Corp.* 1,119,734
15,000 CyberOptics Corp.* 100,620
85,000 Electro Scientific Industries, Inc.* 1,288,600
102,700 FSI International, Inc.* 400,530
6,400 Photronics, Inc.* 111,680
------------
3,496,964
------------
TELECOMMUNICATION EQUIPMENT -- 5.2%
112,500 CIENA Corp.* 583,875
80,300 Comverse Technology, Inc.* 1,206,909
128,000 Tellabs, Inc.* 840,960
------------
2,631,744
------------
TRANSPORTATION -- 0.6%
10,600 CSX Corp. 318,954
------------
TOTAL COMMON STOCKS $ 35,275,830
------------
FOREIGN STOCKS -- 15.3%
AUTOMOTIVE -- 3.5%
110,000 Toyota Industries Corp. $ 1,790,048
------------
ENERGY -- 1.5%
122,400 Smedvig ASA - Class A 778,311
------------
FOREST PRODUCTS & PAPER -- 1.5%
133,000 SFK Pulp Fund 767,411
------------
INSURANCE -- 0.9%
189,000 Aioi Insurance Company, Ltd. 459,613
------------
19
TOUCHSTONE THIRD AVENUE VALUE FUND
Schedule of Investments
June 30, 2003
SHARES VALUE
INVESTMENT COMPANIES -- 5.9%
280,000 Hutchison Whampoa,
Ltd. $ 1,705,533
172,500 Investor AB - Class A 1,260,626
------------
2,966,159
------------
OIL & GAS SERVICES -- 2.0%
25,000 Nabors Industries, Ltd.* 988,750
------------
TOTAL FOREIGN STOCKS $ 7,750,292
------------
TOTAL INVESTMENT SECURITIES-- 85.2% $ 43,026,122
(Cost $45,658,984)
OTHER ASSETS IN EXCESS OF LIABILITIES-- 14.8% 7,473,236
------------
NET ASSETS-- 100.0% $ 50,499,358
============
* Non-income producing security
ADR - American Depository Receipt.
See accompanying notes.
20
Touchstone Variable Series Trust
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Touchstone Baron Small Cap Fund, the Touchstone Large Cap Growth Fund and
the Touchstone Third Avenue Value Fund are each a series of shares of the
Touchstone Variable Series Trust (the "Trust"). The Touchstone Variable Series
Trust is registered under the Investment Company Act of 1940, as amended (the
Act), as an open-end management investment company, and was organized as a
Massachusetts business trust on February 7, 1994.
Touchstone Securities, Inc. ("Touchstone Securities"), a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc., is the principal underwriter
and exclusive agent for the distribution of shares for each Fund. Touchstone
Securities receives no compensation under their underwriting/distribution
agreement with the Trust.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.
INVESTMENT VALUATION
Securities for which market quotations are readily available are valued at the
last sale price on a national securities exchange, or, in the absence of
recorded sales, at the readily available closing bid price on such exchanges, or
at the quoted bid price in the over-the-counter market. Securities which are
quoted by NASDAQ are valued at the NASDAQ official closing price. If there are
no sales on that day, the securities are valued at the mean between the closing
bid and asked prices as reported by NASDAQ. Securities quoted in foreign
currencies are translated into U.S. dollars at the current exchange rate. Debt
securities are valued by a pricing service that determines valuations based upon
market transactions for normal, institutional-size trading units of similar
securities. Securities or other assets for which market quotations are not
readily available are valued at fair value in good faith under consistently
applied procedures in accordance with procedures established by the Board of
Trustees. Such procedures include the use of independent pricing services, which
use prices based upon yields or prices of securities of comparable quality,
coupon, maturity and type; indications as to values from dealers; and general
market conditions. Money market instruments and other debt securities with a
remaining maturity of less than 60 days are valued at amortized cost, which
approximates market. Under the amortized cost valuation method, the discount or
premium is amortized on a constant basis to the maturity of the security.
21
Touchstone Variable Series Trust
Notes to Financial Statements (Continued)
SECURITY TRANSACTIONS
Securities transactions are accounted for as of the trade date. Securities sold
are determined on a specific identification basis.
FEDERAL INCOME TAX MATTERS
The Trust complies with the requirements of the Internal Revenue Code applicable
to regulated investment companies as defined in Subtitle A, Chapter 1,
Subchapter M of the Internal Revenue Code, as amended, and distributes its
taxable net investment income and net realized gains sufficient to relieve it
from all, or substantially all, federal income, excise and state income taxes.
Therefore, no provision for federal or state income tax is required.
As of June 30, 2003, the aggregate cost of securities for financial reporting
purposes is shown on each Fund's Schedule of Investments and differs from market
value by unrealized appreciation (depreciation) of securities as follows:
Touchstone Baron Touchstone Large Touchstone Third
Small Cap Fund Cap Growth Fund Avenue Value Fund
----------------------------------------------------
Unrealized appreciation $ 2,880,925 $ 4,105,807 $ 5,119,711
Unrealized depreciation (600,273) (2,626,299) (7,752,295)
----------------------------------------------------
Net unrealized appreciation
(depreciation) $ 2,280,652 $ 1,479,508 $ (2,632,584)
====================================================
The aggregate cost of securities for federal income tax purposes is determined
at each Fund's tax year end (see Dividend Distributions Note).
As of June 30, 2003, the Funds had accumulated net realized losses on
investments for financial reporting purposes as follows:
Touchstone Baron Touchstone Large Touchstone Third
Small Cap Fund Cap Growth Fund Avenue Value Fund
----------------------------------------------------
Accumulated net
realized losses $ (1,288,997) $(15,900,974) $ (6,106,862)
====================================================
Realized capital loss carryovers which are available to offset future capital
gains are determined at each Fund's tax year end (see Dividend Distributions
Note). As a result of the Fund mergers, discussed in Note 4, utilization of
capital loss carryovers, if any, may be limited based on certain provisions of
the Internal Revenue Code.
22
Touchstone Variable Series Trust
Notes to Financial Statements (Continued)
DIVIDEND DISTRIBUTIONS
Dividends from net investment income and distributions from net realized gains
are declared and distributed annually. Dividends and distributions are recorded
on the ex-dividend date.
Income and capital gain distributions are determined in accordance with income
tax regulations, which may differ from accounting principles generally accepted
in the United States. These differences, which may result in distribution
reclassifications, are primarily due to differing treatments for futures
transactions, post-October capital losses, and losses deferred due to wash
sales.
As discussed in Note 4, as a result of the mergers that took place as of April
28, 2003, the accounting survivor differs from the legal/tax survivor for each
Fund as of June 30, 2003. Prior to the mergers, the accounting survivors had tax
year ends of June 30 and the non-accounting survivors had tax year ends of
December 31. Each accounting survivor fund ("Fund") will file tax returns as of
the date of merger for its pre-merger results and will then change its tax year
end to December 31. As June 30, 2003 is not the tax year end for the Funds, the
tax character of accumulated earnings (deficit) and distributions as of June 30,
2003 cannot be determined. The tax character of distributions paid for the
accounting survivor Funds for the year ended June 30, 2002 were as follows:
CAPITAL RETURN OF
PORTFOLIO: ORDINARY GAIN CAPITAL TOTAL*
- --------------------------------------------------------------------------------
Third Avenue Value Portfolio $ 733,383 $ -- $ -- $ 733,383
*Total distributions paid differ from the Statement of Changes in Net Assets due
primarily to the use of consent dividends for tax purposes.
FUTURES CONTRACTS
Certain Funds may enter into futures contracts to protect against adverse
movement in the price of securities in the Portfolio or to enhance investment
performance. When entering into a futures contract, changes in the market price
of the contracts are recognized as unrealized gains or losses by marking each
contract to market at the end of each trading day through a variation margin
account. When a futures contract is closed, the Funds record a gain or loss
equal to the difference between the value of the contract at the time it was
opened and the value at the time it was closed. As of June 30, 2003, there were
no futures contracts held in the Funds.
The use of futures contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the Statement of Assets and
Liabilities. The Funds bear the market risk that arises from any changes in
contract values.
23
Touchstone Variable Series Trust
Notes to Financial Statements (Continued)
PORTFOLIO SECURITIES LOANED
As of June 30, 2003, the Touchstone Baron Small Cap Fund loaned common stocks
having a fair value of approximately $284,139 and received cash collateral of
$298,413 for the loan. All collateral received as cash and securities is
received, held and administered by the Fund's Custodian for the benefit of the
Fund in the applicable custody account or other account established for the
purpose of holding collateral.
The Touchstone Baron Small Cap Fund receives compensation in the form of fees,
or it retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest or dividends on the
securities loaned. The loans are secured by collateral at least equal, at all
times, to the fair value of the securities loaned plus accrued interest. Gain or
loss in the fair value of the securities loaned that may occur during the term
of the loan will be for the account of the Fund. The Fund has the right under
the lending agreement to recover the securities from the borrower on demand.
REPURCHASE AGREEMENTS
In connection with transactions in repurchase agreements, it is the Funds'
policy that their custodian or another qualified custodian takes possession of
the underlying collateral securities. Repurchase agreements, which are
collateralized by U.S. Government obligations, are valued at cost that, together
with accrued interest, approximates market. At the time each Fund enters into a
repurchase agreement, the seller agrees that the value of the underlying
securities, including accrued interest, will at all times be equal to or exceed
the face amount of the repurchase agreement.
FOREIGN CURRENCY VALUE TRANSLATION
The accounting records of the Funds are maintained in U.S. dollars. The market
value of investment securities, other assets and liabilities and forward
currency contracts denominated in foreign currencies are translated into U.S.
dollars at the prevailing exchange rates at the end of the period. Purchases and
sales of securities, income receipts and expense payments are translated at the
exchange rate prevailing on the respective dates of such transactions. Reported
net realized gains and losses on foreign currency transactions represent net
gains and losses from sales and maturities of forward currency contracts,
disposition of foreign currencies, currency gains and losses realized between
the trade and settlement dates on securities transactions and the difference
between the amount of net investment income accrued and the U.S. dollar amount
actually received.
The effects of changes in foreign currency exchange rates on investments in
securities are not segregated in the Statements of Operations from the effects
of changes in market prices of these securities, but are included with the net
realized and unrealized gain or loss on investments.
24
Touchstone Variable Series Trust
Notes to Financial Statements (Continued)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. PURCHASES AND SALES OF INVESTMENT SECURITIES
Investment transactions (excluding purchases and sales of short-term
investments) for the year ended June 30, 2003 were as follows:
- --------------------------------------------------------------------------------
Touchstone Touchstone Touchstone
Baron Small Cap Large Cap Growth Third Avenue Value
Fund Fund Fund
- --------------------------------------------------------------------------------
Cost of Purchases $ 3,207,078 $ 11,962,086 $ 8,131,230
Proceeds from Sales $ 2,971,476 $ 15,296,765 $ 10,057,583
- --------------------------------------------------------------------------------
3. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES
Touchstone Advisors, Inc. ("Touchstone Advisors") has entered into a
sub-advisory agreement with a registered investment adviser ("Sub-Adviser") for
each of the Funds. Touchstone Advisors, not the Funds, pays the sub-advisory fee
to each of the Sub-Advisers. Listed below are management and sub-advisory fees
payable as a percentage of average daily net assets:
- --------------------------------------------------------------------------------
FUND MANAGEMENT FEE SUB-ADVISORY FEE
- --------------------------------------------------------------------------------
Touchstone Baron Small Cap Fund 1.05% 0.80%
Touchstone Large Cap Growth Fund 0.75% 0.40%
Touchstone Third Avenue Value Fund 0.80% 0.50%
- --------------------------------------------------------------------------------
Under the Management Agreement ("the Agreement"), Touchstone Advisors provides
certain management services to each Fund, and each Fund is responsible for
certain of its direct operating expenses. Touchstone Advisors shall waive all or
a portion of its fee pursuant to the Sponsor Agreement and/or reimburse a
portion of the operating expenses of each Fund such that, after such waiver
and/or reimbursement, the aggregate expenses of the Fund shall be less than or
equal, on an annual basis, to the following percentage of the daily net assets
of the Fund:
25
Touchstone Variable Series Trust
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
FUND AMOUNT OF FEES
WAIVER/ WAIVED AND/OR
EXPENSE EXPENSES
LIMITATIONS* REIMBURSED
- --------------------------------------------------------------------------------
Touchstone Baron Small Cap Fund 1.65% $ 84,925
Touchstone Large Cap Growth Fund 1.05% $ 62,080
Touchstone Third Avenue Value Fund 1.05% $ 18,853
- --------------------------------------------------------------------------------
* The expense limitation rate changed for each fund effective April 28, 2003.
From November 1, 2002 to April 27, 2003, Touchstone Advisors voluntarily agreed
to reimburse each of the Funds for operating expenses that exceeded 1.65%, 1.25%
and 1.25% for Baron Small Cap Portfolio, Harris Bretall Sullivan & Smith Equity
Growth Portfolio and Third Avenue Value Portfolio, respectively. Prior to
November 1, 2002, Touchstone Advisors voluntarily agreed to reimburse each of
the Funds for operating expenses that exceeded 1.55%. 1.15% and 1.15%,
respectively.
Touchstone Baron Small Cap Fund, Touchstone Large Cap Growth Fund and Touchstone
Third Avenue Value Fund placed a portion of their transactions with brokerage
firms, which may be considered affiliates of the Funds under the 1940 Act. The
commissions paid to these firms were approximately $58,424 in the aggregate
during the year ended June 30, 2003.
Certain officers and trustees of the Funds are also officers of Touchstone
Securities, Touchstone Advisors and Integrated Fund Services, Inc., the Trust's
administrator, transfer agent and accounting services agent. The Funds do not
pay any amounts to compensate these individuals. Touchstone Securities,
Touchstone Advisors and Integrated Fund Services, Inc. are each wholly-owned,
indirect subsidiaries of the Western and Southern Life Insurance Company.
PRIOR SERVICE AGREEMENTS
Prior to April 18, 2003, Integrity Life Insurance Company (Integrity) provided
fund accounting services and administrative services for each Fund. The fee for
these services provided by Integrity was a unified fee, which included custody
fees and expenses for administration and accounting and pricing services.
Custody fees presented on the Statements of Operations includes this unified fee
until April 18, 2003 and only custody fees thereafter.
4. FUND MERGERS AND ACQUISITIONS
Touchstone Baron Small Cap Fund
- -------------------------------
On April 18, 2003, a Special Meeting of Shareholders of the Baron Small Cap
Portfolio, a series of The Legends Fund, Inc., was held to approve or disapprove
an Agreement and Plan of Reorganization providing for the acquisition of all of
the assets and liabilities of the Baron Small Cap Portfolio by Touchstone Baron
Small Cap Fund, a new series of Touchstone Variable Series Trust, (the Trust),
in exchange for shares of Touchstone Baron Small Cap Fund.
26
Touchstone Variable Series Trust
Notes to Financial Statements (Continued)
The Agreement and Plan of Reorganization was approved as follows:
- --------------------------------------------------------------------------------
NUMBER OF SHARES
- --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
- --------------------------------------------------------------------------------
Baron Small Cap Portfolio 831,278 32,349 74,947
- --------------------------------------------------------------------------------
The merger was completed as of April 28, 2003. Upon completion of the merger,
Baron Small Cap Portfolio became the accounting survivor, while the Touchstone
Baron Small Cap Fund remained as the legal and tax survivor.
The following is a summary of shares outstanding, net assets, net asset value
per share, unrealized appreciation (depreciation) and accumulated net realized
gains (losses) immediately before and after the reorganization:
- --------------------------------------------------------------------------------
BEFORE REORGANIZATION AFTER REORGANIZATION
- --------------------------------------------------------------------------------
BARON SMALL CAP TOUCHSTONE BARON TOUCHSTONE BARON
PORTFOLIO SMALL CAP FUND SMALL CAP FUND
- --------------------------------------------------------------------------------
Shares 944,565 -- 944,565
- --------------------------------------------------------------------------------
Net Assets $ 10,321,670 -- $ 10,321,670
- --------------------------------------------------------------------------------
Net Asset Value $ 10.93 -- $ 10.93
- --------------------------------------------------------------------------------
Unrealized Appreciation
(Depreciation) $ 840,837 -- $ 840,837
- --------------------------------------------------------------------------------
Accumulated Net
Realized Losses $ (1,270,696) -- $ (1,270,696)
- --------------------------------------------------------------------------------
Touchstone Large Cap Growth Fund
- --------------------------------
On April 18, 2003, a Special Meeting of Shareholders of the Harris Bretall
Sullivan & Smith Equity Growth Portfolio, a series of The Legends Fund, Inc.,
was held to approve or disapprove an Agreement and Plan of Reorganization
providing for the acquisition of all of the assets and liabilities of Harris
Bretall Sullivan & Smith Equity Growth Portfolio by Touchstone Large Cap Growth
Fund, a series of the Trust, in exchange for shares of Touchstone Large Cap
Growth Fund.
On April 18, 2003, a Special Meeting of Shareholders of the Touchstone
Growth/Value Fund, a series of the Trust, was held to approve or disapprove an
Agreement and Plan of Reorganization providing for the acquisition of all of the
assets and liabilities of Touchstone Growth/Value Fund by Touchstone Large Cap
Growth Fund, in exchange for shares of Touchstone Large Cap Growth Fund.
27
Touchstone Variable Series Trust
Notes to Financial Statements (Continued)
Both Agreements and Plans of Reorganization were approved as follows:
- --------------------------------------------------------------------------------
NUMBER OF SHARES
- --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
- --------------------------------------------------------------------------------
Harris Bretall Sullivan & Smith 1,517,636 61,357 127,636
Equity Growth Portfolio
- --------------------------------------------------------------------------------
Touchstone Growth/Value 339,012 3,368 2,653
- --------------------------------------------------------------------------------
The two mergers were completed as of April 28, 2003. Upon completion of the
mergers, Harris Bretall Sullivan & Smith Equity Growth Portfolio became the
accounting survivor, while the Touchstone Large Cap Growth Fund remained as the
legal and tax survivor.
The following is a summary of shares outstanding, net assets, net asset value
per share, unrealized appreciation (depreciation) and accumulated net realized
gains (losses) immediately before and after the reorganization:
- ------------------------------------------------------------------------------------------------------
AFTER
BEFORE REORGANIZATION REORGANIZATION
- ------------------------------------------------------------------------------------------------------
HARRIS BRETALL
SULLIVAN & SMITH TOUCHSTONE TOUCHSTONE LARGE TOUCHSTONE LARGE
EQUITY GROWTH GROWTH/VALUE FUND CAP GROWTH FUND CAP GROWTH FUND
PORTFOLIO
- ------------------------------------------------------------------------------------------------------
Shares 1,637,635 710,305 1,209,810 2,916,806
- ------------------------------------------------------------------------------------------------------
Net Assets $ 14,923,975 $ 4,203,845 $ 7,449,402 $ 26,577,222
- ------------------------------------------------------------------------------------------------------
Net Asset Value $ 9.11 $ 5.92 $ 6.16 $ 9.11
- ------------------------------------------------------------------------------------------------------
Unrealized Appreciation
(Depreciation) $ 864,013 $ (1,255,113) $ (444,774) $ (835,874)
- ------------------------------------------------------------------------------------------------------
Accumulated Net $(10,945,794) $ (1,467,838) $ (3,297,891) $(15,711,523)
Realized Losses
- ------------------------------------------------------------------------------------------------------
Touchstone Third Avenue Value Fund
- ----------------------------------
On April 18, 2003, a Special Meeting of Shareholders of the Third Avenue Value
Portfolio, a series of The Legends Funds, Inc., was held to approve or
disapprove an Agreement and Plan of Reorganization providing for the acquisition
of all of the assets and liabilities of Third Avenue Value Portfolio by
Touchstone Small Cap Value Fund, a series of the Trust, in exchange for shares
of Touchstone Small Cap Value Fund.
On April 18, 2003, a Special Meeting of Shareholders of the Touchstone Small Cap
Value Fund was held to approve or disapprove a change to the investment
restriction of Touchstone Small Cap Value Fund concerning changing from a
"diversified" fund to a "non-diversified" fund.
28
Touchstone Variable Series Trust
Notes to Financial Statements (Continued)
The Agreement and Plan of Reorganization and the investment restriction proposal
were approved as follows:
- --------------------------------------------------------------------------------
NUMBER OF SHARES
- --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
- --------------------------------------------------------------------------------
Third Avenue Value Portfolio 2,565,489 106,679 254,516
- --------------------------------------------------------------------------------
Touchstone Small Cap Value 1,499,146 15,469 24,765
- --------------------------------------------------------------------------------
The merger was completed as of April 28, 2003. Upon completion of the merger,
Third Avenue Value Portfolio became the accounting survivor, while the
Touchstone Small Cap Value Fund remained as the legal and tax survivor. The
Touchstone Small Cap Value Fund was subsequently renamed Touchstone Third Avenue
Value Fund.
The following is a summary of shares outstanding, net assets, net asset value
per share, unrealized appreciation (depreciation) and accumulated net realized
gains (losses) immediately before and after the reorganization:
- -----------------------------------------------------------------------------------------
BEFORE REORGANIZATION AFTER REORGANIZATION
- -----------------------------------------------------------------------------------------
THIRD AVENUE VALUE TOUCHSTONE SMALL TOUCHSTONE THIRD
PORTFOLIO CAP VALUE FUND AVENUE VALUE FUND
- -----------------------------------------------------------------------------------------
Shares 2,808,933 1,493,028 3,383,854
- -----------------------------------------------------------------------------------------
Net Assets $ 36,888,158 $ 7,548,716 $ 44,436,874
- -----------------------------------------------------------------------------------------
Net Asset Value $ 13.13 $ 5.06 $ 13.13
- -----------------------------------------------------------------------------------------
Unrealized Appreciation
(Depreciation) $ (7,060,433) $ (1,344,323) $ (8,404,756)
- -----------------------------------------------------------------------------------------
Accumulated Net
Realized Losses $ (1,035,869) $ (4,468,643) $ (5,504,512)
- -----------------------------------------------------------------------------------------
Each of the mergers discussed above qualified as a tax-free exchange for federal
income tax purposes.
29
Touchstone Variable Series Trust
Notes to Financial Statements (Continued)
5. MANAGEMENT OF THE TRUST (UNAUDITED)
Listed below is basic information regarding the Trustees and principal officers
of the Trust. The Trust's Statement of Additional Information includes
additional information about the Trustees and is available, without charge, upon
request by calling 1.800.669.2796.
INTERESTED TRUSTEES1:
NUMBER OF
FUNDS
TERM OF OVERSEEN
NAME POSITION(S) OFFICE2 IN THE OTHER
ADDRESS HELD WITH AND LENGTH OF PRINCIPAL OCCUPATION(S) DURING TOUCHSTONE DIRECTORSHIPS
AGE TRUST TIME SERVED PAST 5 YEARS FUNDS3 HELD4
Jill T. McGruder Trustee Until President and a director of IFS 29 Director of
Touchstone retirement at Financial Services, Inc. (a holding LaRosa's (a
Advisors, Inc. age 75 or company), Touchstone Advisors, Inc. restaurant
221 East Fourth Street until she (the Trust's investment advisor) and chain).
Cincinnati, OH resigns or is Touchstone Securities, Inc. (the
Age: 47 removed Trust's distributor). She is Senior
Vice President of The Western and
Trustee since Southern Life Insurance Company and a
1999 director of Capital Analysts
Incorporated (a registered investment
advisor and broker-dealer), Integrated
Fund Services, Inc. (the Trust's
administrator and transfer agent) and
IFS Fund Distributors, Inc. (a
registered broker-dealer). She is also
President and a director of IFS Agency
Services, Inc. (an insurance agency),
IFS Insurance Agency, Inc. and Fort
Washington Brokerage Services, Inc. (a
registered broker-dealer). She was
President of Touchstone Tax-Free
Trust, Touchstone Investment Trust,
Touchstone Variable Series Trust and
Touchstone Strategic Trust until 2002.
John F. Barrett Trustee Until Chairman of the Board, President and 29 Director of The
The Western and retirement at Chief Executive Officer of The Western Andersons Inc.
Southern Life Insurance age 75 or and Southern Life Insurance Company (an agribusiness
Company until he and Western- Southern Life Assurance and retailing
400 Broadway resigns or is Company; Director and Vice Chairman of company),
Cincinnati, OH removed Columbus Life Insurance Company; Convergys
Age: 54 Director of Eagle Realty Group, Inc., Corporation (a
Trustee since and Chairman of Fort Washington provider of
2002 Investment Advisors, Inc. integrated
billing
solutions,
customer care
services and
employee care
services) and
Fifth Third
Bancorp.
30
Touchstone Variable Series Trust
Notes to Financial Statements (Continued)
INTERESTED
TRUSTEES1:
John R. Lindholm Trustee Until President and CEO of Integrity Life 11 Director of
Integrity Life retirement at Insurance Company and National National
Insurance Company age 75 or Integrity Life Insurance Company. He Integrity Life
515 West Market Street, until he was the President of the Retail Insurance
8th Floor resigns or is Business Division of Arm Financial Company and
Louisville, KY removed Group from 1996 until 2000. Integrity Life
Age: 54 Insurance
Trustee since Company.
2003
INDEPENDENT
TRUSTEES:
J. Leland Brewster II Trustee Until Retired Senior Partner of Frost Brown 29 Director of
5155 Ivyfarm Road retirement in Todd LLC (a law firm). Consolidated
Cincinnati, OH 2005 or until Health Services,
Age: 74 he resigns or Inc.
is removed
Trustee since
2000
William O. Coleman Trustee Until Retired Vice President of The Procter 29 Director of
c/o Touchstone retirement at & Gamble Company. A Trustee of The LCA-Vision (a
Advisors, Inc. age 75 or Procter & Gamble Profit Sharing Plan laser vision
221 East Fourth Street until he and The Procter & Gamble Employee correction
Cincinnati, OH resigns or is Stock Ownership Plan. company) and
Age: 73 removed Millennium
Bancorp.
Trustee since
1999
Phillip R. Cox Trustee Until President and Chief Executive Officer 29 Director of the
105 East Fourth Street retirement at of Cox Financial Corp. (a financial Federal Reserve
Cincinnati, OH age 75 or services company). Bank of
Age: 55 until he Cleveland;
resigns or is Broadwing, Inc.
removed (a
communications
Trustee since company); and
1999 Cinergy
Corporation (a
utility
company).
H. Jerome Lerner Trustee Until Principal of HJL Enterprises (a 29 None
4700 Smith Road retirement at privately held investment company);
Cincinnati, OH age 75 or Chairman of Crane Electronics, Inc.
Age: 64 until he (a manufacturer of electronic
resigns or is connectors).
removed
Trustee since
1989
Oscar P. Robertson Trustee Until President of Orchem, Inc. (a chemical 29 Director of
621 Tusculum Avenue retirement at specialties distributor), Orpack Countrywide
Cincinnati, OH age 75 or Stone Corporation (a corrugated box Credit
Age: 64 until he manufacturer) and ORDMS (a solution Industries, Inc.
resigns or is planning firm).
removed
Trustee since
1995
Robert E. Stautberg Trustee Until Retired Partner of KPMG LLP (a 29 Trustee of Good
4815 Drake Road retirement at certified public accounting firm). Samaritan
Cincinnati, OH age 75 or He is Vice President of St. Xavier Hospital,
Age: 68 until he High School. Bethesda
resigns or is Hospital and
removed Tri-Health, Inc.
Trustee since
1999
31
Touchstone Variable Series Trust
Notes to Financial Statements (Continued)
INDEPENDENT
TRUSTEES:
John P. Zanotti Trustee Until CEO and Chairman of Avaton, Inc. (a 29 None
5400 Waring Drive retirement at wireless entertainment company). CEO
Cincinnati, OH age 75 or and Chairman of Astrum Digital
Age: 54 until he Information (an information
resigns or is monitoring company) from 2000 until
removed 2001; President of Great American
Life Insurance Company from 1999
Trustee since until 2000; A Director of Chiquita
2002 Brands International, Inc. until
2000; Senior Executive of American
Financial Group, Inc. (a financial
services company) from 1996 until
1999.
1 Ms. McGruder, as President and a director of Touchstone Advisors, Inc., the
Trust's investment advisor, and Touchstone Securities, Inc., the Trust's
distributor, is an "interested person" of the Trust within the meaning of
Section 2(a)(19) of the 1940 Act. Mr. Barrett, as President and Chairman of
The Western and Southern Life Insurance Company and Western-Southern Life
Assurance Company, parent companies of Touchstone Advisors, Inc. and
Touchstone Securities, Inc., and Chairman of Fort Washington Investment
Advisors, Inc., a Trust sub-advisor, is an "interested person" of the Trust
within the meaning of Section 2(a)(19) of the 1940 Act. Mr. Lindholm, as
President and a director of National Integrity Life Insurance Company and
Integrity Life Insurance Company, subsidiaries of The Western and Southern
Life Insurance Company, is an "interested person" of the Trust within the
meaning of Section 2(a)(19) of the 1940 Act.
2 Each Trustee is elected to serve until the age of 75 or after five years of
service, whichever is greater, or until he resigns or is removed.
3 The Touchstone Funds consist of eleven series of the Trust, six series of
the Touchstone Strategic Trust, six series of Touchstone Tax-Free Trust and
six series of Touchstone Investment Trust.
4 Each Trustee, with the exception of Mr. Lindholm, is also a Trustee of
Touchstone Tax-Free Trust, Touchstone Investment Trust and Touchstone
Strategic Trust.
PRINCIPAL
OFFICERS1:
NUMBER OF
FUNDS
TERM OF OVERSEEN
NAME POSITION(S) OFFICE AND IN THE OTHER
ADDRESS HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING TOUCHSTONE DIRECTORSHIPS
AGE TRUST TIME SERVED PAST 5 YEARS FUNDS2 HELD
Patrick T. Bannigan President Until he Senior Vice President of Touchstone 29 None
Touchstone Advisors, Inc. sooner dies, Advisors, Inc. and Touchstone
221 East Fourth Street resigns, is Securities, Inc.; Senior Vice President
Cincinnati, OH removed or of Evergreen Investment Services until
Age: 37 becomes March 2002.
disqualified
President
since 2002
Michael S. Spangler Vice Until he Vice President of Touchstone Advisors, 29 None
Touchstone Advisors, Inc. President sooner dies, Inc. and Touchstone Securities, Inc.;
221 East Fourth Street resigns, is Vice President of Evergreen Investment
Cincinnati, OH removed or Services until July 2002.
Age: 36 becomes
disqualified
Vice President
since 2002
32
Touchstone Variable Series Trust
Notes to Financial Statements (Continued)
PRINCIPAL
OFFICERS:
Brian E. Hirsch Vice Until he Director of Compliance of Fort 29 None
Touchstone Advisors, Inc. President sooner dies, Washington Brokerage Services, Inc.
221 East Fourth Street resigns, is Chief Compliance Officer of Puglisi &
Cincinnati, OH removed or Co. from May 2001 until August 2002;
Age: 46 becomes Vice President - Compliance of Palisade
disqualified Capital Management from June 1997 until
January 2000.
Vice President
since 2003
Terrie A. Wiedenheft Controller Until she Senior Vice President, Chief Financial 29 None
Touchstone Advisors, Inc. sooner dies, Officer and Treasurer of Integrated
221 East Fourth Street resigns, is Fund Services, Inc., IFS Fund
Cincinnati, OH removed or Distributors, Inc. and Fort Washington
Age: 40 becomes Brokerage Services, Inc. She is Chief
disqualified Financial Officer of IFS Financial
Services, Inc., Touchstone Advisors,
Controller Inc. and Touchstone Securities, Inc.
since 2000 and Assistant Treasurer of Fort
Washington Investment Advisors, Inc.
Scott A. Englehart Treasurer Until he President of Integrated Fund Services, 29 None
Integrated Fund Services, sooner dies, Inc. and IFS Fund Distributors, Inc.
Inc. resigns, is From 1998 until 2000, he was a
221 East Fourth Street removed or Director, Transfer Agency and Mutual
Cincinnati, OH becomes Fund Distribution for Nationwide
Age: 40 disqualified Advisory Services, Inc.
Treasurer
since 2000
Tina H. Bloom Secretary Until she Vice President - Managing Attorney of 29 None
Integrated Fund Services, sooner dies, Integrated Fund Services, Inc. and IFS
Inc. resigns, is Fund Distributors, Inc.
221 East Fourth Street removed or
Cincinnati, OH becomes
Age: 34 disqualified
Secretary
since 1999
1 Each officer also holds the same office with Touchstone Investment Trust,
Touchstone Tax-Free Trust and Touchstone Strategic Trust.
2 The Touchstone Funds consist of eleven series of the Trust, six series of
the Touchstone Strategic Trust, six series of Touchstone Tax-Free Trust and
six series of Touchstone Investment Trust.
33
Touchstone Variable Series Trust
Portfolio Performance
June 30, 2003
TOUCHSTONE BARON SMALL CAP FUND
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN
TOUCHSTONE BARON SMALL CAP FUND AND THE RUSSELL 2000 INDEX
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
6/03
Touchstone Baron Small Cap Fund $19,938
Russell 2000 Index $23,531
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS.
- --------------------------------------------------------------------------------
o Average annual total return since inception: 6.77%
o Total return for the fiscal year ended June 30, 2003: (1.04%)
o Average annual return for the five year period ended June 30, 2003: (1.02%)
o Performance relates to the Fund and does not reflect separate account
charges appli-cable to variable annuity contracts through which the Fund is
sold.
o Fund commenced operations on December 14, 1992.
34
MANAGEMENT DISCUSSION AND ANALYSIS
TOUCHSTONE BARON SMALL CAP FUND
Current Strategy
The Fund's total return was negative 1.04% for the twelve months ended June 30,
2003. The total return for the Russell 2000 Index was negative 1.64% for the
same period.
Sectors that had the most positive contribution over the one year period include
Education, Transportation, Recreation and Resorts and Restaurants. University of
Phoenix Online had the largest positive impact on performance. Other holdings
that contributed positively included JetBlue Airways, Apollo Group, and Kerzner
International.
Sectors that hurt performance the most were Chemical, Health Care Facilities and
Retail. OM Group had the most negative impact on performance. We sold the entire
OM Group position on 10/30/2002. Other holdings that negatively impacted
performance were Choicepoint, United Surgical Partners and DVI. DVI was sold on
2/19/2003.
Baron Capital's disciplined practice of buying forward-looking, well-managed,
fast-growing businesses with real earnings has faired well in a time when the
market continues to turns its back on companies with weak balance sheets and
irrational valuations. Though stock prices have recently been very volatile, the
businesses in which we invest have generally continued to grow in a weak
economic environment. We remain optimistic about the long-term prospects of
these businesses and therefore remain optimistic regarding the performance of
their stocks.
During the one year period, the markets were extremely volatile and the first
three quarters saw negative returns. The rally in the equity markets began in
mid March and continued through to the middle of June with the more speculative
investments leading the way. The technology stocks in the Russell 2000 advanced
almost 33% during the second quarter alone. Although we believe that some areas
of the market have gotten ahead of themselves, we do believe that the economy
has begun to recover and that both consumer and business confidence will also
increase. We believe that the businesses that we own are well positioned and
priced to benefit from the recovery.
35
Touchstone Variable Series Trust
Portfolio Performance
June 30, 2003
TOUCHSTONE LARGE CAP GROWTH FUND
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN
TOUCHSTONE LARGE CAP GROWTH FUND AND THE S&P 500 INDEX
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
6/03
Touchstone Large Cap Growth Fund $17,118
S&P 500 Index $27,259
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS.
- --------------------------------------------------------------------------------
o Average annual total return since inception: 5.22%
o Total return for the fiscal year ended June 30, 2003: (0.16%)
o Average annual return for the five year period ended June 30, 2003: (6.95%)
o Performance relates to the Fund and does not reflect separate account
charges appli-cable to variable annuity contracts through which the Fund is
sold.
o Fund commenced operations on December 8, 1992.
36
MANAGEMENT DISCUSSION AND ANALYSIS
TOUCHSTONE LARGE CAP GROWTH FUND
The Fund's total return was negative 0.16% for the twelve months ended June 30,
2003. The total return for the S&P 500 Index was 0.26% for the same period.
Over the last twelve months, geopolitical events threatened to undermine the
improving economic fundamentals. In the same year that saw investor confidence
destroyed by numerous high-profile financial accounting problems, a pending war
with Iraq caused investors to pull back from the market, despite signs of an
improving economy, an accommodative Federal Reserve, and stimulative fiscal
policy. After our success militarily, investors regained confidence and have
slowly come back into the market.
Overweighted Sectors were Semi-Conductors and Electronics, Software and
Services, Biotechnology, Hardware and Equipment, General Merchandise and Leisure
Services. Underweighted Sectors were Energy, Healthcare Services, Telecomm
Services, Materials, Diversified Financials, Banks and Aerospace and Defense.
Overweighted sectors which outperformed included Biotechnology, Hardware and
Equipment, Software and Services. Underweighted sectors that underperformed
included Aerospace and Defense, Materials and Energy. Overweighted sectors that
underperformed included General Merchandise, Semiconductors and Electronics and
Leisure Services. Underweighted sectors that outperformed included Telecomm
Services, Diversified Financials and Banks.
Securities that contributed positively to the Fund's performance were Semis and
Electronics (Intel, Novellus), Diversified Financials (Citigroup, Goldman Sachs)
and General Merchandise (Target, Wal Mart).
Securities that contributed negatively to the Fund's Performance were Software
and Services (Electronic Arts, Siebel, Microsoft, Peoplesoft), Healthcare
Services (Tenet Healthcare) and Pharmaceuticals (Wyeth, Pfizer).
The top four holdings in the portfolio on an absolute basis were Genentech,
Amgen, Dell Computer and Best Buy.
The bottom four holdings on an absolute basis were Tenet Health Care, Texas
Instruments, Wyeth and Walgreens.
Harris Bretall is looking forward to a rebound in consumer sentiment, thanks to
unprecedented levels of monetary and fiscal stimulus, lower oil prices, and
stronger equity markets. At the same time, rising profits, increasing cash flow
and improving visibility are allowing companies to take a longer-term
perspective in evaluating capital investments. Together, these represent the
necessary ingredients for acceleration in both consumer spending and business
investment. We believe that the net result will be an above-average bounce in
the economy for the next four quarters.
37
Touchstone Variable Series Trust
Portfolio Performance
June 30, 2003
TOUCHSTONE THIRD AVENUE VALUE FUND
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN
TOUCHSTONE THIRD AVENUE FUND AND THE S&P 500 INDEX
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
6/03
Touchstone Third Avenue Value Fund $30,619
S&P 500 Index $27,508
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS.
- --------------------------------------------------------------------------------
o Average annual total return since inception: 11.20%
o Total return for the fiscal year ended June 30, 2003: (6.78%)
o Average annual return for the five year period ended June 30, 2003: 1.87%
o Performance relates to the Fund and does not reflect separate account
charges appli-cable to variable annuity contracts through which the Fund is
sold.
o Fund commenced operations on December 14, 1992.
38
MANAGEMENT DISCUSSION AND ANALYSIS
TOUCHSTONE THIRD AVENUE VALUE FUND
Current Strategy
The Fund's total return was negative 6.78% for the twelve months ended June 30,
2003. The total return for the Standard & Poor's 500 Index was 0.26% and the
Russell 2000 Value Index was negative 3.80% for the same period.
The Fund strives to deliver superior absolute returns with limited investment
risk over time. We do not manage for short-term performance or against
benchmarks. We are fundamental, bottom-up value investors and we invest in the
securities of companies with strong financial positions, competent managements,
understandable businesses and whose securities trade at a discount to their
estimated private market or takeover values. As such, we make no attempt to
allocate the portfolio assets among industry sectors based on any macro-economic
view or index-related considerations. Our diligent criteria cannot shield us
from short-term market fluctuations, but hopefully will enable the portfolio
holdings to weather storms.
During the fiscal year, we added 12 new positions to the Fund, increased our
positions in 13 existing holdings, reduced our holdings in two companies and
eliminated five positions. Additionally, 10 securities were acquired through a
merger with another manager's portfolio. The new names to the Fund are engaged
in a wide range of businesses, including Real Estate and Energy related.
As evidenced during the June quarter, an increase in general market prices
produced an immediate change in the value of our holdings. In addition to
benefiting from general market price improvements, our investment strategy has
other avenues for creating value for shareholders. Since the Fund invests in
companies that are extremely well capitalized and have high-quality assets, our
portfolio companies frequently participate in resource conversion activities.
Resource conversions can happen in a number of different ways. For example, a
cash-rich company might convert its liquid assets into higher and better uses by
purchasing the assets or operations of another company. It might involve a
massive share repurchase, extraordinary dividend or a tender offer at a premium
to the market. Resource conversion also happens when businesses of our portfolio
companies get acquired, thereby monetizing our investment, or when the company
divests assets, liquifying its balance sheet. Resource conversion activities,
while not particularly evident in the portfolio during the most recent quarter,
do appear to be on the rise. Most notable are recent high-profile hostile bids
such as Oracle's unsolicited bid for PeopleSoft, Zimmer's unsolicited bid for
Centerpulse AG and Alcan's unsolicited bid for Pechiney. Hostile bids are
generally less common than friendly takeovers because only public information is
available, while in the latter case, prior due diligence research can occur. The
recent activity on the resource conversion front could be a harbinger for more
participation among the companies in the Fund.
39
Of course, it takes a competent management team to realize value for a company.
One of our investment criteria is that each company in which we invest must have
competent management, i.e. a management team that has a good track record as
business owners and operators, as well as have the interests of outside minority
shareholders at heart. Several of our companies' managements took advantage of
current attractive access to capital markets by issuing convertible securities.
For example, Comverse Technology and Nabors Industries issued zero coupon
convertible notes, of which a portion of the proceeds were to be used to pay
down higher interest debt. We believe that these actions illustrate companies
with savvy management teams interested in creating longer-term value for their
shareholders.
Recently, the tax code was amended to enact dividend tax relief. Generally,
dividends received by individuals between tax years 2003 and 2008 are to be
taxed at the capital gains rate. We believe dividend tax relief will be quite
helpful for the Fund over the long-term. Companies with dividend paying ability
might be worth a premium. First and foremost, companies with dividend paying
ability are those with strong financial positions, i.e. cash on the asset side
and enjoying substantial "surplus-surplus" (a relative absence of liabilities)
on the obligation side. These are the types of common stocks in which the Fund
invests. Further, the largest potential beneficiaries from dividend tax relief
might be those who own common stocks selling at a discount from, or a small
premium over, the amount of tax paid earnings retained after year 2000. It seems
as if a major portion of book value for most companies consists of tax paid
retained earnings. Our portfolios are currently priced at meaningful discounts
to the Standard & Poor's Industrial Index. We may not realize on this proximity
to book value advantage for several years. The Fund, however, remains with the
advantage that our portfolio companies' strong financial positions result in
businesses with much above average dividend paying ability. We suspect companies
with dividend paying ability may initiate quarterly-cash dividend programs, or
perhaps issue one-time special dividends as a way to return surplus-surplus to
their shareholders.
While carefully monitoring our existing positions, we continue to focus on
finding additional investment opportunities, that will create longer-term value
for our shareholders. Irrespective of general market conditions, over the medium
term, it is likely that the Fund could benefit from the potential increase in
resource conversion activities and, possibly, even an increase in dividend
programs.
40
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO]TOUCHSTONE
INVESTMENTS
7591-AN-0307
ITEM 2. CODE OF ETHICS. Required only for fiscal years ending after July 15,
2003.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Required only for fiscal years ending
after July 15, 2003.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Require only for fiscal years
ending after December 15, 2003.
ITEMS 5-6. RESERVED
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED END
MANAGEMENT INVESTMENT COMPANIES. Not Applicable.
ITEM 8. RESERVED
ITEM 9. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act")) are effective as of
a date within 90 days of the filing date of this report.
(b) There were no significant changes in the registrant's internal control over
financial reporting that occurred during the registrant's last fiscal half-year
that have materially affected, or are reasonably likely to materially affect,
the registrant's internal control over financial reporting.
ITEM 10. EXHIBITS.
(a) (1) Code of Ethics. Not Applicable
(2) Certifications of Principal Executive Officer and Principal Financial
Officer pursuant to Rule 30a-2(a) under the Investment Company Act of 1940.
(b) Certifications of Principal Executive Officer and Principal Financial
Officer pursuant to Rule 30a-2(b) under the Investment Company Act of 1940.
-2-
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) Touchstone Variable Series Trust
--------------------------------------------------------------------
By (Signature and Title)
/s/ Patrick T. Bannigan
- ------------------------------------
Patrick T. Bannigan
President
Date: September 5, 2003
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)
/s/ Patrick T. Bannigan
- ------------------------------------
Patrick T. Bannigan
President
Date: September 5, 2003
By (Signature and Title)
/s/ Terrie A. Wiedenheft
- ------------------------------------
Terrie A. Wiedenheft
Chief Financial Officer
Date: September 5, 2003
-3-