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 811-8416
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Touchstone Variable Series Trust
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(Exact name of registrant as specified in charter)
303 Broadway, Cincinnati, Ohio 45202
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(Address of principal executive offices) (Zip code)
Jill T. McGruder, 303 Broadway, Cincinnati, Ohio 45202
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(Name and address of agent for service)
Registrant's telephone number, including area code: (513) 362-8000
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Date of fiscal year end: 12/31
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Date of reporting period: 12/31/05
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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, 100 F. Street, N.E,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
Annual Report
TOUCHSTONE
- ----------------------------------------------------------------------- Variable
Series
Trust
TOUCHSTONE VARIABLE SERIES TRUST
o Touchstone Balanced Fund
o Touchstone Baron Small Cap Fund
o Touchstone Core Bond Fund
o Touchstone Eagle Capital Appreciation Fund
o Touchstone Emerging Growth Fund
o Touchstone Enhanced Dividend 30 Fund
o Touchstone Growth & Income Fund
o Touchstone High Yield Fund
o Touchstone Money Market Fund
o Touchstone Third Avenue Value Fund
o Touchstone Value Plus Fund
o Touchstone Aggressive ETF Fund
o Touchstone Conservative ETF Fund
o Touchstone Enhanced ETF Fund
o Touchstone Moderate ETF Fund
Annual Report
December 31, 2005
1
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TOUCHSTONE VARIABLE SERIES TRUST
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LETTER FROM THE PRESIDENT
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Dear Fellow Shareholder:
We are pleased to provide you with the Touchstone Variable Series Trust Annual
Report. Inside you will find key financial information and manager commentaries
for the twelve months ended December 31, 2005.
As we look back on the previous year, the U.S. economy displayed a high degree
of resilience, deflecting the impact of surging energy prices, monetary
tightening and natural disasters. Increased consumer and capital spending,
record employment figures and home sales, along with historically low inflation
have fueled its strength.
In mid-December, the Federal Reserve Board (Fed) completed its 13th consecutive
rate hike since June 2004, bringing the Federal Funds rate to 4.25%. Short-term
consumer and business borrowing costs have moved in stride with the Fed changes.
Uncertainties about future rate increases remain as analysts are watchful of the
Fed's views of inflation, the housing and job markets and other key economic
indicators. Alan Greenspan also ends his 18-year stretch as Fed Chairman in
January and Ben Bernanke takes control, which raises questions whether the rate
increase succession will desist or Bernanke will continue Greenspan's
inflation-fighting resolve.
While short-term rates increased, the yield curve remained moderately flat
throughout the year. Consequently, longer-term bond performance posted
relatively favorable returns.
Oil prices experienced record highs during the year, a situation intensified by
the significant damage inflicted on refining capabilities in the Gulf region by
Hurricanes Katrina and Rita. Despite the rally in energy costs and fears of
accelerating inflation, corporations exhibited continued strength in profit
growth.
The U.S. equity markets also managed to post positive results and completed the
year showing modest gains with a 4.91% return for the S&P 500 Index. Mid-cap
stocks outperformed other equity classes by a large margin. However, many
analysts believe large-cap stocks, which have underperformed stocks of other
capitalization ranges, are due for a return. Meanwhile, value stocks
outperformed growth stocks for the fifth consecutive year, with growth closing
the gap on value near year-end.
Touchstone endeavors to offer a disciplined approach to investment management
that is well suited to helping you attain your goals. It is our belief that
aligning ourselves with expert sub-advisors, who are proven managers, can
consequently produce excellent performance. We continue to support a long-term
investment outlook and encourage you to focus on diversifying your portfolio to
achieve the full potential benefits of investing.
On behalf of my colleagues at Touchstone Investments, I thank you for the
opportunity to assist with your investments and appreciate the trust you've
placed in us. We look forward to serving you in the future.
Best regards,
/s/ Jill T. McGruder
Jill T. McGruder
President
Touchstone Variable Series Trust
2
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TOUCHSTONE VARIABLE SERIES TRUST
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TABULAR PRESENTATION OF SCHEDULES OF INVESTMENTS
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(UNAUDITED) December 31, 2005
The illustrations below provide each Fund's sector allocation. We hope it will
be useful to shareholders as it summarizes key information about each Fund's
investments.
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TOUCHSTONE BALANCED FUND
EQUITY SECTOR ALLOCATION (% OF EQUITY ASSETS)
Financials 31.5
Consumer Discretionary 19.6
Industrials 14.3
Health Care 14.2
Information Technology 7.9
Energy 5.4
Utilities 3.6
Materials 1.4
Telecommunication 1.0
Investment Funds 5.9
Other Assets/Liabilities (Net) (4.8)
-----
TOTAL 100.0
-----
FIXED INCOME (% OF FIXED
SECTOR ALLOCATION INCOME ASSETS)
U.S. Treasury 31.0
U.S. Agency 27.8
AAA/Aaa 6.7
AA/Aa 8.6
A/A 12.3
BBB/Baa 8.4
BB/Ba 4.1
B/B 1.1
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TOTAL 100.0
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ASSET ALLOCATION (% OF NET ASSETS)
Equities 68.9
Fixed Income 30.0
Investment Funds 5.9
Other Assets/Liabilities (4.8)
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TOTAL 100.0
-----
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TOUCHSTONE EAGLE CAPITAL APPRECIATION FUND
SECTOR ALLOCATION (% OF NET ASSETS)
Information Technology 21.4
Financials 17.7
Consumer Discretionary 17.2
Health Care 16.1
Industrials 10.9
Consumer Staples 7.3
Telecommunication 2.1
Investment Funds 14.8
Other Assets/Liabilities (Net) (7.5)
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TOTAL 100.0
-----
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TOUCHSTONE ENHANCED DIVIDEND 30 FUND
SECTOR ALLOCATION (% OF NET ASSETS)
Industrials 18.7
Telecommunication 18.1
Consumer Discretionary 13.2
Consumer Staples 12.3
Financials 11.7
Information Technology 9.0
Health Care 6.5
Materials 4.0
Energy 3.2
Investment Funds 10.8
Other Assets/Liabilities (Net) (7.5)
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TOTAL 100.0
-----
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TOUCHSTONE BARON SMALL CAP FUND
SECTOR ALLOCATION (% OF NET ASSETS)
Consumer Discretionary 42.9
Financials 17.0
Health Care 15.0
Industrials 7.7
Information Technology 6.0
Energy 5.7
Utilities 1.8
Materials 1.0
Investment Funds 17.5
Other Assets/Liabilities (Net) (14.6)
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TOTAL 100.0
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TOUCHSTONE CORE BOND FUND
CREDIT QUALITY (% OF TOTAL INVESTMENTS)
U.S. Treasury 21.8
U.S. Agency 41.0
AAA/Aaa 17.7
AA/Aa 0.6
A/A 7.9
BBB/Baa 10.7
BB/Ba 0.3
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TOTAL 100.0
-----
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TOUCHSTONE EMERGING GROWTH FUND
SECTOR ALLOCATION (% OF NET ASSETS)
Health Care 27.9
Information Technology 19.1
Energy 15.8
Consumer Discretionary 12.5
Industrials 12.0
Financials 7.0
Materials 1.8
Consumer Staples 0.2
Investment Funds 18.8
Other Assets/Liabilities (Net) (15.1)
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TOTAL 100.0
-----
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TOUCHSTONE GROWTH & INCOME FUND
SECTOR ALLOCATION (% OF NET ASSETS)
Financials 15.5
Information Technology 12.2
Energy 9.0
Industrials 5.5
Health Care 4.5
Consumer Discretionary 3.9
Consumer Staples 2.8
Utilities 2.4
Telecommunication 1.7
Materials 1.5
Investment Funds 42.0
Other Assets/Liabilities (Net) (1.0)
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TOTAL 100.0
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3
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TOUCHSTONE VARIABLE SERIES TRUST
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TOUCHSTONE HIGH YIELD FUND
CREDIT QUALITY (% OF TOTAL INVESTMENTS)
BBB/Baa 3.8
BB/Ba 42.6
B/B 50.7
CCC/Caa 2.9
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TOTAL 100.0
-----
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TOUCHSTONE THIRD AVENUE VALUE FUND
SECTOR ALLOCATION (% OF NET ASSETS)
Financials 34.8
Information Technology 15.4
Energy 14.6
Consumer Discretionary 6.5
Materials 4.2
Health Care 3.7
Industrials 2.9
Investment Funds 17.1
Other Assets/Liabilities (Net) 0.8
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TOTAL 100.0
-----
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TOUCHSTONE MONEY MARKET FUND
CREDIT QUALITY (% OF TOTAL INVESTMENTS)
A-1/P-1F-1 98.3
FW1* 1.7
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TOTAL 100.0
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PORTFOLIO ALLOCATION (% OF NET ASSETS)
Variable Rate Demand Notes 62.8
Corporate Notes/Commercial Paper 26.9
Taxable Municipal Bonds 8.2
U.S. Government Agency 1.3
Other Assets/Liabilities (Net) 0.8
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TOTAL 100.0
-----
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TOUCHSTONE VALUE PLUS FUND
SECTOR ALLOCATION (% OF NET ASSETS)
Financials 26.6
Health Care 12.0
Energy 11.5
Consumer Discretionary 10.0
Information Technology 9.2
Industrials 9.1
Consumer Staples 6.2
Utilities 5.3
Telecommunication 4.6
Materials 2.6
Investment Funds 7.5
Other Assets/Liabilities (Net) (4.6)
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TOTAL 100.0
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* Equivalent of Standard & Poor's and Moody's highest short-term ratings of
A1 and P1, respectively, based upon independent research conducted by Fort
Washington Investment Advisors, Inc.
4
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TOUCHSTONE VARIABLE SERIES TRUST
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Tabular Presentation of Schedules of Investments continued
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TOUCHSTONE AGGRESSIVE ETF FUND
SECTOR ALLOCATION (% OF NET ASSETS)
Exchange Traded Funds 96.1
Investment Funds 2.3
Other Assets/Liabilities (Net) 1.6
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TOTAL 100.0
-----
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TOUCHSTONE CONSERVATIVE ETF FUND
SECTOR ALLOCATION (% OF NET ASSETS)
Exchange Traded Funds 98.6
Investment Funds 2.4
Other Assets/Liabilities (Net) (1.0)
-----
TOTAL 100.0
-----
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TOUCHSTONE ENHANCED ETF FUND
SECTOR ALLOCATION (% OF NET ASSETS)
Exchange Traded Funds 97.9
Investment Funds 2.6
Other Assets/Liabilities (Net) (0.5)
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TOTAL 100.0
-----
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TOUCHSTONE MODERATE ETF FUND
SECTOR ALLOCATION (% OF NET ASSETS)
Exchange Traded Funds 98.3
Investment Funds 3.0
Other Assets/Liabilities (Net) (1.3)
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TOTAL 100.0
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5
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TOUCHSTONE BALANCED FUND
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MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
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TOUCHSTONE BALANCED FUND
SUB-ADVISED BY OPPENHEIMER CAPITAL LLC
PERFORMANCE AND MARKET OVERVIEW
The Fund's total return was 6.61% for the twelve months ended December 31, 2005.
The total return for the S&P 500 Index was 4.91% and the Lehman Brothers U.S.
Aggregate Index was 2.43% for the same period. Its blended benchmark comprised
of 60% of the S&P 500 Index and 40% of the Lehman Brothers U.S. Aggregate Index
was 3.92% for the same period.
In 2005, stocks posted modest gains as concerns over rising energy prices and a
rising interest rate environment helped put a damper on stock market
performance. Smaller-capitalization stocks outperformed their large-cap peers.
Energy and Utility stocks were the best performers in 2005, while Consumer
Discretionary and Telecommunication stocks were the poorest performers for the
year. Bonds gained ground in 2005, leaning against the headwinds of 200 basis
points (2%) of Federal Reserve tightening and concern that higher energy prices
would fuel inflation pressure.
PORTFOLIO REVIEW
The equity portion of the Fund outperformed the S&P 500 Index. The Consumer
Discretionary, Energy and Technology sectors provided the greatest contribution
to performance, as stock selection was strong in all three sectors. The Consumer
Discretionary sector saw strong contributions from Retail chains. One stock
performed well, after announcing its pending acquisition, as did another, which
largely benefited from investor enthusiasm for its new management team and
turnaround strategy. In the Energy sector, two stocks were strong contributors
to performance. Three Technology stocks all posted substantial gains.
Exposure to the Health Care, Consumer Staples and Materials sectors negatively
impacted Fund performance in 2005. We believe many of these stocks are poised to
perform well in 2006 as the market refocuses on their strong fundamentals.
The fixed income portion of the Fund slightly underperformed the Lehman Brothers
Aggregate Index. Auto sector problems, coupled with increased leveraged buyouts
and stock dividends, hurt the corporate bond market during 2005, which in turn
negatively impacted performance, as the Fund was overweight in Corporate Bonds.
Conversely, the fixed income portion of the Fund's overweight in longer duration
securities positively impacted performance as the yield curve flattened during
the year, with longer-term bonds outperforming shorter maturity bonds. The
Federal Reserve raised rates eight times in 2005, which sent shorter-term bond
yields considerably higher. In this environment, longer-term bonds performed
well, as investors remained confident that the Fed was active enough to stave
off future inflation. Also, our near-Index weight of Mortgage-Backed securities
also was positive factor affecting performance, as this sector had favorable
relative returns during the year.
6
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TOUCHSTONE BALANCED FUND
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CURRENT STRATEGY AND OUTLOOK
Looking ahead, we believe the low risk premiums that have prevailed in the
equity markets for the past couple of years may be in the process of
normalizing. We see this being driven by higher interest rates, transition of
the Fed chairmanship and moderating economic growth. With an end to the Fed's
interest-rate-tightening cycle likely approaching, several Financial stocks have
become more attractive to us due to improved risk profiles, meaning on a
risk-adjusted basis they now appear sufficiently undervalued to be considered
for investment. In addition, valuations of many Large Cap Financial stocks
remain depressed due to worries about rising interest rates. Once the Fed
indicates that a pause in rate hikes may be near, we believe a number of these
stocks could be strong performers.
We also continue to find value among Industrials, where we believe the
misperception that earnings are nearing a cyclical peak has caused a number of
individual securities to be priced improperly. In our view, many of these
companies have several more years of earnings growth ahead of them and expect
that once this becomes better recognized, the stocks would be poised for
attractive upside potential.
In an environment in which investors may require a higher return for putting
their capital at risk, we believe the Fund, with its higher-quality bias, could
be well positioned for favorable relative returns in the year ahead.
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Average Annual Total Return
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One Year Five Years Ten Years
Ended Ended Ended
12/31/05 12/31/05 12/31/05
6.61% 5.81% 9.12%
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Cumulative Total Return
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Ten Years
Ended
12/31/05
139.31%
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[The following table was represented
as a mountain chart in the printed material.]
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GROWTH OF A $10,000 INVESTMENT
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Lehman Blend: 60%
Brothers 60% S&P 500 -
U.S. 40% Lehman
Aggregate Brothers U.S.
Touchstone S&P 500 (Major Aggregate
Date Balanced Fund (Major Index) Index 2) (Minor Index)
12/31/95 10,000 10,000 10,000 10,000
12/31/96 11,678 12,296 10,363 11,523
12/31/97 13,851 16,398 11,363 14,274
12/31/98 14,605 21,085 12,350 17,218
12/31/99 16,010 25,522 12,249 19,336
12/31/00 18,045 23,198 13,674 19,179
12/31/01 18,526 20,440 14,828 18,458
12/31/02 16,842 15,923 16,349 16,768
12/31/03 20,475 20,490 17,020 19,929
12/31/04 22,447 22,719 17,758 21,575
12/31/05 23,931 23,834 18,190 22,421
Past performance is not indicative of future performance.
Performance information does not reflect fees that are paid by the separate
accounts through which shares of the Fund are sold. Inclusion of those fees
would reduce figures for all periods.
The Fund commenced operations on November 21, 1994.
7
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TOUCHSTONE BALANCED FUND
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SCHEDULE OF INVESTMENTS
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December 31, 2005
Shares Value
COMMON STOCKS -- 68.9%
ADVERTISING -- 4.0%
5,500 Lamar Advertising Co.*+ $ 253,770
7,000 Omnicom Group, Inc. 595,910
6,600 WPP Group plc - ADR 356,400
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1,206,080
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AEROSPACE & DEFENSE -- 1.4%
2,200 DRS Technologies, Inc. 113,124
4,000 L-3 Communications Holdings, Inc. 297,400
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410,524
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AIRLINES -- 1.7%
23,700 Continental Airlines, Inc. - Class B*+ 504,810
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AUTOMOTIVE -- 0.7%
7,500 Lear Corp. 213,450
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BANKING -- 3.5%
2,100 M&T Bank Corp. 229,005
3,700 Prosperity Bancshares, Inc.+ 106,338
4,500 Texas Regional Bancshares, Inc. 127,350
8,000 Zions Bancorp 604,480
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1,067,173
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BUSINESS SERVICES -- 1.5%
24,300 Digitas, Inc.* 304,236
5,500 MoneyGram International, Inc. 143,440
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447,676
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COMPUTERS -- 1.4%
3,000 Jabil Circuit, Inc.* 111,270
7,000 Zebra Technologies, Inc. - Class A* 299,950
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411,220
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DIVERSIFIED MANUFACTURING -- 1.1%
9,200 General Electric, Inc. 322,460
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ELECTRONICS -- 1.4%
9,600 Amphenol Corp. - Class A 424,896
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ENERGY -- 2.5%
13,200 Cinergy Corp. 560,472
5,000 SCANA Corp. 196,900
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757,372
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FINANCIAL SERVICES -- 12.5%
4,600 American Express Co. 236,716
1,520 Ameriprise Financial, Inc. 62,320
2,800 Capital One Financial Corp. 241,920
10,300 CIT Group, Inc. 533,334
16,600 Citigroup, Inc. 805,598
6,400 Countrywide Financial Corp. 218,816
21,000 JPMorgan Chase & Co. 833,489
7,100 Merrill Lynch & Co., Inc. 480,883
13,000 TCF Financial Corp. 352,820
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3,765,896
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HEALTH & HOSPITALS -- 4.3%
11,000 DaVita, Inc.* 557,040
7,100 Kindred Healthcare, Inc.* 182,896
10,500 Laboratory Corp. of America Holdings* 565,425
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1,305,361
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HOTELS & LODGING -- 1.0%
28,000 La Quinta Corp.* 311,920
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INSURANCE -- 5.9%
13,700 Conseco, Inc.* $ 317,429
4,100 Hartford Financial
Services Group, Inc. (The) 352,149
4,000 MGIC Investment Corp. 263,280
5,900 PartnerRe Ltd. 387,453
9,700 Reinsurance Group of America, Inc. 463,272
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1,783,583
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MACHINERY/ENGINEERING -- 1.3%
6,300 National-Oilwell, Inc.* 395,010
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MANUFACTURING -- 8.2%
6,500 Actuant Corp. - Class A 362,700
8,600 Eaton Corp. 576,974
6,000 Gardner Denver, Inc.* 295,800
7,700 Gentex Corp. 150,150
19,000 Thermo Electron Corp.* 572,470
13,400 Waters Corp.* 506,520
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2,464,614
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MEDICAL RESEARCH -- 1.9%
10,200 Beckman Coulter, Inc. 580,380
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MULTI-MEDIA -- 1.7%
20,500 News Corp. - Class A 318,775
6,000 Viacom, Inc. - Class B 195,600
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514,375
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OIL & GAS -- 2.5%
1,900 BP plc - ADR 122,018
8,200 Delta Petroleum Corp.* 178,514
3,700 Exxon Mobil Corp. 207,829
5,500 XTO Energy, Inc. 241,670
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750,031
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PAPER PRODUCTS -- 1.0%
21,000 Smurfit-Stone Container Corp.* 297,570
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RESTAURANTS -- 2.2%
9,100 Applebee's International, Inc. 205,569
5,200 Brinker International, Inc. 201,032
10,500 Ruby Tuesday, Inc.+ 271,845
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678,446
- --------------------------------------------------------------------------------
RETAIL -- 3.5%
15,600 Claire's Stores, Inc. 455,832
25,400 TJX Companies, Inc. (The) 590,042
- --------------------------------------------------------------------------------
1,045,874
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TECHNOLOGY -- 1.2%
38,000 Taiwan Semiconductor
Manufacturing Co. - ADR 376,580
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 0.7%
3,400 ALLTEL Corp. 214,540
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TRUCKING/SHIPPING -- 1.8%
6,200 Oshkosh Truck Corp. 276,458
10,000 Pacer International, Inc. 260,600
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537,058
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TOTAL COMMON STOCKS $20,786,899
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INVESTMENT FUNDS -- 5.9%
1,768,177 Touchstone Institutional
Money Market Fund ^** $ 1,768,177
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The accompanying notes are an integral part of the financial statements.
8
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TOUCHSTONE BALANCED FUND
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Schedule of Investments continued
Principal Interest Maturity
Amount Rate Date Value
ASSET-BACKED SECURITIES -- 0.0%
HOUSING -- 0.0%
$ 263 Access Financial
Manufacture
Housing Contract
Trust 7.10% 5/15/21 $ 262
- --------------------------------------------------------------------------------
CORPORATE BONDS -- 10.3%
AUTOMOTIVE -- 0.3%
150,000 General Motors + 7.20% 1/15/11 105,375
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BANKING -- 0.9%
250,000 BB&T Corp. 7.25% 6/15/07 257,975
134 Nykredit 6.00% 10/1/26 22
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257,997
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BEVERAGES -- 0.5%
160,000 Coca-Cola 8.95% 11/1/06 164,600
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FINANCIAL SERVICES -- 2.8%
500,000 General Electric
Capital Corp. 6.75% 3/15/32 586,926
250,000 Household Finance
Corp. 7.88% 3/1/07 258,061
- --------------------------------------------------------------------------------
844,987
- --------------------------------------------------------------------------------
HOTELS & LODGING -- 1.3%
350,000 ITT Corp. 7.38% 11/15/15 379,750
- --------------------------------------------------------------------------------
OIL & GAS -- 1.9%
500,000 Pemex Project
Funding Master
Trust 9.13% 10/13/10 575,500
- --------------------------------------------------------------------------------
RETAIL -- 0.8%
250,000 Wal-Mart
Stores, Inc. 5.25% 9/1/35 242,669
- --------------------------------------------------------------------------------
TECHNOLOGY -- 0.8%
250,000 IBM Corp. 4.88% 10/1/06 250,205
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 1.0%
250,000 Verizon Global 7.75% 6/15/32 297,611
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS $ 3,118,694
- --------------------------------------------------------------------------------
MUNICIPAL BONDS -- 0.1%
TRANSPORTATION -- 0.1%
30,000 Oklahoma
City Airport 9.40% 11/1/10 $ 32,759
- --------------------------------------------------------------------------------
SOVEREIGN GOVERNMENT OBLIGATIONS -- 0.8%
GREAT BRITAIN -- 0.8%
105,000 United Kingdom
Treasury 8.00% 12/7/15 $ 238,351
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 9.8%
500,000 Federal Home
Loan Mortgage
Corporation 6.25% 3/5/12 $ 507,595
$ 397,087 Federal National
Mortgage
Association 5.50% 11/1/33 394,175
78,332 Federal National
Mortgage
Association 6.00% 1/1/14 80,043
60,175 Federal National
Mortgage
Association 6.00% 3/1/31 $60,884
35,029 Federal National
Mortgage
Association 6.00% 2/1/33 35,394
860,360 Federal National
Mortgage
Association 6.00% 12/15/33 854,051
42,166 Federal National
Mortgage
Association 6.50% 12/1/12 43,360
20,070 Federal National
Mortgage
Association 8.00% 1/2/30 21,440
372,363 Government
National Mortgage
Association 5.50% 7/15/33 375,316
129,265 Government
National Mortgage
Association 6.00% 12/15/32 132,515
391,365 Government
National Mortgage
Association 6.00% 11/15/33 400,782
38,668 Government
National Mortgage
Association 7.00% 1/15/32 40,586
26,689 Government
National Mortgage
Association 7.50% 9/1/30 28,073
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS $ 2,974,214
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 9.0%
500,000 U.S. Treasury Bond 5.50% 8/15/28 562,207
550,000 U.S. Treasury Note 3.25% 1/15/09 532,533
1,000,000 U.S. Treasury Note 3.50% 11/15/06 992,149
650,000 U.S. Treasury Note 4.13% 8/15/10 643,601
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS $ 2,730,490
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 104.8%
(COST $29,419,827) $31,649,846
LIABILITIES IN EXCESS OF OTHER ASSETS -- (4.8%) (1,444,828)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $30,205,018
- --------------------------------------------------------------------------------
* Non-income producing security.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
+ All or a portion of the security is on loan. The total value of securities
on loan as of December 31, 2005, was $1,134,232.
** As of December 31, 2005, $1,171,354 represents collateral for securities
loaned.
ADR - American Depository Receipt.
The accompanying notes are an integral part of the financial statements.
9
-------------------------------
TOUCHSTONE BARON SMALL CAP FUND
-------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
TOUCHSTONE BARON SMALL CAP FUND
SUB-ADVISED BY BAMCO, INC.
PERFORMANCE AND MARKET OVERVIEW
The Fund's total return was 7.69% for the twelve months ended December 31, 2005.
The total return for the Russell 2000 Index was 4.55% for the same period.
During the year, the Fund maintained its investment focus on what we believe to
be well-managed, small-company growth businesses that have large opportunities
and significant barriers to competition.
PORTFOLIO REVIEW
Energy & Energy Service had the most positive impact on Fund performance for
2005. Record high gas and oil prices resulted in a very tight balance between
supply and demand, which was exacerbated by an especially hot summer in the U.S.
and hurricanes Katrina and Rita.
Financial Services (Brokerage & Exchanges) also positively impacted Fund
performance. The three holdings in the group were all up for the year. Consumer
Discretionary (Apparel) also made a significant contribution to the Fund. One
stock in particular led performance, due to the company's double-digit revenue
and earnings growth in its core business and a strategic acquisition of its
struggling competitor this past summer. Together, the two businesses will
represent the most recognized brands in the U.S. and offer several avenues for
continued market share gains. Throughout the year, this company posted robust
growth across all channels (mass, wholesale and retail) and expanded operating
margins to double-digit levels.
Health Services (Insurance) and Financial Services (Miscellaneous) detracted
from Fund performance in 2005. Despite strong enrollment growth and significant
new business wins, one stock declined significantly in 2005 when the company
experienced higher than anticipated medical cost trends in several of its
markets. Lower earnings, limited visibility of the causes, and questions over
the company's ability to return to its historically stable and predictable
healthcare cost trends, contributed to the stock's sell off. We believe the
opportunity for pure play Medicaid HMOs remains very large, and that its
talented management team is taking proper steps to restore the company to its
former growth and profitability.
CURRENT STRATEGY AND OUTLOOK
We believe the companies we own will continue to grow at healthy and sustainable
rates and we expect that their share prices will continue to reflect their
attractive prospects. The Fund invests in what we believe are forward-looking,
well-managed, fast-growing businesses for the long-term. We remain optimistic
about the long-term prospects of these businesses and therefore remain
optimistic regarding the performance of their stocks.
10
- -------------------------------
TOUCHSTONE BARON SMALL CAP FUND
- -------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Ten Years
Ended Ended Ended
12/31/05 12/31/05 12/31/05
7.69% 10.97% 9.36%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Ten Years
Ended
12/31/05
144.61%
- --------------------------------------------------------------------------------
[The following table was represented
as a mountain chart in the printed material.]
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
Touchstone Russell
Baron Small 2000
Date Cap Fund (Major Index)
12/31/95 10,000 10,000
12/31/96 11,854 11,649
12/31/97 14,827 14,254
12/31/98 14,737 13,890
12/31/99 14,358 16,843
12/31/00 14,537 16,335
12/31/01 15,497 16,741
12/31/02 13,319 13,313
12/31/03 17,772 19,603
12/31/04 22,716 23,196
12/31/05 24,461 24,252
Past performance is not indicative of future performance.
Performance information does not reflect fees that are paid by the separate
accounts through which shares of the Fund are sold. Inclusion of those fees
would reduce figures for all periods.
The Fund commenced operations on December 14, 1992.
11
-------------------------------
TOUCHSTONE BARON SMALL CAP FUND
-------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2005
Shares Value
COMMON STOCKS -- 97.1%
ADVERTISING SERVICES -- 1.6%
5,000 Getty Images, Inc.* $ 446,350
- --------------------------------------------------------------------------------
APPAREL -- 3.6%
9,000 Carter's, Inc.* 529,650
8,000 Polo Ralph Lauren Corp. 449,120
- --------------------------------------------------------------------------------
978,770
- --------------------------------------------------------------------------------
BUSINESS SERVICES -- 3.2%
12,000 ChoicePoint Inc.* 534,120
15,000 Copart, Inc.* 345,900
- --------------------------------------------------------------------------------
880,020
- --------------------------------------------------------------------------------
CHEMICALS -- 1.7%
15,000 Senomyx, Inc.* 181,800
10,000 Symyx Technologies, Inc.* 272,900
- --------------------------------------------------------------------------------
454,700
- --------------------------------------------------------------------------------
COMMUNICATIONS -- 1.5%
22,500 SBA Communications Corp.* 402,750
- --------------------------------------------------------------------------------
CONSULTING -- 1.1%
8,000 Hewitt Associates, Inc.* 224,080
4,000 LECG Corp.* 69,520
- --------------------------------------------------------------------------------
293,600
- --------------------------------------------------------------------------------
EDUCATION -- 6.5%
30,000 DeVry, Inc.* + 600,000
15,000 Education Management Corp.* 502,650
4,000 Strayer Education, Inc. 374,800
10,000 Universal Technical Institute, Inc.* 309,400
- --------------------------------------------------------------------------------
1,786,850
- --------------------------------------------------------------------------------
ENERGY & ENERGY SERVICES -- 5.7%
12,000 Encore Acquisition Company* 384,480
9,500 FMC Technologies, Inc.* 407,740
5,000 SEACOR SMIT, Inc.* 340,500
10,000 XTO Energy, Inc. 439,400
- --------------------------------------------------------------------------------
1,572,120
- --------------------------------------------------------------------------------
FINANCIAL SERVICES/ASSET MANAGEMENT -- 0.7%
10,000 Cohen & Steers, Inc. 186,300
- --------------------------------------------------------------------------------
FINANCIAL SERVICES/BROKERAGE & EXCHANGES -- 5.1%
1,600 Chicago Mercantile Exchange 587,984
10,000 International Securities Exchange, Inc.* 275,200
12,000 Jefferies Group, Inc. 539,760
- --------------------------------------------------------------------------------
1,402,944
- --------------------------------------------------------------------------------
FINANCIAL SERVICES/COMMUNITY BANKS -- 2.8%
3,500 Central Pacific Financial Corp. 125,720
12,000 First Republic Bank 444,120
11,000 UCBH Holdings, Inc. + 196,680
- --------------------------------------------------------------------------------
766,520
- --------------------------------------------------------------------------------
FINANCIAL SERVICES/INSURANCE -- 2.5%
12,500 Arch Capital Group Ltd.* 684,375
- --------------------------------------------------------------------------------
FINANCIAL SERVICES/MISCELLANEOUS -- 2.4%
6,000 CheckFree Corp.* 275,400
12,000 First Marblehead Corp. (The) + 394,320
- --------------------------------------------------------------------------------
669,720
- --------------------------------------------------------------------------------
GAMING SERVICES -- 1.4%
15,000 Shuffle Master, Inc.* + 377,100
- --------------------------------------------------------------------------------
GOVERNMENT SERVICES -- 1.5%
7,500 Anteon International Corp.* 407,625
- --------------------------------------------------------------------------------
HEALTH CARE FACILITIES -- 4.3%
8,000 Community Health Systems, Inc.* $ 306,720
12,000 Manor Care, Inc. 477,240
12,500 United Surgical Partners
International, Inc.* 401,875
- --------------------------------------------------------------------------------
1,185,835
- --------------------------------------------------------------------------------
HEALTH CARE PRODUCTS -- 2.9%
25,000 DepoMed, Inc.* + 150,000
11,000 Edwards Lifesciences Corp.* 457,710
2,000 INAMED Corp.* 175,360
- --------------------------------------------------------------------------------
783,070
- --------------------------------------------------------------------------------
HEALTH SERVICES -- 2.8%
6,000 Charles River Laboratories
International, Inc.* 254,220
15,000 Odyssey Healthcare, Inc.* 279,600
8,000 PRA International* 225,200
- --------------------------------------------------------------------------------
759,020
- --------------------------------------------------------------------------------
HEALTH SERVICES/INSURANCE -- 3.8%
27,000 AMERIGROUP Corp.* 525,420
20,000 Centene Corp.* 525,800
- --------------------------------------------------------------------------------
1,051,220
- --------------------------------------------------------------------------------
HOME BUILDING -- 0.7%
4,000 Hovnanian Enterprises, Inc. - Class A* 198,560
- --------------------------------------------------------------------------------
HOTELS & LODGING -- 2.6%
10,000 Choice Hotels International, Inc. 417,600
6,200 Four Seasons Hotels, Inc. 308,450
- --------------------------------------------------------------------------------
726,050
- --------------------------------------------------------------------------------
MEDIA -- 0.7%
5,000 Radio One, Inc. - Class A* 51,350
5,000 Radio One, Inc. - Class D* 51,750
7,200 Saga Communications, Inc. - Class A* 78,264
- --------------------------------------------------------------------------------
181,364
- --------------------------------------------------------------------------------
MEDICAL EQUIPMENT -- 0.8%
9,000 Immucor, Inc.* 210,240
- --------------------------------------------------------------------------------
REAL ESTATE -- 5.3%
1,500 Alexander's, Inc.* 368,250
10,000 CB Richard Ellis Group, Inc.* 588,500
6,500 CoStar Group, Inc.* 280,605
20,000 Spirit Finance Corp. 227,000
- --------------------------------------------------------------------------------
1,464,355
- --------------------------------------------------------------------------------
RECREATION & RESORTS -- 12.7%
10,000 Isle of Capri Casinos, Inc.* + 243,600
15,000 Kerzner International Ltd.* 1,031,250
12,000 Station Casinos, Inc. 813,600
10,000 Vail Resorts, Inc.* 330,300
20,000 Wynn Resorts, Ltd.* + 1,096,999
- --------------------------------------------------------------------------------
3,515,749
- --------------------------------------------------------------------------------
RESTAURANTS -- 5.6%
10,000 California Pizza Kitchen, Inc.* 319,700
9,750 Cheesecake Factory Inc. (The)* 364,553
6,000 P.F. Chang's China Bistro, Inc.* + 297,780
5,000 Panera Bread Company* + 328,400
4,500 Red Robin Gourmet Burgers* 229,320
- --------------------------------------------------------------------------------
1,539,753
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
12
- -------------------------------
TOUCHSTONE BARON SMALL CAP FUND
- -------------------------------
- --------------------------------------------------------------------------------
Schedule of Investments continued
Shares Value
COMMON STOCKS -- 97.1% - CONTINUED
RETAIL STORES -- 8.6%
10,000 Cabela's, Inc. - Class A* + $ 166,000
15,000 CarMax, Inc.* 415,200
15,000 Dick's Sporting Goods, Inc.* + 498,600
16,500 DSW, Inc. - Class A* 432,630
6,000 PETCO Animal Supplies, Inc.* 131,700
20,000 Select Comfort Corp.* + 547,000
4,700 United Auto Group, Inc. 179,540
- --------------------------------------------------------------------------------
2,370,670
- --------------------------------------------------------------------------------
SOFTWARE -- 1.3%
8,500 Kronos Inc.* 355,810
- --------------------------------------------------------------------------------
TRANSPORTATION -- 1.9%
10,500 Genesee & Wyoming Inc.* 394,275
7,500 JetBlue Airways Corp.* + 115,350
- --------------------------------------------------------------------------------
509,625
- --------------------------------------------------------------------------------
UTILITY SERVICES -- 1.8%
10,000 ITC Holdings Corp. 280,900
8,820 Southern Union Company* 208,417
- --------------------------------------------------------------------------------
489,317
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS $26,650,382
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 17.5%
4,796,258 Touchstone Institutional
Money Market Fund ^ ** $ 4,796,258
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 114.6%
(COST $22,007,276) $31,446,640
LIABILITIES IN EXCESS OF OTHER ASSETS -- (14.6%) (4,003,367)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $27,443,273
- --------------------------------------------------------------------------------
* Non-income producing security.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
+ All or a portion of the security is on loan. The total value of securities
on loan as of December 31, 2005, was $4,280,053.
** As of December 31, 2005, $4,417,383 represents collateral for securities
loaned.
The accompanying notes are an integral part of the financial statements.
13
-------------------------
TOUCHSTONE CORE BOND FUND
-------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
TOUCHSTONE CORE BOND FUND
SUB-ADVISED BY FORT WASHINGTON INVESTMENT ADVISORS, INC.
PERFORMANCE AND MARKET OVERVIEW
The Fund's total return was 1.68% for the twelve months ended December 31, 2005.
The total return for the Lehman Brothers U.S. Aggregate Index was 2.43% for the
same period.
We are struck by how well the U.S. economy has overcome the headwinds of
monetary tightening, surging energy prices and a series of natural disasters.
The economy may have posted its eleventh consecutive quarter of growth in excess
of 3% in the fourth quarter. Meanwhile, core inflation, which excludes food and
energy, appears to be holding around 2%, despite more than a doubling of oil
prices in the past two years.
The end result for 2005 was a lackluster year for U.S. financial markets. Bond
investors were not able to earn the coupon rates on bonds, as short- and
medium-term yields rose. Nonetheless, long-term yields stayed in narrow ranges,
despite a 200 basis point rise in the federal funds rate to 4.25%. Meanwhile,
the stock market, as measured by the S&P 500 Index, generated a 5% total return.
Volatility in the bond market was the lowest in nearly 20 years, while stock
market volatility was the lowest in four decades. Interest rates increased the
greatest in the short end of the curve during the year with the longest portion
of the curve decreasing in yield.
PORTFOLIO REVIEW
The overall performance of the Fund, relative to the benchmark, was negative.
This was due to low returns and low volatility in the bond market which, when
combined with the diversified nature of the Fund, make outperformance difficult
without taking extreme positions versus the benchmark.
Fund performance relative to the market during the year was positively
influenced by the Fund's defensive interest rate position (positioned for higher
interest rates) and its holdings in Treasury Inflation Protected Securities.
Corporate bonds and Mortgage-Backed Securities underperformed U.S. Treasuries.
The Fund was slightly overweight both sectors, which negatively impacted
performance compared to the market.
The Fund's higher-quality bias of its holdings in Corporate Bonds contributed to
relative performance, which outperformed lower quality bonds. Good security
selection in Mortgage-Backed Securities also contributed to relative
performance.
CURRENT STRATEGY AND OUTLOOK
Looking forward, the consensus calls for the economy to slow somewhat, as the
housing sector cools; nonetheless, real GDP growth is expected to exceed 3%.
Core inflation is expected to edge up to about 2.2%. The most likely outcome is
that investors will again be able to earn moderate returns on financial assets.
Although we believe interest rates may drift to the higher end of last year's
range, the risk of a large increase in rates looks less likely, and therefore we
have reduced our defensive interest rate position. The position of the Fund
relative to the yield curve has been moved to a neutral position based on our
view that the yield curve is not likely to invert significantly. We are less
optimistic about Corporate Bonds given the relatively small risk premiums and
recent volatility of this sector. Stable to slightly higher interest rates are
typically a good environment for Mortgage-Backed Securities and we have
increased the Fund's allocation to this sector.
14
- -------------------------
TOUCHSTONE CORE BOND FUND
- -------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Since
Ended Ended Inception
12/31/05 12/31/05 1/1/99
1.68% 4.82% 4.54%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Since Inception
1/1/99
36.42%
- --------------------------------------------------------------------------------
[The following table was represented
as a mountain chart in the printed material.]
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
Touchstone Lehman Brothers
Core Bond U.S. Aggregate
Fund (Major Index)
01/01/99 10,000 10,000
12/31/99 9,872 9,872
12/31/00 10,780 11,020
12/31/01 11,626 11,950
12/31/02 12,548 13,176
12/31/03 12,986 13,717
12/31/04 13,416 14,312
12/31/05 13,642 14,660
Past performance is not indicative of future performance.
Performance information does not reflect fees that are paid by the separate
accounts through which shares of the Fund are sold. Inclusion of those fees
would reduce figures for all periods.
The Fund commenced operations on January 1, 1999.
15
-------------------------
TOUCHSTONE CORE BOND FUND
-------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2005
Principal Interest Maturity
Amount Rate Date Value
CORPORATE BONDS -- 19.4%
AEROSPACE & DEFENSE -- 0.3%
$ 135,000 United Technologies
Corp. 5.40% 5/1/35 $ 134,529
- --------------------------------------------------------------------------------
AUTOMOBILES -- 0.9%
320,000 Daimlerchrysler
NA Holding 7.20% 9/1/09 338,414
- --------------------------------------------------------------------------------
BANKING -- 1.6%
105,000 JPMorgan Capital 5.88% 3/15/35 104,394
250,000 Key Bank NA 5.80% 7/1/14 259,754
225,000 National
Westminster Bank 7.38% 10/1/09 244,271
- --------------------------------------------------------------------------------
608,419
- --------------------------------------------------------------------------------
DIVERSIFIED MANUFACTURING -- 0.4%
140,000 General Electric Co. 5.00% 2/1/13 139,927
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 5.0%
275,000 Appalachian
Power Co. 5.95% 5/15/33 276,236
300,000 Carolina Power
& Light 5.25% 12/15/15 299,622
225,000 Entergy
Louisiana 6.30% 9/1/35 220,273
215,000 National Rural
Utilities 3.25% 10/1/07 208,936
440,000 NiSource Finance
Corp. 3.20% 11/1/06 433,637
200,000 Pacific Gas
& Electric 6.05% 3/1/34 206,992
285,000 PSI Energy, Inc. 7.85% 10/15/07 298,077
- --------------------------------------------------------------------------------
1,943,773
- --------------------------------------------------------------------------------
FINANCIAL SERVICES -- 1.1%
325,000 Caterpillar
Financial Services
Corp. 4.75% 2/17/15 317,388
120,000 Ford Motor Credit 7.38% 10/28/09 106,426
- --------------------------------------------------------------------------------
423,814
- --------------------------------------------------------------------------------
FOOD -- 1.2%
200,000 Coca-Cola
Enterprises 6.70% 10/15/36 228,843
225,000 Pepsi Bottling 5.63% 2/17/09 230,243
- --------------------------------------------------------------------------------
459,086
- --------------------------------------------------------------------------------
HOME BUILDING -- 0.6%
250,000 Centex Corp. 4.55% 11/1/10 239,633
- --------------------------------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING -- 1.7%
100,000 AOL Time Warner 7.70% 5/1/32 112,466
212,000 British Sky
Broadcasting 6.88% 2/23/09 222,084
350,000 Reed Elsevier
Capital 4.63% 6/15/12 339,197
- --------------------------------------------------------------------------------
673,747
- --------------------------------------------------------------------------------
OIL & GAS -- 1.7%
295,000 Canadian Natural
Resources 4.90% 12/1/14 288,617
125,000 Nexen, Inc. 5.88% 3/10/35 122,915
250,000 Ras Laffan Lng II,
144A 5.30% 9/30/20 247,938
- --------------------------------------------------------------------------------
659,470
- --------------------------------------------------------------------------------
PHARMACEUTICALS -- 0.3%
$ 125,000 Bristol-Myers
Squibb 5.75% 10/1/11 $ 129,097
- --------------------------------------------------------------------------------
REAL ESTATE -- 0.9%
315,000 Avalon Properties 7.50% 12/15/10 347,678
- --------------------------------------------------------------------------------
TECHNOLOGY -- 0.6%
230,000 IBM Corp. 6.22% 8/1/27 250,756
- --------------------------------------------------------------------------------
TELEPHONE SYSTEMS -- 2.1%
180,000 Ameritech Capital
Funding 6.15% 1/15/08 183,339
200,000 Cingular Wireless 7.13% 12/15/31 228,937
250,000 Sing
Telecommunications 6.38% 12/1/11 266,365
125,000 Sprint Capital Corp. 7.63% 1/30/11 137,841
- --------------------------------------------------------------------------------
816,482
- --------------------------------------------------------------------------------
TRANSPORTATION -- 1.0%
380,000 Union Pacific Co. 6.63% 2/1/08 392,461
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS $7,557,286
- --------------------------------------------------------------------------------
AGENCY MORTGAGE-BACKED SECURITIES -- 35.6%
232,698 Federal Home
Loan Mortgage
Corporation 5.00% 12/1/18 230,711
344,134 Federal Home
Loan Mortgage
Corporation 5.50% 1/1/19 346,222
38,394 Federal Home
Loan Mortgage
Corporation 7.00% 5/1/30 40,366
315,550 Federal Home
Loan Mortgage
Corporation 6.50% 8/1/32 323,952
585,308 Federal Home
Loan Mortgage
Corporation 5.50% 5/1/33 581,369
424,161 Federal Home
Loan Mortgage
Corporation 5.00% 8/1/33 412,120
452,876 Federal Home
Loan Mortgage
Corporation 6.50% 10/1/34 464,611
452,677 Federal Home
Loan Mortgage
Corporation 5.50% 1/1/35 448,965
708,198 Federal Home
Loan Mortgage
Corporation 6.00% 9/1/35 714,911
1,161,053 Federal National
Mortgage
Association 6.00% 11/1/17 1,186,841
153,705 Federal National
Mortgage
Association 4.50% 1/1/18 149,911
338,838 Federal National
Mortgage
Association 4.50% 6/1/18 330,475
82,680 Federal National
Mortgage
Association 8.00% 5/1/30 88,319
The accompanying notes are an integral part of the financial statements.
16
- -------------------------
TOUCHSTONE CORE BOND FUND
- -------------------------
- --------------------------------------------------------------------------------
Schedule of Investments continued
Principal Interest Maturity
Amount Rate Date Value
AGENCY MORTGAGE-BACKED SECURITIES -- 35.6% - CONTINUED
$ 74,927 Federal National
Mortgage
Association 7.50% 1/1/31 $ 78,524
61,849 Federal National
Mortgage
Association 6.50% 6/1/31 63,471
384,087 Federal National
Mortgage
Association 6.50% 6/1/32 396,286
293,276 Federal National
Mortgage
Association 6.50% 9/1/32 301,409
77,261 Federal National
Mortgage
Association 6.50% 9/1/32 79,404
253,173 Federal National
Mortgage
Association 6.50% 12/1/32 260,193
389,001 Federal National
Mortgage
Association 4.50% 8/1/33 367,728
811,671 Federal National
Mortgage
Association 5.50% 8/1/33 805,718
538,539 Federal National
Mortgage
Association 5.50% 10/1/33 534,589
200,864 Federal National
Mortgage
Association 5.00% 4/1/34 195,018
771,994 Federal National
Mortgage
Association 5.00% 4/1/34 749,524
690,896 Federal National
Mortgage
Association 5.00% 5/1/34 670,787
1,471,210 Federal National
Mortgage
Association 5.50% 12/1/34 1,458,213
271,944 Federal National
Mortgage
Association 5.00% 2/1/35 263,502
736,961 Federal National
Mortgage
Association 6.00% 9/1/35 739,036
1,483,740 Federal National
Mortgage
Association 6.00% 1/1/36 1,497,186
994 Government
National
Mortgage
Association 7.50% 7/1/23 1,052
65,718 Government
National
Mortgage
Association 3.75% 9/20/24 66,063
96,545 Government
National
Mortgage
Association 4.00% 10/17/29 92,644
16,330 Government
National
Mortgage
Association 8.00% 7/15/30 17,477
- --------------------------------------------------------------------------------
TOTAL AGENCY MORTGAGE-BACKED SECURITIES $13,956,597
- --------------------------------------------------------------------------------
MORTGAGE RELATED SECURITIES -- 16.3%
585,000 Banc of America
Commercial
Mortgage 4.65% 9/11/36 569,370
300,000 Countrywide
Alternative Loan
Trust, Series
2005-11CB,
Class 2A3 5.50% 6/25/35 296,408
1,000,000 Credit Suisse
First Boston
Mortgage Securities
Corp. 5.00% 6/25/35 984,030
696,532 Credit Suisse
First Boston
Mortgage
Securities Corp.,
Series 2005-9,
Class 2A1 5.50% 10/25/35 687,428
500,000 Deutsche Bank
Alternative Loan
Trust, Series
2003-2XS,
Class A6 4.97% 9/25/33 490,662
735,000 GE Capital
Commercial
Mortgage Corp.,
Series 2004-C1,
Class A2 3.92% 11/10/38 705,996
735,000 JPMorgan Chase
Commercial
Mortgage Securities
Corp., Series
2001-C1, Class A3 5.86% 10/12/35 760,637
492,938 Structured Asset
Securities Corp.,
Series 2005-17,
Class 5A1 5.50% 10/25/35 484,927
497,503 Washington Mutual
Alternative Loan
Trust, Series 2005-9,
Class 2A4 5.50% 10/25/35 498,351
911,604 Wells Fargo
Mortgage Backed
Securities 4.99% 2/25/34 898,386
- --------------------------------------------------------------------------------
TOTAL MORTGAGE RELATED SECURITIES $ 6,376,195
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
17
-------------------------
TOUCHSTONE CORE BOND FUND
-------------------------
Principal Interest Maturity
Amount Rate Date Value
SOVEREIGN GOVERNMENT OBLIGATIONS -- 0.5%
HUNGARY -- 0.5%
$ 190,000 Republic of
Hungary 4.75% 2/3/15 $ 184,724
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 6.7%
825,000 Federal Home
Loan Bank 4.10% 6/13/08 812,648
473,886 Federal Home
Loan Bank 5.25% 7/28/15 469,740
660,000 Federal National
Mortgage
Association 4.63% 1/15/08 658,566
670,000 Federal National
Mortgage
Association 4.75% 12/15/10 670,007
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS $ 2,610,961
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 15.2%
505,000 U.S. Treasury Bond 8.75% 5/15/20 724,497
670,000 U.S. Treasury Bond 6.25% 8/15/23 800,074
894,740 U.S. Treasury
Inflation Index
Note 2.00% 1/15/14 889,672
850,000 U.S. Treasury Note 4.25% 10/31/07 847,510
2,745,000 U.S. Treasury Note 3.50% 8/15/09 2,665,115
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS $ 5,926,868
- --------------------------------------------------------------------------------
Shares Value
INVESTMENT FUNDS -- 9.5%
3,691,857 Touchstone Institutional
Money Market Fund ^ $ 3,691,857
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 103.2%
(COST $40,719,061) $40,304,488
LIABILITIES IN EXCESS OF OTHER ASSETS -- (3.2%) (1,255,239)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $39,049,249
- --------------------------------------------------------------------------------
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
144A - This is a restricted security that was sold in a transaction exempt from
Rule 144A of the Securities Act of 1933. This security may be sold in a
transaction exempt from registration, normally to qualified institutional
buyers. At December 31, 2005, this security was valued at $247,938 or
0.63% of net assets.
The accompanying notes are an integral part of the financial statements.
18
- ------------------------------------------
TOUCHSTONE EAGLE CAPITAL APPRECIATION FUND
- ------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
TOUCHSTONE EAGLE CAPITAL APPRECIATION FUND
SUB-ADVISED BY EAGLE ASSET MANAGEMENT, INC.
PERFORMANCE AND MARKET OVERVIEW
The Fund's total return was 0.05% for the twelve months ended December 31, 2005.
The total return for the S&P 500 Index was 4.91% for the same period.
Last year was a stop-and-go affair for investors as the broad S&P 500 Index went
through periods of weakness and strength before ending the year modestly higher.
Following a broad decline during the first quarter with a slight recovery in the
second quarter, the S&P 500 Index posted a solid gain in the third quarter as
low inflation with healthy economic growth supported a rally through early
August. That rally was subsequently interrupted by a rise in crude-oil prices to
new highs with related economic concerns over high energy costs. A modest gain
in the Index occurred on the strength of a November rally that ended in December
on investor uncertainty over the Fed's future interest rate policy; crude oil
prices that were up 40% for the year; and a yield-curve inversion that has
historically signaled a slowing economy or possible recession.
PORTFOLIO REVIEW
In that environment, the Fund experienced a rare "perfect storm" of impediments
that penalized its return relative to its benchmark. The Fund's poor performance
largely reflected its lack of positioning in the strongest S&P sector, Energy,
which responded to the spike in crude oil prices during the year, as well as
underperformance in the overweight Technology sector, where it was hurt by
significant declines in several stocks.
The Fund's lack of Energy exposure reflected the following rationale: Demand for
crude went up in 2004 while supply remained stable. Some believe this had set a
trend in which demand growth should continue to exceed supply growth for the
foreseeable future, leading to ever-higher crude oil prices. We don't believe
the supply/demand balance will remain this tight and that the spike in crude oil
prices reflected a speculative bubble exacerbated by petroleum-facility damage
caused by the Gulf Coast hurricanes. The Fund also suffered due to its lack of
holdings in Utilities, the S&P 500 Index's second-strongest performing sector.
Our process seeks to invest in good businesses that offer achievable growth
potential with attractive valuations. At year-end, the Fund had above-market
weightings in Consumer Discretionary, Technology and Health Care; a market
weighting in Industrials; and underweight in Consumer Staples and Financials. In
addition, our strategy normally underweights Materials, Energy and Utilities due
to their lack of secular growth appeal and the inherent cyclicality in the case
of Materials. Our overall sector positioning, however, is more reflective of a
dynamic process that seeks attractive businesses selling at reasonable
valuations than a macro-based, top-down strategy.
CURRENT STRATEGY AND OUTLOOK
Lower-than-expected long-term interest rates have been a key factor supporting
the economy's remarkable resilience. Recent economic data indicates that the
housing market is cooling and with higher gasoline, heating-oil and natural gas
costs this winter consumer spending is expected to slow.
19
------------------------------------------
TOUCHSTONE EAGLE CAPITAL APPRECIATION FUND
------------------------------------------
Meanwhile, corporate spending has been slower compared to previous economic
expansions, but we believe it may be more sustainable this time given impressive
corporate balance sheets.
We expect to see much slower earnings growth ahead and believe that attractively
priced quality and stability will be rewarded. We believe the run-up in Energy
stocks and speculative names is unmistakable evidence of momentum investors
moving the market. Our style is often at odds with momentum investors, as it is
currently, but we will remain patient and disciplined investors.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Ten Years
Ended Ended Ended
12/31/05 12/31/05 12/31/05
0.05% (5.30%) 5.25%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Ten Years
Ended
12/31/05
66.74%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
[The following table was represented
as a mountain chart in the printed material.]
Touchstone
Eagle Capital
Appreciation S&P 500
Fund (Major Index)
12/31/95 10,000 10,000
12/31/96 11,395 12,296
12/31/97 15,358 16,398
12/31/98 20,833 21,085
12/31/99 28,231 25,522
12/31/00 21,893 23,198
12/31/01 15,776 20,440
12/31/02 10,969 15,923
12/31/03 14,506 20,490
12/31/04 16,666 22,719
12/31/05 16,674 23,834
Past performance is not indicative of future performance.
Performance information does not reflect fees that are paid by the separate
accounts through which shares of the Fund are sold. Inclusion of those fees
would reduce figures for all periods.
The Fund commenced operations on December 8, 1992.
20
- ------------------------------------------
TOUCHSTONE EAGLE CAPITAL APPRECIATION FUND
- ------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2005
Shares Value
COMMON STOCKS -- 92.7%
CAPITAL GOODS -- 10.9%
43,100 Tyco International Ltd. $ 1,243,866
19,100 United Technologies Corp. 1,067,881
29,800 Waste Management Inc. 904,430
- --------------------------------------------------------------------------------
3,216,177
- --------------------------------------------------------------------------------
CONSUMER CYCLICALS -- 7.2%
11,100 Omnicom Group Inc. 944,943
35,900 Viacom, Inc. - Class B 1,170,340
- --------------------------------------------------------------------------------
2,115,283
- --------------------------------------------------------------------------------
CONSUMER STAPLES -- 15.4%
19,900 CVS Corp. 525,758
9,600 Kimberly-Clark Corp. 572,640
18,900 McDonald's Corp. 637,308
35,700 Newell Rubbermaid Inc. + 848,946
14,600 The Coca-Cola Co. 588,526
51,700 Time Warner, Inc. 901,648
10,000 Wal-Mart Stores, Inc. 468,000
- --------------------------------------------------------------------------------
4,542,826
- --------------------------------------------------------------------------------
FINANCIALS -- 17.7%
11,200 American Express Co. 576,352
21,200 Bank of America Corp. + 978,380
20,600 Citigroup, Inc. 999,718
10,500 Fannie Mae 512,505
7,300 Freddie Mac 477,055
7,700 Merrill Lynch & Co., Inc. 521,521
21,700 Wachovia Corp. 1,147,062
- --------------------------------------------------------------------------------
5,212,593
- --------------------------------------------------------------------------------
HEALTH CARE -- 16.1%
25,200 Baxter International Inc. $ 948,780
15,200 Guidant Corp. 984,200
19,600 HCA Inc. 989,800
50,500 Pfizer Inc. 1,177,660
14,000 Wyeth 644,980
- --------------------------------------------------------------------------------
4,745,420
- --------------------------------------------------------------------------------
TECHNOLOGY -- 25.4%
20,400 Analog Devices, Inc. 731,748
37,700 Applied Materials, Inc. 676,338
52,300 Cisco Systems, Inc.* 895,376
17,900 International Game Technology 550,962
46,300 Microsoft Corp. 1,210,744
45,500 Nokia Corp. - ADR 832,650
96,200 Oracle Corp.* 1,174,602
26,000 Sprint Nextel Corp. 607,360
45,499 Symantec Corp.* 796,233
- --------------------------------------------------------------------------------
7,476,013
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS $27,308,312
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 14.8%
4,373,645 Touchstone Institutional
Money Market Fund ^ ** $ 4,373,645
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 107.5%
(COST $29,448,917) $31,681,957
LIABILITIES IN EXCESS OF OTHER ASSETS -- (7.5%) (2,220,475)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $29,461,482
- --------------------------------------------------------------------------------
* Non-income producing security.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
+ All or a portion of the security is on loan. The total value of securities
on loan as of December 31, 2005, was $1,796,152.
** As of December 31, 2005, $1,858,941 represents collateral for securities
loaned.
ADR - American Depository Receipt.
The accompanying notes are an integral part of the financial statements.
21
-------------------------------
TOUCHSTONE EMERGING GROWTH FUND
-------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
TOUCHSTONE EMERGING GROWTH FUND
SUB-ADVISED BY WESTFIELD CAPITAL MANAGEMENT COMPANY LLC
TCW INVESTMENT MANAGEMENT COMPANY LLC
PERFORMANCE AND MARKET OVERVIEW
The Fund's total return was 15.29% for the twelve months ended December 31,
2005. The total return for the Russell Mid Cap Index was 12.65% and the Russell
2500 Index was 8.11% for the same period.
The Russell Mid Cap Index was among the top performers. Style did not matter, as
both the Russell Mid Cap Growth and Value Indexes returned over 12% for the
year.
PORTFOLIO REVIEW - WESTFIELD CAPITAL MANAGEMENT COMPANY LLC
The Energy sector drove outperformance during the year, in spite of pulling back
during the fourth quarter due to profit taking. We remained overweight the
Energy sector as we believed the supply/demand imbalance was underestimated by
the market. We do not think this correction will last long, and believe that
Energy will remain the leadership group for 2006. Holdings within the Materials
sector were the second largest contributor to portfolio outperformance in 2005.
The Health Care sector had the largest weight in the portfolio at year-end, with
Health Care equipment being the largest component. Our portion of the Fund
benefited from good stock selection with Biotechnology companies driving
performance.
Our Technology companies added value with Electronic Equipment Manufacturers and
Semiconductor companies leading the sector's performance during the year. Small
and medium-sized semiconductor companies have seen increased share gain as
larger competition has experienced capacity constraints and industry demand
appears to be picking up. Our underweight within the Technology space became
less pronounced as we progressed through 2005. We are nearing an equal weight to
the benchmark within Technology as valuations look attractive and fundamentals
are finally improving. We remain diversified across multiple industries and
believe our holdings are positioned to benefit from increased capital spending
as corporate America puts enormous free cash flow to work.
Industrials did well on the whole, but a holding involved in relocation services
cost us relative performance early in the year. Holdings within the electrical
components and the employment services were positive contributors to
performance. Positions in industry groups such as Building Products, Industrial
Machinery and Environmental Services all contributed to this sector's
performance as well. We started the year overweight the Industrial sector and
ended the year with an equal weight to the benchmark; however this is an area
where we will most likely recommit capital.
The portfolio remained underweight Consumer Discretionary for the entire period
as energy prices dampened our outlook for the continued resiliency of the U.S.
consumer. We were slightly underweight Financials but will look to put
additional funds to work in this sector in 2006.
22
- -------------------------------
TOUCHSTONE EMERGING GROWTH FUND
- -------------------------------
CURRENT STRATEGY AND OUTLOOK - WESTFIELD CAPITAL MANAGEMENT COMPANY LLC
Westfield Capital Management favors investing in earnings growth stocks given
our conviction that stock prices follow earnings progress and that they offer
the best opportunity for superior real rates of return. Reasonably priced stocks
of companies with high foreseen earnings potential are best identified through
in-depth, fundamental research. It is our belief that the mid-cap portion of the
market is under-researched, and therefore inefficient. Westfield's research
efforts enable us to uncover and exploit these inefficiencies. The firm's
experience, extensive research, and first-hand knowledge of company operations
derived through on-site visits and meetings with management provide its
competitive edge.
Westfield continues to believe that the Health Care sector offers great
potential for growth as companies benefit from strong demographics, scientific
advancements and positive reimbursement trends. The supply/demand imbalance
continues to drive the Energy market, creating vast opportunities for those
companies that are properly positioned. In our opinion, coal companies, despite
the fourth quarter correction, remain the best opportunity for growth as new
price contracts flow to the bottom line. Our analytical team is finding a
variety of investments within the Industrial space, as the back end of the
economy continues to show strength.
As we enter 2006, we are optimistic about the coming year, the market
environment and our portfolio positioning. We will continue to seek out
companies with quality earnings growth potential that trade at attractive
valuations. Business conditions across the U.S. are generally very good. GDP
growth has consistently exceeded expectations during the past several years and
corporate balance sheets and profit margins are healthy. Stocks are reasonably
priced and further increases in profits, dividends and stock repurchases could
support higher prices in the months ahead.
PORTFOLIO REVIEW - TCW INVESTMENT MANAGEMENT COMPANY LLC
For 2005, our portion of the Fund underperformed due to security selection in
Health Care and an overweight position in Information Technology. Benefiting
performance for the year was an over three times weighting in the Health Care
sector, positive security selection in the Industrial sector and an underweight
in Financials as a flat yield curve compressed the net interest margins of
financial intermediaries and constricted profit growth.
Our companies generally boast strong balance sheets with ample cash cushions,
dominant positions in their respective end markets, and are inexpensive based on
a variety of measures including price-to-book and price-to-normalized earnings.
Consistent with our investment philosophy, we typically establish positions in
out-of-favor equities when a liquidity event affords us the opportunity to
accumulate shares at attractive prices. In many cases we are early to build
positions, and the holding period for a stock to perform to its potential may
last several years.
23
-------------------------------
TOUCHSTONE EMERGING GROWTH FUND
-------------------------------
CURRENT STRATEGY AND OUTLOOK - TCW INVESTMENT MANAGEMENT COMPANY LLC
While restrictive monetary policy is generally hostile to Small and Mid Cap
stocks, in particular, we believe the compelling valuations among our holdings
more than justify an extended holding period. The Federal Reserve Board has
raised rates by 325 basis points since the middle of 2004 to the end of 2005.
However, since both U.S. and global inflation remains muted, Fed tightening
should be nearing its end, as indicated by the minutes of the December 13th FOMC
meeting. Our style of investing has outperformed its benchmarks over longer
periods and we believe the portfolio should now be well positioned for excellent
future returns.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Ten Years
Ended Ended Ended
12/31/05 12/31/05 12/31/05
15.29% 7.56% 15.44%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Ten Years
Ended
12/31/05
320.17%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
[The following table was represented
as a mountain chart in the printed material.]
Touchstone Russell
Emerging Growth Mid Cap Russell 2500
Date Fund (Major Index) (Minor Index)
12/31/95 10,000 10,000 10,000
12/31/96 11,116 11,900 11,903
12/31/97 14,859 15,352 14,803
12/31/98 15,346 16,903 14,859
12/31/99 22,520 19,984 18,447
12/31/00 29,191 21,633 19,235
12/31/01 28,426 20,417 19,470
12/31/02 22,084 17,114 16,004
12/31/03 32,521 23,969 23,287
12/31/04 36,443 28,816 27,547
12/31/05 42,017 32,461 29,781
Past performance is not indicative of future performance.
Performance information does not reflect fees that are paid by the separate
accounts through which shares of the Fund are sold. Inclusion of those fees
would reduce figures for all periods.
The Fund commenced operations on November 21, 1994.
24
- -------------------------------
TOUCHSTONE EMERGING GROWTH FUND
- -------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2005
Shares Value
COMMON STOCKS -- 96.3%
AEROSPACE & DEFENSE -- 0.1%
550 Alliant Techsystems* $ 41,894
- --------------------------------------------------------------------------------
APPAREL -- 0.1%
940 Jones Apparel Group 28,877
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES -- 0.1%
550 Anixter International, Inc. 21,516
- --------------------------------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING -- 3.5%
13,500 Mercury Interactive Corp.* 375,165
106,100 TIBCO Software, Inc.* 792,567
2,750 Unisys Corp.* 16,033
- --------------------------------------------------------------------------------
1,183,765
- --------------------------------------------------------------------------------
COMPUTERS & INFORMATION -- 0.0%
355 Lexmark International, Inc. - Class A* 15,915
- --------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- 1.7%
950 Estee Lauder Companies, Inc. (The) 31,806
510 Molson Coors Brewing Co. - Class B 34,165
750 Univision Communications Inc. - Class A* 22,043
10,900 Williams-Sonoma* 470,334
- --------------------------------------------------------------------------------
558,348
- --------------------------------------------------------------------------------
CONSUMER DISCRETIONARY - AUTOMOTIVE RETAIL -- 2.6%
27,000 O'Reilly Automotive, Inc.* 864,270
- --------------------------------------------------------------------------------
CONSUMER DISCRETIONARY - HOUSEHOLD APPLIANCES -- 3.4%
9,700 American Standard Companies, Inc. 387,515
15,500 Stanley Works (The) + 744,620
- --------------------------------------------------------------------------------
1,132,135
- --------------------------------------------------------------------------------
CONSUMER DISCRETIONARY - SPECIALTY STORES -- 2.2%
13,400 Dick's Sporting Goods, Inc.* + 445,416
6,100 Weight Watchers International, Inc.* 301,523
- --------------------------------------------------------------------------------
746,939
- --------------------------------------------------------------------------------
ELECTRONICS -- 0.5%
2,515 Celestica* 26,558
465 EMCOR Group* 31,401
3,650 LSI Logic* 29,200
1,240 Tektronix 34,980
4,000 Vishay Intertechnology* 55,041
- --------------------------------------------------------------------------------
177,180
- --------------------------------------------------------------------------------
ENERGY - COAL AND CONSUMER FUELS -- 8.4%
7,600 Amerada Hess Corp. 963,832
5,700 Arch Coal 453,150
11,700 CONSOL Energy, Inc. 762,606
17,000 Massey Energy Co. + 643,790
- --------------------------------------------------------------------------------
2,823,378
- --------------------------------------------------------------------------------
ENERGY - OIL AND GAS -- 7.2%
18,500 BJ Services 678,395
18,700 Chesapeake Energy + 593,351
800 Cooper Cameron* 33,120
500 Ensco International 22,175
450 Murphy Oil Corp. 24,296
7,400 Pioneer Natural Resources Co. 379,398
18,000 Smith International, Inc. 667,980
400 Weatherford International, Ltd. 14,480
- --------------------------------------------------------------------------------
2,413,195
- --------------------------------------------------------------------------------
FINANCIAL - BANKING -- 3.1%
10,190 Commerce Bancorp, Inc. + $ 350,638
1,900 North Fork Bancorporation 51,984
625 People's Bank 19,413
8,350 Zions Bancorporation 630,925
- --------------------------------------------------------------------------------
1,052,960
- --------------------------------------------------------------------------------
FINANCIAL SERVICES -- 3.3%
11,700 Investors Financial Services + 430,911
9,200 T. Rowe Price Group, Inc. 662,676
- --------------------------------------------------------------------------------
1,093,587
- --------------------------------------------------------------------------------
HEALTH CARE -- 5.2%
11,350 Coventry Health Care, Inc.* 646,496
18,900 Omnicare, Inc. 1,081,458
- --------------------------------------------------------------------------------
1,727,954
- --------------------------------------------------------------------------------
HEALTH CARE - BIOTECHNOLOGY -- 4.4%
22,500 Celgene* + 1,458,000
540 Charles River Laboratories
International, Inc.* 22,880
- --------------------------------------------------------------------------------
1,480,880
- --------------------------------------------------------------------------------
HEALTH CARE - PHARMACEUTICALS -- 4.9%
69,000 Elan Corp. plc* + 961,170
750 Par Pharmaceutical Companies, Inc.* + 23,505
16,100 Shire Pharmaceuticals Group plc 624,519
1,700 Valeant Pharmaceuticals International 30,736
- --------------------------------------------------------------------------------
1,639,930
- --------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT -- 10.2%
16,700 Cytyc Corp.* 471,441
19,500 Dade Behring Holdings, Inc. 797,355
13,000 Fisher Scientific International, Inc.* 804,179
550 Hillenbrand Industries, Inc. 27,176
29,000 PerkinElmer 683,240
20,500 Thermo Electron* 617,665
- --------------------------------------------------------------------------------
3,401,056
- --------------------------------------------------------------------------------
HEALTH CARE FACILITY -- 2.6%
15,000 Community Health Systems* 575,100
7,700 Manor Care 306,229
- --------------------------------------------------------------------------------
881,329
- --------------------------------------------------------------------------------
HEAVY MACHINERY -- 0.5%
1,050 Dover 42,515
1,200 Pentair, Inc. 41,424
1,225 Varian* 48,742
550 W.W. Grainger, Inc. 39,105
- --------------------------------------------------------------------------------
171,786
- --------------------------------------------------------------------------------
HOME FURNISHINGS -- 0.1%
1,450 Leggett & Platt 33,292
- --------------------------------------------------------------------------------
HOTELS/MOTELS & RESORTS -- 1.3%
9,900 Gaylord Entertainment Co.* 431,541
- --------------------------------------------------------------------------------
INDUSTRIALS -- 10.0%
20,500 AMETEK, Inc. 872,070
13,100 IDEX Corp. 538,541
4,800 ITT Industries, Inc. 493,536
25,800 Monster Worldwide Inc.* 1,053,155
10,700 Republic Services, Inc. 401,785
- --------------------------------------------------------------------------------
3,359,087
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
25
-------------------------------
TOUCHSTONE EMERGING GROWTH FUND
-------------------------------
Shares Value
COMMON STOCKS -- 96.3% - CONTINUED
INFORMATION TECHNOLOGY -- 3.3%
16,300 Alliance Data Systems Corp.* $ 580,279
968 Avid Technology, Inc.* 53,008
1,295 Diebold, Inc. 49,210
1,000 Lam Research* 35,680
650 SPX Corp. 29,751
27,400 Symbol Technologies, Inc. 351,268
- --------------------------------------------------------------------------------
1,099,196
- --------------------------------------------------------------------------------
INFORMATION TECHNOLOGY -
COMMUNICATIONS EQUIPMENT -- 3.6%
10,100 Avaya, Inc.* 107,767
42,500 Polycom, Inc.* 650,250
10,400 Scientific-Atlanta, Inc. 447,928
- --------------------------------------------------------------------------------
1,205,945
- --------------------------------------------------------------------------------
INFORMATION TECHNOLOGY - CONSULTING -- 4.0%
10,100 CACI International, Inc. - Class A* 579,538
21,200 Satyam Computer Services Ltd. - ADR 775,708
- --------------------------------------------------------------------------------
1,355,246
- --------------------------------------------------------------------------------
INSURANCE -- 0.5%
1,000 Arthur J. Gallagher & Company + 30,880
1,240 Assurant, Inc. 53,928
1,350 Old Republic International Corp. 35,451
1,100 Willis Group Holdings, Ltd. 40,634
- --------------------------------------------------------------------------------
160,893
- --------------------------------------------------------------------------------
MATERIALS -- 1.8%
565 Cytec Industries, Inc. 26,911
800 International Flavors & Fragrances, Inc. 26,800
7,000 Monsanto Company 542,710
- --------------------------------------------------------------------------------
596,421
- --------------------------------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING -- 0.3%
2,850 Andrew Corporation* 30,580
840 Dow Jones & Company, Inc. + 29,812
350 Entercom Communications Corp.* 10,385
1,210 Westwood One, Inc. 19,723
- --------------------------------------------------------------------------------
90,500
- --------------------------------------------------------------------------------
MEDICAL SUPPLIES -- 0.3%
500 Beckman Coulter, Inc. 28,450
650 Edwards Lifesciences Corp.* 27,047
3,850 Teradyne* 56,094
- --------------------------------------------------------------------------------
111,591
- --------------------------------------------------------------------------------
RESTAURANTS -- 1.8%
20,800 Sonic Corp.* $ 613,600
- --------------------------------------------------------------------------------
RETAILERS -- 0.4%
1,450 Family Dollar Stores, Inc. 35,946
667 Federated Department Stores, Inc. 44,242
1,445 OfficeMax, Inc. 36,645
700 Tiffany & Co. 26,803
- --------------------------------------------------------------------------------
143,636
- --------------------------------------------------------------------------------
SERVICES - DATA PROCESSING -- 1.2%
8,400 CheckFree Corp.* 385,560
- --------------------------------------------------------------------------------
TECHNOLOGY - SEMI-CONDUCTORS -- 3.7%
13,300 Advanced Micro Devices, Inc.* 406,979
2,600 Cypress Semiconductor Corp.* + 37,050
1,650 Freescale Semiconductor, Inc. - Class B* 41,531
750 Intersil Corp. - Class A 18,660
26,200 Micron Technology, Inc.* 348,722
13,225 National Semiconductor Corp. 343,586
1,950 Novellus Systems, Inc.* 47,034
- --------------------------------------------------------------------------------
1,243,562
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS $32,286,964
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 18.8%
6,294,048 Touchstone Institutional
Money Market Fund ^ ** $ 6,294,048
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 115.1%
(COST $31,511,395) $38,581,012
LIABILITIES IN EXCESS OF OTHER ASSETS -- (15.1%) (5,070,166)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $33,510,846
- --------------------------------------------------------------------------------
* Non-income producing security.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
+ All or a portion of the security is on loan. The total value of securities
on loan as of December 31, 2005, was $4,983,820.
** As of December 31, 2005, $5,140,258 represents collateral for securities
loaned.
ADR - American Depository Receipt.
The accompanying notes are an integral part of the financial statements.
26
- ------------------------------------
TOUCHSTONE ENHANCED DIVIDEND 30 FUND
- ------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
TOUCHSTONE ENHANCED DIVIDEND 30 FUND
SUB-ADVISED BY TODD INVESTMENT ADVISORS, INC.
PERFORMANCE AND MARKET OVERVIEW
The Fund's total return was -3.06% for the twelve months ended December 31,
2005. The total return for the Dow Jones Industrial Average (DJIA) was 1.72% for
the same period.
The Fund posted less than favorable performance for the year. The Fund is
structured to overweight the top three yielding stocks in the Index and garner
better total returns by rebalancing monthly. The overweight was calculated by
allocating approximately 75% of the invested amount to the Index, with the
remainder split evenly among the top three yielding stocks. Given the new tax
laws, we believe the Fund should outperform the DJIA over time on a total return
basis, and provide some element of tax-advantaged dividends.
PORTFOLIO REVIEW
Over the years, this strategy has been used to highlight the out of favor stocks
that have good business fundamentals supporting them. Determining a stock is out
of favor through selecting the highest dividend yields usually makes good sense
in the DJIA because the index favors larger names that have durable businesses
and are unlikely to shut down. The basic premise is that if a company is not
going out of business, it has a good chance to recover. While the discipline has
worked in the past, it did not work well this year for several reasons.
On a macro basis, markets have not been favoring the higher yielding stocks for
the past few years. It seems that investors are more interested in the potential
for earnings growth in the current environment. Investors are also shying away
from larger capitalization companies. When you couple these factors, 2005 was
not a good year for large cap, high yielding stocks, especially those that we
like to overweight.
GM and AT&T were emphasized for the entire year while Verizon and Merck switched
places with each other twice during the period. GM was the primary culprit for
portfolio underperformance as the stock declined almost 50%. Concerns for GM are
well publicized and surround high oil prices hurting sales as well as high labor
costs. There may be some hope there as we see large investors clamoring for
change to help the share price.
CURRENT STRATEGY AND OUTLOOK
Dividend paying stocks have been out of favor for the past year, but we believe
they are due for a resurgence. Additionally, aging baby boomers may require more
income and bond yields are still historically low. For these reasons we continue
to favor this strategy.
27
------------------------------------
TOUCHSTONE ENHANCED DIVIDEND 30 FUND
------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Since
Ended Ended Inception
12/31/05 12/31/05 5/1/99
(3.06%) (1.64%) (0.81%)
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Since Inception
5/1/99
(5.29%)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
[The following table was represented
as a mountain chart in the printed material.]
Touchstone Dow Jones
Enhanced Industrial
Dividend 30 Average
Fund (Major Index)
05/01/99 10,000 10,000
12/31/99 10,599 10,776
12/31/00 10,286 10,268
12/31/01 9,109 9,709
12/31/02 7,044 8,252
12/31/03 9,298 10,586
12/31/04 9,770 11,148
12/31/05 9,471 11,339
Past performance is not indicative of future performance.
Performance information does not reflect fees that are paid by the separate
accounts through which shares of the Fund are sold. Inclusion of those fees
would reduce figures for all periods.
The Fund commenced operations on May 1, 1999.
28
- ------------------------------------
TOUCHSTONE ENHANCED DIVIDEND 30 FUND
- ------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2005
Shares Value
COMMON STOCKS -- 96.7%
AEROSPACE & DEFENSE -- 6.0%
14,220 Boeing $ 998,813
14,220 Honeywell International 529,695
- --------------------------------------------------------------------------------
1,528,508
- --------------------------------------------------------------------------------
AUTOMOBILES -- 7.7%
100,350 General Motors Corporation + 1,948,797
- --------------------------------------------------------------------------------
BANKING -- 2.7%
14,220 Citigroup 690,097
- --------------------------------------------------------------------------------
BEVERAGES, FOOD & TOBACCO -- 8.3%
14,220 Altria Group 1,062,519
14,220 Coca-Cola 573,208
14,220 McDonald's 479,498
- --------------------------------------------------------------------------------
2,115,225
- --------------------------------------------------------------------------------
CHEMICALS -- 2.4%
14,220 Du Pont (E.I.) De Nemours 604,350
- --------------------------------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING -- 1.5%
14,220 Microsoft 371,853
- --------------------------------------------------------------------------------
COMPUTERS & INFORMATION -- 6.2%
14,220 Hewlett-Packard 407,119
14,220 International Business Machines 1,168,884
- --------------------------------------------------------------------------------
1,576,003
- --------------------------------------------------------------------------------
ELECTRONICS -- 1.4%
14,220 Intel 354,931
- --------------------------------------------------------------------------------
ENTERTAINMENT & LEISURE -- 1.3%
14,220 Walt Disney Company (The) 340,853
- --------------------------------------------------------------------------------
FINANCIAL SERVICES -- 5.1%
14,220 American Express 731,761
14,220 J.P. Morgan Chase & Co. 564,392
- --------------------------------------------------------------------------------
1,296,153
- --------------------------------------------------------------------------------
FIRE, MARINE, & CASUALTY INSURANCE -- 3.8%
14,220 American International Group 970,231
- --------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS -- 3.2%
14,220 Procter & Gamble Co. 823,054
- --------------------------------------------------------------------------------
INDUSTRIAL - DIVERSIFIED -- 14.4%
14,220 Alcoa, Inc. 420,485
14,220 Caterpiller, Inc. 821,489
14,220 General Electric 498,411
14,220 Minnesota Mining &
Manufacturing (3M) 1,102,050
14,220 United Technologies 795,040
- --------------------------------------------------------------------------------
3,637,475
- --------------------------------------------------------------------------------
MEDICAL SUPPLIES -- 3.4%
14,220 Johnson & Johnson $ 854,622
- --------------------------------------------------------------------------------
OIL & GAS -- 3.1%
14,220 Exxon Mobil 798,737
- --------------------------------------------------------------------------------
PHARMACEUTICALS -- 3.1%
14,220 Merck 452,339
14,220 Pfizer 331,610
- --------------------------------------------------------------------------------
783,949
- --------------------------------------------------------------------------------
RETAILERS -- 4.9%
14,220 Home Depot 575,626
14,220 Wal-Mart Stores, Inc. 665,496
- --------------------------------------------------------------------------------
1,241,122
- --------------------------------------------------------------------------------
TELEPHONE SYSTEMS -- 18.2%
92,230 AT&T, Inc. 2,258,713
77,370 Verizon Communications 2,330,383
- --------------------------------------------------------------------------------
4,589,096
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS $24,525,056
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 10.8%
2,747,557 Touchstone Institutional
Money Market Fund ^ ** $ 2,747,557
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 107.5%
(COST $27,177,064) $27,272,613
LIABILITIES IN EXCESS OF OTHER ASSETS -- (7.5%) (1,912,525)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $25,360,088
- --------------------------------------------------------------------------------
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
+ All or a portion of the security is on loan. The total value of securities
on loan as of December 31, 2005, was $1,850,590.
** As of December 31, 2005, $1,903,932 represents collateral for securities
loaned.
The accompanying notes are an integral part of the financial statements.
29
-------------------------------
TOUCHSTONE GROWTH & INCOME FUND
-------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
TOUCHSTONE GROWTH & INCOME FUND
SUB-ADVISED BY DEUTSCHE INVESTMENT MANAGEMENT AMERICAS, INC.
PERFORMANCE AND MARKET REVIEW
The Fund's total return was 1.86% for the twelve months ended December 31, 2005.
The total return for the Russell 1000 Value Index was 7.05% for the same period.
2005 was fraught with incongruities and market anomalies both at home and around
the globe. Many indices experienced high rates of return and many languished. On
balance, overseas markets fared better than domestic markets and in the U.S.
smaller and Mid Cap indices did better than those dominated by large- and
mega-cap stocks. It appears that money flows and market capitalization rather
than fundamentals dictated these disparities.
We find that our fundamentals have been intact and that our stocks have traded
overwhelmingly within projected risk reward ranges. Our results for 2005 have
been hurt by our commitment to high quality, Large Cap stocks which exemplify
our investment strategy - strong earnings growth, below market price to earnings
and above market dividend yield. We are confident in our investment approach and
the strength of our process and portfolio holdings. Patience and discipline are
essential to longer-term investment success. We believe that those who stay with
their discipline have been rewarded for their steadfastness over time.
PORTFOLIO REVIEW
The Fund's relative results for the year were hurt by our philosophical
commitment to large cap, high quality securities that have longer-term earnings
growth at above market levels, sell at below market price earnings ratios and,
on average, have above market dividend yields. The strength of mid caps was the
primary reason for trailing our benchmarks. For the year, Energy, Utilities,
Health Care and Financials led the market and in fact were the only four sectors
that outperformed the S&P 500 Index. Moreover, within virtually every sector,
the smaller cap components were better than the larger cap.
The Fund's relative performance was hurt as a stock held in the Index, but not
in the Fund, had positive outcomes in two of its liability cases. Subsequently,
its stock price rallied on the potential for an improved earnings outlook.
Another Health Care holding failed its primary goal.
Financials contributed to results due primarily to stock selection and an
overweight in this strong performing group. One position rose on the belief that
interest rate hikes would end soon and that there would be continued economic
health and a better than expected capital market environment. Another was
affected positively by better than expected earnings and a pending acquisition,
which captures more consumers and has good financial synergies.
Lastly, based on good stock selection, another sector contributor was Consumer
Discretionary. Our retailers had good performance as sales were more resilient
in the wake of the hurricanes and preliminary holiday purchases were more
positive than expected for specific issues. Also, avoiding weak groups such as
Autos and Media, which experienced declines, assisted in good relative
performance.
30
- -------------------------------
TOUCHSTONE GROWTH & INCOME FUND
- -------------------------------
CURRENT STRATEGY AND OUTLOOK
U.S. economic fundamentals appear sound and are expected to exhibit continued
growth including strong consumer spending, employment, modest wage gains, record
home ownership and net worth, strong profits for the S&P 500 Index as well as
low interest and inflation. Investors may continue to be cautious and influenced
by the latest headline, anxiety, speculation or brokerage advice, which may keep
volatility high. On balance, it seems to have been a traders market rather than
an investors market. Over time, we believe fundamentals overwhelm speculation
and psychology.
The Fund continues to have strong fundamentals, high quality, lower than market
price earnings ratio, higher than market dividend yield, superior quality and
earnings purity well above indices. Our risk reward profile continues to suggest
better-than-market opportunities going forward.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Since
Ended Ended Inception
12/31/05 12/31/05 1/1/99
1.86% 3.73% 4.70%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Since Inception
1/1/99
37.89%
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
[The following table was represented
as a mountain chart in the printed material.]
Touchstone Russell
Growth & 1000
Income Value
Fund (Major Index)
01/01/99 10,000 10,000
12/31/99 10,239 10,735
12/31/00 11,484 11,488
12/31/01 10,878 10,845
12/31/02 9,257 9,162
12/31/03 12,297 11,914
12/31/04 13,539 13,878
12/31/05 13,789 14,857
Past performance is not indicative of future performance.
Performance information does not reflect fees that are paid by the separate
accounts through which shares of the Fund are sold. Inclusion of those fees
would reduce figures for all periods.
The Fund commenced operations on January 1, 1999.
31
-------------------------------
TOUCHSTONE GROWTH & INCOME FUND
-------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2005
Shares Value
COMMON STOCKS -- 59.0%
AEROSPACE & DEFENSE -- 1.7%
3,900 Honeywell International $ 145,275
3,100 L-3 Communications Holdings, Inc. 230,485
2,000 United Technologies Corp. 111,820
- --------------------------------------------------------------------------------
487,580
- --------------------------------------------------------------------------------
BANKING -- 8.2%
8,800 AmSouth Bancorp 230,648
11,254 Bank of America + 519,372
8,600 Citigroup 417,358
1,900 SunTrust Banks 138,244
5,400 U.S. Bancorp 161,406
8,100 Wachovia 428,166
7,100 Wells Fargo 446,093
- --------------------------------------------------------------------------------
2,341,287
- --------------------------------------------------------------------------------
BEVERAGES, FOOD & TOBACCO -- 1.1%
4,200 General Mills 207,144
1,400 Unilever NV 96,110
- --------------------------------------------------------------------------------
303,254
- --------------------------------------------------------------------------------
CHEMICALS -- 1.0%
1,800 Air Products & Chemicals 106,542
4,400 E.I. du Pont de Nemours & Co. 187,000
- --------------------------------------------------------------------------------
293,542
- --------------------------------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING -- 0.9%
10,200 Microsoft 266,730
- --------------------------------------------------------------------------------
COMPUTERS & INFORMATION -- 5.8%
4,600 Automatic Data Processing 211,094
25,200 Cisco Systems* 431,424
6,800 First Data Corp. 292,468
11,997 Hewlett-Packard 343,474
4,600 International Business Machines 378,120
- --------------------------------------------------------------------------------
1,656,580
- --------------------------------------------------------------------------------
CONSUMER PRODUCTS -- 1.0%
5,100 Colgate-Palmolive Co. 279,735
- --------------------------------------------------------------------------------
ELECTRONICS -- 3.9%
21,500 Applied Materials 385,710
20,400 Intel 509,184
7,100 Texas Instruments, Inc. 227,697
- --------------------------------------------------------------------------------
1,122,591
- --------------------------------------------------------------------------------
FINANCIAL SERVICES -- 5.4%
1,900 Bear Stearns Companies 219,507
4,400 Freddie Mac 287,540
10,300 J.P. Morgan Chase 408,807
3,200 Merrill Lynch & Co. 216,736
3,300 Morgan Stanley 187,242
3,500 PNC Financial Services Group 216,405
- --------------------------------------------------------------------------------
1,536,237
- --------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER -- 1.3%
3,800 Kimberly-Clark 226,670
4,700 Sonoco Products 138,180
- --------------------------------------------------------------------------------
364,850
- --------------------------------------------------------------------------------
INDUSTRIAL -- 2.8%
5,600 Dover Corp. 226,744
8,100 General Electric 283,905
7,300 Ingersoll-Rand Co., Ltd. - Class A 294,701
- --------------------------------------------------------------------------------
805,350
- --------------------------------------------------------------------------------
INSURANCE -- 1.9%
2,300 AFLAC, Inc. $ 106,766
6,400 American International Group 436,672
- --------------------------------------------------------------------------------
543,438
- --------------------------------------------------------------------------------
MEDICAL SUPPLIES -- 2.1%
8,300 Baxter International, Inc. 312,495
4,900 Johnson & Johnson 294,490
- --------------------------------------------------------------------------------
606,985
- --------------------------------------------------------------------------------
OIL & GAS -- 9.1%
4,300 Baker Hughes, Inc. 261,354
5,000 BP Amoco plc - ADR 321,100
8,500 Chevron Texaco 482,545
3,700 ConocoPhillips 215,266
11,142 Exxon Mobil 625,846
2,800 Halliburton Co. 173,488
4,900 Marathon Oil Corp. 298,753
600 PetroChina Co., Ltd. - ADR 49,176
2,700 Royal Dutch Shell plc 166,023
- --------------------------------------------------------------------------------
2,593,551
- --------------------------------------------------------------------------------
PHARMACEUTICALS -- 2.3%
9,100 Abbott Laboratories 358,813
4,500 Mylan Laboratories, Inc. 89,820
4,700 Wyeth 216,529
- --------------------------------------------------------------------------------
665,162
- --------------------------------------------------------------------------------
RETAILERS -- 3.9%
900 Federated Department Stores, Inc. 59,697
3,300 Kohl's Corp.* 160,380
9,900 Limited Brands, Inc. 221,265
3,700 Lowe's Companies, Inc. 246,642
18,100 TJX Companies, Inc. (The) 420,463
- --------------------------------------------------------------------------------
1,108,447
- --------------------------------------------------------------------------------
TELEPHONE SYSTEMS -- 3.2%
10,300 AT&T, Inc. 252,247
23,500 Nokia Oyj - ADR 430,050
7,600 Verizon Communications 228,912
- --------------------------------------------------------------------------------
911,209
- --------------------------------------------------------------------------------
TRANSPORTATION -- 1.0%
2,800 FedEx Corp. 289,492
- --------------------------------------------------------------------------------
UTILITIES -- 2.4%
4,500 FPL Group, Inc. 187,020
4,400 Progress Energy, Inc. 193,248
8,600 The Southern Co. 296,958
- --------------------------------------------------------------------------------
677,226
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS $16,853,246
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 42.0%
11,998,685 Touchstone Institutional
Money Market Fund ^ ** $11,998,685
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 101.0%
(COST $27,489,953) $28,851,931
LIABILITIES IN EXCESS OF OTHER ASSETS -- (1.0%) (282,302)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $28,569,629
- --------------------------------------------------------------------------------
* Non-income producing security.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
+ All or a portion of the security is on loan. The total value of securities
on loan as of December 31, 2005, was $484,852.
** As of December 31, 2005, $494,833 represents collateral for securities
loaned.
ADR - American Depository Receipt.
The accompanying notes are an integral part of the financial statements.
32
- --------------------------
TOUCHSTONE HIGH YIELD FUND
- --------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
TOUCHSTONE HIGH YIELD FUND
SUB-ADVISED BY FORT WASHINGTON INVESTMENT ADVISORS, INC.
PERFORMANCE AND MARKET REVIEW
The Fund's total return was 3.27% for the twelve months ended December 31, 2005.
The total return for the Merrill Lynch High Yield Master Index was 2.83% for the
same period.
High Yield spreads widened by approximately 60 basis points and interest rates
rose marginally in 2005. Spreads bounced around between 266 and 450 basis points
before ending the year at approximately 366 basis points above U.S. Treasuries.
Higher and mid quality securities easily outperformed the lower quality segment
of the High Yield market. The Auto, Cable TV and Paper sectors clearly detracted
from performance while Telecom, Health Care and Energy contributed to
performance.
PORTFOLIO REVIEW
The Fund benefited from its overweight exposure to Energy and Health Care and
its underweight to Autos. Specific issuers that contributed to performance were
subject to tenders while two others showed improving fundamentals. One generated
higher earnings and a positive outlook, resulting from an improved trash hauling
pricing environment. The other company's earnings outlook continues to benefit
from the growth of infrastructure and construction spending.
Three issues hindered performance with negative price movements. One issue
traded down on an anticipation of increased leverage resulting from announced
plans to acquire it in a leveraged buyout and another suffered from reduced
earnings guidance. We have reduced our exposure to one but are comfortable with
our exposure and continue to monitor these situations.
OUTLOOK AND STRATEGY
We expect High Yield returns that are equal to or slightly below coupon rates.
Although, we anticipate a modest slowing in the economy, growth should still be
strong enough to allow leveraged companies to increase cash flow, service debt
and potentially improve credit profiles. As such, we think default rates will
increase slightly but remain below the long-term average. This scenario appears
to be priced into the market and should allow High Yield to post modest returns
in 2006.
While the next phase of the credit cycle is likely to be characterized by softer
fundamentals and wider credit spreads, the current phase (solid fundamentals and
range-bound spreads) can last for many years. In the prior credit cycle, spreads
remained range-bound for more than three years after the default rate bottomed
(1995-1998). However, it is clear that downside volatility will be greater than
upside volatility in 2006. As a result, we feel the avoidance of specific credit
problems will be a key differentiator.
The Fund is constructed to exhibit less volatility than the broad market and
deliver attractive risk-adjusted returns. It is designed for performance over a
full cycle with focus on protecting principal in down markets; we continue to
believe that our style will outperform over the long-term.
33
--------------------------
TOUCHSTONE HIGH YIELD FUND
--------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Since
Ended Ended Inception
12/31/05 12/31/05 5/1/99
3.27% 9.05% 5.26%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Since Inception
5/1/99
40.75%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
[The following table was represented
as a mountain chart in the printed material.]
Merrill Lynch
Touchstone High Yield
High Yield Master
Fund (Major Index)
05/01/99 10,000 10,000
12/31/99 9,189 9,931
12/31/00 9,127 9,554
12/31/01 9,759 10,147
12/31/02 10,034 10,031
12/31/03 12,441 12,762
12/31/04 13,630 14,136
12/31/05 14,075 14,536
Past performance is not indicative of future performance.
Performance information does not reflect fees that are paid by the separate
accounts through which shares of the Fund are sold. Inclusion of those fees
would reduce figures for all periods.
The Fund commenced operations on May 1, 1999.
34
- --------------------------
TOUCHSTONE HIGH YIELD FUND
- --------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2005
Principal Interest Maturity
Amount Rate Date Value
CORPORATE BONDS -- 96.7%
AIRLINES -- 1.1%
$ 434,775 American Airlines 9.71% 1/2/07 $ 420,879
- --------------------------------------------------------------------------------
AUTOMOTIVE -- 3.7%
300,000 Ford Motor
Credit Co. 7.00% 10/1/13 256,337
257,000 General Motors
Acceptance Corp. 6.88% 9/15/11 234,370
257,000 General Motors
Acceptance Corp. 8.00% 11/1/31 246,175
150,000 Navistar
International 7.50% 6/15/11 142,875
250,000 Navistar
International 6.25% 3/1/12 223,750
260,000 TRW Automotive 11.00% 2/15/13 291,850
- --------------------------------------------------------------------------------
1,395,357
- --------------------------------------------------------------------------------
BEVERAGES -- 1.5%
500,000 Cia Brasileira
de Bebidas 8.75% 9/15/13 584,375
- --------------------------------------------------------------------------------
BUILDING PRODUCTS -- 0.7%
120,000 Texas Industries,
Inc., 144A 7.25% 7/15/13 124,500
125,000 U.S. Concrete 8.38% 4/1/14 124,688
- --------------------------------------------------------------------------------
249,188
- --------------------------------------------------------------------------------
CHEMICALS -- 4.3%
200,000 MacDermid 9.13% 7/15/11 211,750
577,000 Mylan Labs, Inc.,
144A 6.38% 8/15/15 577,721
500,000 Nalco 7.75% 11/15/11 513,750
156,000 Nell Af Sarl, 144A 8.38% 8/15/15 154,440
150,000 Polyone Corp. 10.63% 5/15/10 160,875
- --------------------------------------------------------------------------------
1,618,536
- --------------------------------------------------------------------------------
COAL -- 2.7%
500,000 Foundation PA
Coal Co. 7.25% 8/1/14 516,875
500,000 Massey Energy
Co., 144A 6.88% 12/15/13 504,375
- --------------------------------------------------------------------------------
1,021,250
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES -- 1.8%
150,000 Allied Waste NA + 7.25% 3/15/15 151,500
500,000 Mail Well Corp. 9.63% 3/15/12 540,000
- --------------------------------------------------------------------------------
691,500
- --------------------------------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING -- 0.5%
152,000 SunGard Data
Systems, Inc. 4.88% 1/15/14 132,240
60,000 SunGard Data
Systems, Inc., 144A 9.13% 8/15/13 62,100
- --------------------------------------------------------------------------------
194,340
- --------------------------------------------------------------------------------
CONSUMER -- 2.3%
500,000 Bombardier
Recreational 8.38% 12/15/13 500,625
180,000 Rayovac Corp. 8.50% 10/1/13 157,050
250,000 Spectrum
Brands, Inc. 7.38% 2/1/15 208,750
- --------------------------------------------------------------------------------
866,425
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 6.4%
$ 400,000 AES Corp., 144A 9.00% 5/15/15 $ 438,000
300,000 Ava Capital Trust III 6.50% 4/1/34 301,200
200,000 Avista Corp. 9.75% 6/1/08 218,302
287,000 CMS Energy 6.30% 2/1/12 283,771
368,000 Mirant NA LLC,
144A 7.38% 12/31/13 372,140
96,000 NRG Energy 8.00% 12/15/13 107,040
250,000 Reliant Resources 9.50% 7/15/13 250,625
231,000 Texas Genco LLC,
144A 6.88% 12/15/14 250,058
196,300 Tiete Certificates
Grantor Trust,
144A (a) 11.50% 4/15/16 217,402
- --------------------------------------------------------------------------------
2,438,538
- --------------------------------------------------------------------------------
ELECTRONIC COMPONENTS -- 1.3%
500,000 Communications
& Power Industry 8.00% 2/1/12 498,750
- --------------------------------------------------------------------------------
FINANCIAL SERVICES -- 7.5%
2,821,500 Dow Jones
CDX HY + 8.75% 12/29/10 2,832,081
- --------------------------------------------------------------------------------
FOOD PROCESSORS -- 1.9%
200,000 Chiquita Brands
International 7.50% 11/1/14 176,000
500,000 Pilgrims Pride
Corp. 9.25% 11/15/13 533,750
- --------------------------------------------------------------------------------
709,750
- --------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER -- 1.3%
250,000 Georgia-Pacific 7.70% 6/15/15 241,250
250,000 Stone Container 9.75% 2/1/11 252,500
- --------------------------------------------------------------------------------
493,750
- --------------------------------------------------------------------------------
FUNERAL SERVICES -- 2.9%
500,000 Service Corp.
International 6.75% 4/1/16 487,500
263,000 Service Corp.
International, 144A 7.00% 6/15/17 261,028
350,000 Stewart
Enterprises, 144A 6.25% 2/15/13 336,000
- --------------------------------------------------------------------------------
1,084,528
- --------------------------------------------------------------------------------
HEALTH CARE PROVIDERS -- 8.3%
250,000 Chemed Corp. 8.75% 2/24/11 268,125
234,000 HCA, Inc. 6.30% 10/1/12 235,168
260,000 HCA, Inc. 5.75% 3/15/14 252,123
500,000 Iasis Healthcare 8.75% 6/15/14 525,000
111,000 NDC Health
Corp. 10.50% 12/1/12 126,818
75,000 Omnicare, Inc. 6.88% 12/15/15 76,125
253,000 Res-Care, Inc.,
144A 7.75% 10/15/13 253,000
500,000 Rotech Healthcare 9.50% 4/1/12 524,999
500,000 Tenet Healthcare 6.38% 12/1/11 456,250
380,000 U.S. Oncology 9.00% 8/15/12 406,600
- --------------------------------------------------------------------------------
3,124,208
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
35
--------------------------
TOUCHSTONE HIGH YIELD FUND
--------------------------
Principal Interest Maturity
Amount Rate Date Value
CORPORATE BONDS -- 96.7% - CONTINUED
HEAVY MACHINERY -- 2.7%
$ 500,000 Case New Holland 9.25% 8/1/11 $ 535,000
488,000 Dresser-Rand
Group, Inc., 144A 7.38% 11/1/14 502,640
- --------------------------------------------------------------------------------
1,037,640
- --------------------------------------------------------------------------------
HOMEFURNISHINGS -- 1.1%
316,000 Interface 7.30% 4/1/08 319,160
89,000 Sealy Mattress
Co. + 8.25% 6/15/14 91,670
- --------------------------------------------------------------------------------
410,830
- --------------------------------------------------------------------------------
HOUSING -- 5.5%
315,000 Beazer Homes 6.88% 7/15/15 302,006
500,000 Champion
Enterprises 7.63% 5/15/09 501,250
460,000 K Hovnanian
Enterprises 6.25% 1/15/15 432,909
250,000 KB Homes 9.50% 2/15/11 262,980
400,000 M/I Homes, Inc. 6.88% 4/1/12 360,000
250,000 Meritage Homes
Corp. 6.25% 3/15/15 227,500
- --------------------------------------------------------------------------------
2,086,645
- --------------------------------------------------------------------------------
INDUSTRIAL -- 3.0%
380,000 Chaparral Steel
Co. 10.00% 7/15/13 409,450
250,000 International Steel
Group 6.50% 4/15/14 250,000
500,000 United Rentals
NA, Inc. 6.50% 2/15/12 486,875
- --------------------------------------------------------------------------------
1,146,325
- --------------------------------------------------------------------------------
LODGING -- 0.7%
250,000 Station Casinos 6.50% 2/1/14 252,500
- --------------------------------------------------------------------------------
MANUFACTURING -- 0.5%
200,000 Trinity Industries,
Inc. 6.50% 3/15/14 197,000
- --------------------------------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING -- 4.4%
400,000 Corus
Entertainment, Inc. 8.75% 3/1/12 433,000
447,000 CSC Holdings, Inc. 8.13% 7/15/09 451,470
250,000 Susquehanna Media 7.38% 4/15/13 266,250
500,000 Videotron Ltee 6.88% 1/15/14 506,250
- --------------------------------------------------------------------------------
1,656,970
- --------------------------------------------------------------------------------
METALS -- 3.5%
610,000 Gibraltar Industries,
Inc., 144A 8.00% 12/1/15 614,574
200,000 Newmont Mining 8.63% 5/15/11 230,584
317,000 Novelis, Inc., 144A 7.25% 2/15/15 295,603
200,000 Southern Peru
Copper Corp., 144A 6.38% 7/27/15 199,636
- --------------------------------------------------------------------------------
1,340,397
- --------------------------------------------------------------------------------
OFFICE EQUIPMENT -- 2.2%
354,000 ACCO Brands
Corp. 7.63% 8/15/15 333,645
524,000 Ikon Office
Solutions, 144A 7.75% 9/15/15 510,900
- --------------------------------------------------------------------------------
844,545
- --------------------------------------------------------------------------------
OIL & GAS -- 9.8%
$ 146,000 Atlas Pipeline
Partners, 144A 8.13% 12/15/15 $ 147,278
250,000 Bluewater Finance
Ltd. 10.25% 2/15/12 268,750
500,000 Chesapeake Energy
Corp. 6.88% 1/15/16 512,500
161,000 Glencore Funding
LLC, 144A 6.00% 4/15/14 151,427
100,000 Holly Energy
Partners LP 6.25% 3/1/15 96,875
660,000 Husky Oil 8.90% 8/15/28 707,906
100,000 Lone Star Tech,
Series B 9.00% 6/1/11 105,000
381,000 Paramount
Resources, Ltd. 8.50% 1/31/13 391,478
250,000 Petrobras
International
Finance 7.75% 9/15/14 270,000
500,000 Transmontaigne 9.13% 6/1/10 491,250
500,000 United Refining
Co. 10.50% 8/15/12 535,000
- --------------------------------------------------------------------------------
3,677,464
- --------------------------------------------------------------------------------
PAPER & PACKAGING -- 1.6%
100,000 Alltrista Corp. 9.75% 5/1/12 103,000
530,000 Owens-Brockway
Containers 6.75% 12/1/14 514,100
- --------------------------------------------------------------------------------
617,100
- --------------------------------------------------------------------------------
PHARMACEUTICALS -- 1.4%
488,000 Alpharma 8.63% 5/1/11 530,090
- --------------------------------------------------------------------------------
PUBLISHING -- 1.4%
500,000 Houghton Mifflin 8.25% 2/1/11 516,250
- --------------------------------------------------------------------------------
REAL ESTATE -- 0.4%
158,000 Ventas Realty LP 7.13% 6/1/15 165,900
- --------------------------------------------------------------------------------
RETAIL -- 1.9%
503,000 Asbury Automotive
Group 8.00% 3/15/14 480,365
250,000 CSK Auto 7.00% 1/15/14 226,250
- --------------------------------------------------------------------------------
706,615
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 5.9%
500,000 Broadwing 7.25% 6/15/23 475,000
475,000 GCI, Inc. 7.25% 2/15/14 470,250
500,000 Qwest Corp. 7.88% 9/1/11 538,750
400,000 Rogers Wireless, Inc. 7.25% 12/15/12 420,500
343,000 Rogers Wireless, Inc. 6.38% 3/1/14 343,858
500,000 Williams Comm.
Group, Inc. * (a) 0.00% 10/1/09 0
- --------------------------------------------------------------------------------
2,248,358
- --------------------------------------------------------------------------------
TRANSPORTATION -- 2.5%
297,000 CHC Helicopter
Corp. 7.38% 5/1/14 300,341
350,000 Overseas Shipping
Group 8.75% 12/1/13 383,250
250,000 Stena AB 9.63% 12/1/12 271,563
- --------------------------------------------------------------------------------
955,154
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS $36,613,238
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
36
- --------------------------
TOUCHSTONE HIGH YIELD FUND
- --------------------------
- --------------------------------------------------------------------------------
Schedule of Investments continued
Shares Value
PREFERRED STOCKS -- 0.0%
TELECOMMUNICATIONS -- 0.0%
1 McLeodusa, Series A $ 0
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 9.4%
3,542,702 Touchstone Institutional
Money Market Fund ^ ** $ 3,542,702
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 106.1%
(COST $39,696,030) $40,155,940
LIABILITIES IN EXCESS OF OTHER ASSETS -- (6.1%) (2,303,080)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $37,852,860
- --------------------------------------------------------------------------------
* Non-income producing security.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
+ All or a portion of the security is on loan. The total value of securities
on loan as of December 31, 2005, was $714,748.
** As of December 31, 2005, $732,163 represents collateral for securities
loaned.
144A - This is a restricted security that was sold in a transaction exempt from
Rule 144A of the Securities Act of 1933. This security may be sold in a
transaction exempt from registration, normally to qualified institutional
buyers. At December 31, 2005, these securities were valued at $5,972,822
or 15.78% of net assets.
(a) Security valued at fair value - see Note 1 to the financial statements. At
December 31, 2005, fair valued securities totaled $217,402 and represented
0.57% of net assets.
The accompanying notes are an integral part of the financial statements.
37
----------------------------
TOUCHSTONE MONEY MARKET FUND
----------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2005
Principal Interest Maturity
Amount Rate Date Value
COMMERCIAL PAPER -- 6.4%
$ 3,939,000 Rabobank USA
Finance 4.00% 1/3/06 $ 3,938,124
900,000 GOVCO, Inc. 4.12% 1/3/06 899,794
292,000 UBS Finance 4.15% 1/3/06 291,933
- --------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER $ 5,129,851
- --------------------------------------------------------------------------------
CORPORATE BONDS -- 20.5%
200,000 Morgan Stanley 6.30% 1/15/06 200,172
410,000 Citicorp, Inc. 6.38% 1/15/06 410,452
300,000 Household
Finance Co. 6.50% 1/24/06 300,423
400,000 Merrill Lynch & Co. 6.15% 1/26/06 400,713
100,000 Caterpillar Financial
Services Corp. 2.65% 1/30/06 99,848
100,000 Merrill Lynch & Co. 2.94% 1/30/06 99,929
720,000 Georgia Power Co. 6.20% 2/1/06 721,574
100,000 Bank One Corp. 6.50% 2/1/06 100,227
1,000,000 Caterpillar Financial
Services Corp. FRN 4.47% 2/5/06 1,000,227
470,000 National Rural
Utilities 3.00% 2/15/06 469,382
200,000 Wells Fargo
Financial 6.13% 2/15/06 200,450
400,000 LBW Capital
Markets 5.50% 2/23/06 400,264
450,000 Merrill Lynch & Co. 2.47% 3/10/06 448,384
500,000 Salomon Smith
Barney Holdings 5.88% 3/15/06 501,346
1,100,000 First Union Corp. 7.00% 3/15/06 1,106,513
300,000 Mellon Bank NA 7.00% 3/15/06 301,562
512,000 Bayerische
Landesbank 2.50% 3/30/06 509,446
296,000 Bear Stearns
Co., Inc. 3.00% 3/30/06 295,269
250,000 Wells Fargo & Co. 6.88% 4/1/06 251,887
500,000 FPL Group
Capital, Inc. 3.25% 4/11/06 498,948
1,205,000 Morgan Stanley 6.10% 4/15/06 1,211,020
142,000 Citigroup, Inc. 5.75% 5/10/06 142,725
275,000 National Rural
Utilities 6.00% 5/15/06 276,628
206,000 Household
Finance Co. 7.25% 5/15/06 208,367
550,000 Merrill Lynch & Co. 6.13% 5/16/06 553,652
200,000 Wells Fargo & Co. 5.90% 5/21/06 200,937
100,000 Merrill Lynch & Co. 2.07% 6/12/06 98,965
460,000 American General
Finance 5.91% 6/12/06 463,318
150,000 HSBC Bank PLC 7.63% 6/15/06 152,192
100,000 ABN AMRO Bank 7.55% 6/28/06 101,359
106,000 American General
Finance 5.88% 7/14/06 106,613
745,000 Household
Finance Co. 7.20% 7/15/06 755,683
210,000 First Union Corp. 7.50% 7/15/06 213,152
197,000 Bank One Corp. 6.88% 8/1/06 199,522
438,000 Norwest Corp. 6.88% 8/8/06 444,448
200,000 JPMorgan
Chase & Co. 6.75% 9/15/06 203,139
150,000 First National
Bank of Boston 7.38% 9/15/06 152,901
617,000 Nationsbank Corp. 7.50% 9/15/06 629,543
1,560,000 First Union Corp. 7.13% 10/15/06 1,586,959
150,000 First Chicago
NBD Corp. 7.00% 10/16/06 152,624
250,000 General Electric
Capital Corp. 3.13% 11/9/06 246,999
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS $16,417,762
- --------------------------------------------------------------------------------
TAXABLE MUNICIPAL BONDS -- 8.2%
255,000 Chicago IL GO 2.56% 1/1/06 255,000
500,000 Minneapolis &
St. Paul MN
(Metro Airport) 6.25% 1/1/06 500,000
960,000 New York NY
Transitional Fin
Auth Ser B 3.13% 2/1/06 959,436
1,495,000 Energy Acquisition
Corp II OH 3.87% 2/15/06 1,495,000
735,000 Pittsburgh PA
Urban Redev Auth 4.50% 3/1/06 735,543
1,500,000 New York St Rev
(Thruway Service
Contract) Ser B 2.59% 3/15/06 1,495,575
450,000 Texas St Pub Fin
Auth Rev Ser B 2.63% 6/15/06 445,854
350,000 Darke Co OH
BANS 5.00% 7/11/06 350,885
330,000 Santa Rosa CA
Redev Agy Refining
Ser B 4.79% 10/1/06 329,974
- --------------------------------------------------------------------------------
TOTAL TAXABLE MUNICIPAL BONDS $ 6,567,267
- --------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES* -- 62.8%
400,000 Clayton Co GA
MFH (Forest Club
Project) Ser B 4.50% 1/1/06 400,000
900,000 WA St HFA Rev
(Rolling Hills Proj)
Ser B 4.50% 1/1/06 900,000
250,000 American
Watchmakers 4.57% 1/1/06 250,000
445,000 WA St HFC (Carlyle
Care Ctr) Ser B 4.57% 1/1/06 445,000
505,000 Westmoreland Co
PA IDA (Greensburg
Thermal) Ser B 4.39% 1/4/06 505,000
950,000 Haas Door Co &
Nofziger Doors
Intl Inc 4.46% 1/4/06 950,000
75,000 CA PCR Solid Waste
(Escondido Disp Inc)
Ser B 4.48% 1/4/06 75,000
The accompanying notes are an integral part of the financial statements.
38
- ----------------------------
TOUCHSTONE MONEY MARKET FUND
- ----------------------------
- --------------------------------------------------------------------------------
Schedule of Investments continued
Principal Interest Maturity
Amount Rate Date Value
VARIABLE RATE DEMAND NOTES* -- 62.8% - continued
$ 250,000 Chattanooga TN
Hlth Ed MFH
(Windridge) 4.56% 1/4/06 $ 250,000
235,000 Florida HFC MFH
(Arlington) 4.56% 1/4/06 235,000
1,250,000 Florida HFC MFH
(Heritage) Ser I-2 4.56% 1/4/06 1,250,000
445,000 Greenville SC Mem
Aud (Bi-Lo Ctr) 4.56% 1/4/06 445,000
70,000 St Johns Co FL HFA
(Ponce Harbor Apts) 4.56% 1/4/06 70,000
425,000 Volusia Co FL HFA
MFH (Sunrise Pointe) 4.56% 1/4/06 425,000
945,000 Agra Enterprises 4.38% 1/5/06 945,000
1,835,000 Findlay Medical -
Dental 4.38% 1/5/06 1,835,000
500,000 Vista Funding
Ser 01-B 4.40% 1/5/06 500,000
1,740,000 Wai Enterprises
LLC Ser 2004 4.40% 1/5/06 1,740,000
1,150,000 Corp Finance
Managers 4.42% 1/5/06 1,150,000
580,000 Lake Oswego OR
Redev Agy Tax
Increment Rev Ser B 4.42% 1/5/06 580,000
250,000 Florida HFC MFH
(Avalon Reserve) 4.43% 1/5/06 250,000
1,000,000 MI St Strat Fd Rev
Ser B (Mot LLC) 4.43% 1/5/06 1,000,000
800,000 Simi Valley CA MFH
Rev (Parker Ranch) 4.44% 1/5/06 800,000
820,000 Wilmington Iron
& Metal 4.45% 1/5/06 820,000
300,000 Powell Healthcare 4.47% 1/5/06 300,000
1,000,000 American Natl Fish
& Wildlife Museum 4.48% 1/5/06 1,000,000
145,000 LA Local Govt
Environment CDA
(Northwestern
St Univ) 4.48% 1/5/06 145,000
290,000 CA Statewide Com
Dev MFH (Sunrise
Fresno) 4.49% 1/5/06 290,000
400,000 Tarrant Co TX HFC
MFH (Oaklake
VIII LLC) 4.49% 1/5/06 400,000
1,000,000 Atlanta GA Urban
Res MFH (Auburn
Glenn) Ser B 4.50% 1/5/06 1,000,000
785,000 Bee-Holdings Inc 4.51% 1/5/06 785,000
1,490,000 Goodwill Industries
Miami Valley OH
Project 4.51% 1/5/06 1,490,000
560,000 IL Fin Auth (Sunshine
Thru Golf) 4.51% 1/5/06 560,000
1,310,000 Keltec Inc 4.51% 1/5/06 1,310,000
1,000,000 P&P Investment
Co Inc 4.51% 1/5/06 $1,000,000
215,000 Suffolk Co NY IDA
(Hampton Day
School) 4.51% 1/5/06 215,000
700,000 Assk Properties
LLC 4.52% 1/5/06 700,000
2,000,000 Paragon Films 4.52% 1/5/06 2,000,000
995,000 Aurora Kane &
Du Page Co IL IDR
(A&B Hldgs) 4.54% 1/5/06 995,000
375,000 CWB Investments
LLC 4.54% 1/5/06 375,000
357,000 Fitch Denney
Funeral Home Inc 4.54% 1/5/06 357,000
400,000 Miklin Enterprises
Inc 4.54% 1/5/06 400,000
1,800,000 Mountain Agency
Inc 4.54% 1/5/06 1,800,000
1,120,000 Mountain State
Univ Inc WV Rev 4.54% 1/5/06 1,120,000
20,000 New Jersey EDA
(Mercer Co)
Ser D-2 4.54% 1/5/06 20,000
855,000 VP Pack LLC 4.54% 1/5/06 855,000
1,000,000 Albany NY IDA
(Albany Med Ctr)
Ser B 4.55% 1/5/06 1,000,000
3,000,000 Heart Center
LLC 4.55% 1/5/06 3,000,000
2,110,000 Taylor Steel Inc 4.55% 1/5/06 2,110,000
740,000 Aurora IL IDA
Rev Ser B 4.56% 1/5/06 740,000
380,000 Cunat Capital
Corp Ser 99-B 4.57% 1/5/06 380,000
2,460,000 Springfield MO
Redev Auth Rev
(Univ Plaza Hotel) 4.58% 1/5/06 2,460,000
100,000 IL Dev Fin Auth IDR
(Technifast Inds)
Ser B 4.63% 1/5/06 100,000
1,000,000 Rev Bd Ctf Ser
2004-12 (Timber
Lake) 4.88% 1/5/06 1,000,000
2,000,000 Cl B Rev Bd Ctfs
Ser 2004-2 4.89% 1/5/06 2,000,000
625,000 Rev Bd Ctf Ser
2004-15
(Centennial) 4.89% 1/5/06 625,000
1,070,000 Community
Christian
School Inc 4.50% 1/6/06 1,070,000
545,000 Diaz-Upton LLC 4.50% 1/6/06 545,000
1,125,000 Green Valley
Baptist Church
(Birmingham AL) 4.50% 1/6/06 1,125,000
The accompanying notes are an integral part of the financial statements.
39
----------------------------
TOUCHSTONE MONEY MARKET FUND
----------------------------
Principal Interest Maturity
Amount Rate Date Value
VARIABLE RATE DEMAND NOTES* -- 62.8% - continued
$ 810,000 Melrose Supply
Sales Corp 4.65% 1/6/06 $ 810,000
310,000 Schenectady NY
IDA Rev (JMR Dev
Co Project) 4.39% 1/7/06 310,000
- --------------------------------------------------------------------------------
TOTAL VARIABLE RATE DEMAND NOTES* $50,212,000
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 1.3%
1,000,000 Federal National
Mortgage
Association 5.50% 5/2/06 $ 1,004,551
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 99.2%
(COST $79,331,431) $79,331,431
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.8% 624,423
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $79,955,854
- --------------------------------------------------------------------------------
* Maturity date represents the next reset date.
BANS - Bond Anticipation Notes
CDA - Community Development Authority
EDA - Economic Development Authority
FRN - Floating Rate Note
GO - General Obligation
HFA - Housing Finance Authority
HFC - Housing Finance Corporation
IDA - Industrial Development Authority
IDR - Industrial Development Revenue
MFH - Multi-Family Housing
PCR - Pollution Control Revenue
The accompanying notes are an integral part of the financial statements.
40
- ----------------------------------
TOUCHSTONE THIRD AVENUE VALUE FUND
- ----------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
TOUCHSTONE THIRD AVENUE VALUE FUND
SUB-ADVISED BY THIRD AVENUE MANAGEMENT LLC
PERFORMANCE AND MARKET OVERVIEW
The Fund's total return was 17.41% for the twelve months ended December 31,
2005. The total return for the Russell 3000 Value Index was 6.85% and the
Russell 2500 Value Index was 7.74% for the same period.
At Third Avenue, we adhere to a disciplined value approach to investing. We
perform a thorough, bottom-up analysis to identify companies that we feel are
"Safe and Cheap ," based on their financial strength, reasonable management
teams, readily available financial information and disclosure, and pricing below
their private market values. In order to achieve our goal of creating value in
the Fund over the long term, our portfolio companies, almost without exception,
possess strong balance sheets that translate into long-term corporate staying
power, and that serve as cushions for the businesses underlying our securities
holdings.
PORTFOLIO REVIEW
During the year, we continued to focus on individual opportunities in various
industries that met our aforementioned criteria. We added to the Fund's
Energy-related holdings with a new position in one of the largest domestic
producers of tubular steel products used in both energy and industrial
applications. We purchased shares of a leading financial guarantee firm,
following a sharp stock price decline due to a reduced earnings outlook. The
shares of this well-capitalized company were purchased below adjusted net asset
value. We purchased the stock of the world's largest pharmaceutical company,
which possesses a key competitive advantage in the strength of its marketing
force. Additionally, the long-term outlook for pharmaceutical sales looks
favorable, given demographic trends and an aging population. We also purchased a
blue chip producer of carbon steel and specialty steel, which is well
capitalized, has an impressive long-term track record, and appears to be well
positioned to continue increasing its presence in the People's Republic of
China. It was also attractively valued at the time of purchase. Shares of a
company best known for its computer printers and related products were purchased
opportunistically.
Throughout the year, the Fund's positions in several holdings were eliminated as
a result of "resource conversions" (i.e., going private or selling to a
strategic buyer). In each case, the acquisition price represented a significant
premium to our cost basis. We believe that proper execution of our "Safe and
Cheap" investing philosophy gives the Fund two ways to win: value recognition by
the public markets or resource conversions, such as the three aforementioned
examples.
CURRENT STRATEGY AND OUTLOOK
At the end of the year, the top three sectors, in terms of percentage of total
Fund assets, were Energy, Business Development/Investment Companies, and Real
Estate. In each sector, we are excited about the long-term prospects for our
holdings. Looking forward, we continue to be pleased with the overall quality of
names in the Fund and we are encouraged by solid business fundamentals for most
of our holdings. We will continue to strive to find additional investment
opportunities that meet our "Safe and Cheap" criteria today, and that will
enable us to achieve attractive investment returns in the future.
41
----------------------------------
TOUCHSTONE THIRD AVENUE VALUE FUND
----------------------------------
For long-term fundamental investors like Third Avenue, the general market is
relatively unimportant. In the long run, we believe the Fund's performance will
be driven by the merits of the investments, not by general market
considerations. Regardless of the performance of the general market, we continue
to be very comfortable with our investment philosophy, and how we are applying
it.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Ten Years
Ended Ended Ended
12/31/05 12/31/05 12/31/05
17.41% 14.53% 13.98%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Ten Years
Ended
12/31/05
270.11%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
[The following table was represented
as a mountain chart in the printed material.]
Touchstone Russell 3000 Russell
Third Avenue Value 2500 Value
Value Fund (Major Index) (Minor Index)
12/31/95 10,000 10,000 10,000
12/31/96 12,451 12,160 12,220
12/31/97 16,239 16,395 16,264
12/31/98 19,228 18,609 15,951
12/31/99 16,894 19,846 16,189
12/31/00 18,779 21,442 19,555
12/31/01 21,639 20,513 21,459
12/31/02 17,855 17,399 19,341
12/31/03 25,030 22,818 28,031
12/31/04 31,521 26,683 34,081
12/31/05 37,011 28,511 36,718
Past performance is not indicative of future performance.
Performance information does not reflect fees that are paid by the separate
accounts through which shares of the Fund are sold. Inclusion of those fees
would reduce figures for all periods.
The Fund commenced operations on December 14, 1992.
On May 1, 2005, the Fund changed its benchmark from the Russell 2500 Value Index
to the Russell 3000 Value Index because the Russell 3000 Value Index is more
representative of the multi-cap nature of the Fund.
42
- ----------------------------------
TOUCHSTONE THIRD AVENUE VALUE FUND
- ----------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2005
Shares Value
COMMON STOCKS -- 61.8%
AUTOMOTIVE -- 2.6%
53,400 American Axle & Manufacturing
Holdings, Inc. $ 978,822
91,200 Superior Industries International, Inc. 2,030,112
- --------------------------------------------------------------------------------
3,008,934
- --------------------------------------------------------------------------------
BANKING -- 2.2%
75,600 Brookline Bancorp, Inc. 1,071,252
100,010 NewAlliance Bancshares, Inc. 1,454,145
- --------------------------------------------------------------------------------
2,525,397
- --------------------------------------------------------------------------------
CONSUMER PRODUCTS -- 2.5%
66,900 JAKKS Pacific, Inc.* 1,400,886
98,000 LeapFrog Enterprises, Inc.* 1,141,700
32,000 Russ Berrie and Company, Inc. 365,440
- --------------------------------------------------------------------------------
2,908,026
- --------------------------------------------------------------------------------
ELECTRONICS -- 7.2%
82,800 American Power Conversion Corp. 1,821,600
169,000 AVX Corp. 2,447,120
24,600 Bel Fuse, Inc. - Class B 782,280
62,600 Electronics For Imaging, Inc.* 1,665,786
25,600 Lexmark International, Inc. - Class A* 1,147,648
30,700 Synopsys, Inc.* 615,842
- --------------------------------------------------------------------------------
8,480,276
- --------------------------------------------------------------------------------
FINANCIAL SERVICES -- 8.2%
15,000 Ambac Financial Group, Inc. 1,155,900
13,800 CIT Group, Inc. 714,564
38,250 Legg Mason, Inc. 4,578,142
37,100 MBIA, Inc. 2,231,936
48,725 Westwood Holdings Group, Inc. 887,770
- --------------------------------------------------------------------------------
9,568,312
- --------------------------------------------------------------------------------
HEALTH CARE PRODUCTS & SERVICES -- 3.2%
60,800 Cross Country Healthcare, Inc.* 1,081,024
30,400 PAREXEL International Corp.* 615,904
88,000 Pfizer, Inc. 2,052,160
- --------------------------------------------------------------------------------
3,749,088
- --------------------------------------------------------------------------------
INDUSTRIAL -- 4.1%
51,300 Alamo Group, Inc. 1,051,650
13,000 Bandag, Inc. 554,710
63,800 POSCO - ADR 3,158,738
- --------------------------------------------------------------------------------
4,765,098
- --------------------------------------------------------------------------------
INSURANCE -- 5.3%
39,410 Millea Holdings, Inc. - ADR 3,391,231
61,800 Phoenix Companies, Inc. (The) 842,952
33,000 Radian Group, Inc. 1,933,470
- --------------------------------------------------------------------------------
6,167,653
- --------------------------------------------------------------------------------
INVESTMENT COMPANIES -- 0.7%
9,500 Capital Southwest Corp. 859,750
- --------------------------------------------------------------------------------
OIL & GAS -- 6.2%
29,000 Maverick Tube Corp.* 1,155,940
37,800 Pogo Producing Company 1,882,818
23,800 St. Mary Land & Exploration Company* 876,078
35,000 Tidewater, Inc. 1,556,100
46,200 Whiting Petroleum Corp.* 1,848,000
- --------------------------------------------------------------------------------
7,318,936
- --------------------------------------------------------------------------------
REAL ESTATE -- 12.2%
58,550 Brookfield Asset
Management, Inc. - Class A $ 2,946,822
84,000 Forest City Enterprises, Inc. - Class A 3,186,120
103,950 Origen Financial, Inc. 740,124
40,420 ProLogis 1,888,422
2,100 Skyline Corp. 76,440
34,100 St. Joe Company (The) 2,292,202
127,600 Trammell Crow Co.* 3,272,940
- --------------------------------------------------------------------------------
14,403,070
- --------------------------------------------------------------------------------
SEMI-CONDUCTOR EQUIPMENT -- 2.6%
30,000 Applied Materials, Inc. 538,200
93,900 Credence Systems Corp.* 653,544
76,000 Electro Scientific Industries, Inc.* 1,835,400
- --------------------------------------------------------------------------------
3,027,144
- --------------------------------------------------------------------------------
SOFTWARE -- 0.6%
31,100 Sybase, Inc.* 679,846
- --------------------------------------------------------------------------------
TELECOMMUNICATION EQUIPMENT -- 4.2%
80,300 Comverse Technology, Inc.* 2,135,177
214,650 Sycamore Networks, Inc.* 927,288
168,000 Tellabs, Inc.* 1,831,200
- --------------------------------------------------------------------------------
4,893,665
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS $ 72,355,195
- --------------------------------------------------------------------------------
FOREIGN STOCKS -- 20.3%
AUTOMOTIVE -- 3.4%
110,000 Toyota Industries Corp. $ 3,954,553
- --------------------------------------------------------------------------------
COMPUTERS - INTEGRATED SYSTEMS -- 1.1%
121,100 Geac Computer Corp.* 1,319,990
- --------------------------------------------------------------------------------
FORESTRY -- 1.1%
100,000 TimberWest Forest Corp. 1,318,000
- --------------------------------------------------------------------------------
INDUSTRIAL -- 0.8%
44,300 Agrium, Inc. 974,157
- --------------------------------------------------------------------------------
INSURANCE -- 1.5%
20,000 Arch Capital Group Ltd.* 1,095,000
410,000 British Insurance Holdings plc 631,420
- --------------------------------------------------------------------------------
1,726,420
- --------------------------------------------------------------------------------
INVESTMENT COMPANIES -- 5.2%
320,000 Hutchison Whampoa, Ltd. 3,047,835
172,500 Investor AB - Class A 3,006,853
- --------------------------------------------------------------------------------
6,054,688
- --------------------------------------------------------------------------------
OIL & GAS -- 6.8%
69,200 Canadian Natural Resources, Ltd. 3,433,704
70,400 EnCana Corp. 3,179,264
10,000 Nabors Industries, Ltd.* 757,500
44,100 Willbros Group, Inc.* 636,804
- --------------------------------------------------------------------------------
8,007,272
- --------------------------------------------------------------------------------
PHARMACEUTICALS -- 0.4%
23,000 Daiichi Sankyo Company, Ltd.* 443,658
- --------------------------------------------------------------------------------
TOTAL FOREIGN STOCKS $ 23,798,738
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 17.1%
20,041,878 Touchstone Institutional
Money Market Fund ^ $ 20,041,878
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 99.2%
(COST $83,404,071) $116,195,811
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.8% 946,361
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $117,142,172
- --------------------------------------------------------------------------------
* Non-income producing security.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
ADR - American Depository Receipt.
The accompanying notes are an integral part of the financial statements.
43
--------------------------
TOUCHSTONE VALUE PLUS FUND
--------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
TOUCHSTONE VALUE PLUS FUND
SUB-ADVISED BY FORT WASHINGTON INVESTMENT ADVISORS, INC.
PERFORMANCE AND MARKET OVERVIEW
The Fund's total return was 2.17% for the twelve months ended December 31, 2005.
The total return for the Russell 1000 Value Index was 7.05% for the same period.
The end result for 2005 was a lackluster year for U.S. financial markets. Bond
investors were not able to earn the coupon rates on bonds, as short and
medium-term yields rose. Nonetheless, long-term yields stayed in narrow ranges,
despite a 200 basis point rise in the federal funds rate to 4.25%. Meanwhile,
the stock market, as measured by the S&P 500 Index, generated a 4.91% total
return. Volatility in the bond market was the lowest in nearly 20 years, while
stock market volatility was the lowest in four decades.
PORTFOLIO REVIEW
In 2005, our strategy benefited from strong stock selection in the Health Care
and Consumer Discretionary sectors. Unfortunately, the strength in these sectors
did not completely offset weakness in stock selection in the Technology and
Industrial sectors.
Sector decisions that negatively impacted performance included holding lower
than index weights in the Energy and Utilities sectors. The Fund benefited from
an overweight in Health Care and an underweight in Telecommunications.
Our expectation early in the year for large cap stocks to outperform small cap
stocks did not happen. However, this outlook appears closer to becoming a
reality in 2006, as there was no clear leader in terms of market capitalization
in 2005. There was clear leadership in terms of sector performance as Energy and
Utility stocks ended the year with solid double-digit gains. However, these
gains were realized in the first three quarters of the year leading us to
believe that new sector leadership may be on the horizon, especially as the
market anticipates the end of the Fed tightening.
Over the period, a strategic decision was made to increase sector weights in the
Financials and Utilities sectors. The ability to add to these sectors was
created through slightly decreasing the Technology, Industrials and Consumer
Discretionary sectors. Staying true to our discipline, we continue to focus on
diversification and quality as the foundation of our strategy.
MARKET OUTLOOK
We are struck by how well the U.S. economy has overcome the headwinds of
monetary tightening, surging energy prices and a series of natural disasters.
The economy may have posted its eleventh consecutive quarter of growth in excess
of 3% in the fourth quarter. Meanwhile, core inflation, which excludes food and
energy, appears to be holding around 2%, despite more than a doubling of oil
prices in the past two years.
We believe earnings growth will remain stable giving investors additional
confidence in the market. If this additional confidence is established, slight
multiple expansion is a possibility. While double-digit returns for 2006 are
possible, single-digit returns are realistic. If, as we anticipate, new
leadership emerges from the Health Care and Technology sectors, we expect the
Fund to perform well against the Russell 1000 Value Index.
44
- --------------------------
TOUCHSTONE VALUE PLUS FUND
- --------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Since
Ended Ended Inception
12/31/05 12/31/05 05/01/98
2.17% 1.27% 3.31%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Since Inception
05/01/98
28.38%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
[The following table was represented
as a mountain chart in the printed material.]
Touchstone Russell 1000
Value Plus Value
Fund (Major Index)
05/01/98 10,000 10,000
12/31/98 10,211 10,287
12/31/99 11,745 11,043
12/31/00 12,055 11,817
12/31/01 11,949 11,157
12/31/02 8,764 9,425
12/31/03 11,369 12,255
12/31/04 12,567 14,276
12/31/05 12,838 15,283
Past performance is not indicative of future performance.
Performance information does not reflect fees that are paid by the separate
accounts through which shares of the Fund are sold. Inclusion of those fees
would reduce figures for all periods.
The Fund commenced operations on May 1, 1998.
45
--------------------------
TOUCHSTONE VALUE PLUS FUND
--------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2005
Shares Value
COMMON STOCKS -- 97.1%
BANKING -- 10.5%
16,778 Bank of America + $ 774,305
16,807 Citigroup 815,645
8,860 U.S. Bancorp 264,825
- --------------------------------------------------------------------------------
1,854,775
- --------------------------------------------------------------------------------
BEVERAGES, FOOD & TOBACCO -- 6.6%
6,417 Anheuser Busch 275,674
4,928 Diageo plc - ADR 287,302
5,761 McDonald's 194,261
9,863 Outback Steakhouse, Inc. 410,400
- --------------------------------------------------------------------------------
1,167,637
- --------------------------------------------------------------------------------
BUILDING MATERIALS -- 1.4%
8,200 Masco 247,558
- --------------------------------------------------------------------------------
CABLE TELEVISION -- 1.7%
11,789 Comcast Corp. - Class A* 302,859
- --------------------------------------------------------------------------------
CHEMICALS -- 1.2%
5,008 Du Pont (E.I.) De Nemours 212,840
- --------------------------------------------------------------------------------
COMPUTERS & INFORMATION -- 6.0%
2,434 Computer Sciences* 123,258
4,450 First Data 191,395
13,499 Hewlett-Packard 386,476
4,352 International Business Machines 357,734
- --------------------------------------------------------------------------------
1,058,863
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 5.3%
7,319 Cinergy 310,765
3,629 Dominion Resources 280,159
5,319 Public Service Enterprise Group, Inc. 345,575
- --------------------------------------------------------------------------------
936,499
- --------------------------------------------------------------------------------
ELECTRONICS -- 3.2%
3,951 Analog Devices 141,722
21,003 Flextronics International* 219,271
7,881 Intel 196,710
- --------------------------------------------------------------------------------
557,703
- --------------------------------------------------------------------------------
FINANCIAL SERVICES -- 10.1%
7,322 Federal Home Loan Mortgage
Corporation 478,493
13,104 J.P. Morgan Chase 520,097
2,957 Lehman Brothers Holdings 378,999
6,081 Merrill Lynch & Co., Inc. 411,866
- --------------------------------------------------------------------------------
1,789,455
- --------------------------------------------------------------------------------
HEALTH CARE PROVIDERS -- 1.2%
2,586 WellPoint, Inc.* 206,337
- --------------------------------------------------------------------------------
HEAVY MACHINERY -- 3.5%
7,005 Caterpiller 404,679
3,183 Deere & Co. 216,794
- --------------------------------------------------------------------------------
621,473
- --------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS -- 1.2%
3,564 Kimberly-Clark 212,593
- --------------------------------------------------------------------------------
INDUSTRIAL - DIVERSIFIED -- 4.2%
13,902 General Electric 487,265
8,962 Tyco International 258,643
- --------------------------------------------------------------------------------
745,908
- --------------------------------------------------------------------------------
INSURANCE -- 6.0%
5,834 American International Group, Inc. 398,054
10,633 Genworth Financial, Inc. 367,689
5,597 Lincoln National 296,809
- --------------------------------------------------------------------------------
1,062,552
- --------------------------------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING -- 2.6%
8,647 Clear Channel Communications $ 271,948
10,793 Time Warner, Inc. 188,230
- --------------------------------------------------------------------------------
460,178
- --------------------------------------------------------------------------------
MEDICAL SUPPLIES -- 1.5%
10,831 Boston Scientific Corp.* 265,251
- --------------------------------------------------------------------------------
OIL & GAS -- 11.6%
4,180 Baker Houghes 254,060
3,176 BJ Services Co. 116,464
5,527 ChevronTexaco 313,768
9,142 ConocoPhillips 531,882
14,536 Exxon Mobil 816,488
- --------------------------------------------------------------------------------
2,032,662
- --------------------------------------------------------------------------------
PAPER & RELATED PRODUCTS -- 1.4%
4,361 Sealed Air Corp.* 244,957
- --------------------------------------------------------------------------------
PHARMACEUTICALS -- 9.3%
2,526 Amgen, Inc.* 199,200
3,850 Cardinal Health, Inc. 264,688
5,503 Novartis AG - ADR 288,797
32,985 Pfizer 769,210
3,729 Watson Pharmaceuticals, Inc.* 121,230
- --------------------------------------------------------------------------------
1,643,125
- --------------------------------------------------------------------------------
RETAILERS -- 3.2%
11,711 CVS 309,404
6,497 Home Depot, Inc. 262,999
- --------------------------------------------------------------------------------
572,403
- --------------------------------------------------------------------------------
TELEPHONE SYSTEMS -- 4.6%
2,916 Alltell 184,000
13,064 AT&T, Inc. 319,937
10,359 Verizon Communications 312,013
- --------------------------------------------------------------------------------
815,950
- --------------------------------------------------------------------------------
TELEVISION BROADCASTING STATIONS -- 0.8%
1,081 CCE Spinco, Inc.* 14,159
3,895 Viacom, Inc. - Class B 126,977
- --------------------------------------------------------------------------------
141,136
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS $17,152,714
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 7.5%
1,316,751 Touchstone Institutional
Money Market Fund ^ ** $ 1,316,751
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 104.6%
(COST $15,945,262) $18,469,465
LIABILITIES IN EXCESS OF OTHER ASSETS -- (4.6%) (815,700)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $17,653,765
- --------------------------------------------------------------------------------
* Non-income producing security.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
+ All or a portion of the security is on loan. The total value of securities
on loan as of December 31, 2005, was $770,751.
** As of December 31, 2005, $786,617 represents collateral for securities
loaned.
ADR - American Depository Receipt.
The accompanying notes are an integral part of the financial statements.
46
- --------------------
TOUCHSTONE ETF FUNDS
- --------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
TOUCHSTONE ETF FUNDS
SUB-ADVISED BY TODD INVESTMENT ADVISORS
TOUCHSTONE AGGRESSIVE ETF FUND
TOUCHSTONE CONSERVATIVE ETF FUND
TOUCHSTONE ENHANCED ETF FUND
TOUCHSTONE MODERATE ETF FUND
PERFORMANCE AND MARKET OVERVIEW
Four Exchange Traded Funds (ETF) are available for investors seeking "Lifestyle"
products for their annuity holdings. Strategic options include the Aggressive,
Conservative, and Moderate ETF Funds. These funds use asset allocations of up to
9 ETFs that should not change dramatically over time, with higher bond
weightings for the more conservative funds, and lower bond weights for the more
aggressive funds. The fourth option is the Enhanced ETF Fund, which uses a
tactical asset allocation in an effort to generate better returns.
Performance for the Funds was in line with expectations. As of December 31,
2005, the one-year total return for the Conservative ETF Fund was 3.32%. This
compares with the Lehman Brothers Aggregate Index returning 2.43%. As of
December 31, 2005, the one-year total return for the Aggressive ETF Fund was
4.63%, Enhanced ETF Fund was 6.02% and Moderate ETF Fund was 3.93%. This
compares with the S&P 1500 Index returning 5.68%. The specific blended benchmark
returns were 3.65% for the Conservative ETF Fund, 5.09% for the Aggressive ETF
Fund, 5.39% for the Enhanced ETF Fund and 4.47% for the Moderate ETF Fund.
U.S. markets underperformed international markets for the year. This was largely
because the U.S. had been increasing short-term interest rates while many
foreign markets were enjoying lower short-term interest rates. Within the U.S.
markets, the S&P (Mid-Cap) 400 Index (+15.5%) performed better than the S&P 600
(Small-Cap) Index (+7.7%) and S&P (Large-Cap) 500 Index (+4.9%). Large-Cap Value
outperformed Large-Cap Growth for the year and the most recent quarter. Mid- and
Small-Cap Growth outperformed their Value counterparts.
PORTFOLIO REVIEW
Our asset allocations for the strategic portfolios (Aggressive, Conservative and
Moderate ETF Funds) have favored mid and smaller capitalization stocks versus
the larger stocks. This has helped performance. Within those sectors we have
favored value stocks over growth stocks. This was less helpful as Small and Mid
Cap growth indices outperformed their value counterparts. Our tactical asset
allocation fund, the Enhanced ETF Fund, outperformed its benchmark. It has had
an emphasis toward the Mid- and Small-Cap stocks, as well as some exposure to
EAFE (Europe, Australia, Far East) during the rebalancing this past year.
CURRENT STRATEGY AND OUTLOOK
As we look forward, there seems to be some change afoot in the markets. The
1990's saw that U.S. markets were predominant, and style results for the past 5
years have generally favored Value and Small Caps over Growth and Large Caps. We
are closely watching the markets and have started to see some of these trends
stall or reverse. The Enhanced ETF Fund is the one best positioned to give us
early indications of these shifts and with the recent rebalance favoring Mid Cap
Growth and Value, Small Cap Growth and International stocks, we are closely
watching these asset classes to see if they remain the leaders.
47
------------------------------
TOUCHSTONE AGGRESSIVE ETF FUND
------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Since
Ended Inception
12/31/05 7/16/04
4.63% 9.16%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Since Inception
7/16/04
13.65%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
[The following table was represented
as a mountain chart in the printed material.]
Blend:
80% S&P 1500 -
Touchstone 20% Lehman Brothers
Aggressive S&P 1500 U.S. Aggregate
ETF Fund (Major Index) (Minor Index)
7/16/2004 10,000 10,000 10,000
7/31/2004 9,900 9,999 10,005
8/31/2004 9,940 10,029 10,067
9/30/2004 10,100 10,168 10,185
10/31/2004 10,220 10,326 10,328
11/30/2004 10,640 10,778 10,673
12/31/2004 10,862 11,147 10,985
1/31/2005 10,651 10,875 10,785
2/28/2005 10,842 11,119 10,965
3/31/2005 10,661 10,925 10,801
4/30/2005 10,470 10,684 10,639
5/31/2005 10,772 11,063 10,964
6/30/2005 10,853 11,113 11,016
7/31/2005 11,164 11,551 11,344
8/31/2005 11,114 11,441 11,286
9/30/2005 11,184 11,534 11,336
10/31/2005 10,983 11,330 11,158
11/30/2005 11,324 11,774 11,518
12/31/2005 11,365 11,781 11,545
Past performance is not indicative of future performance.
Performance information does not reflect fees that are paid by the separate
accounts through which shares of the Fund are sold. Inclusion of those fees
would reduce figures for all periods.
The Fund commenced operations on July 16, 2004.
48
- --------------------------------
TOUCHSTONE CONSERVATIVE ETF FUND
- --------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Since
Ended Inception
12/31/05 7/16/04
3.32% 5.89%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Since Inception
7/16/04
8.71%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
[The following table was represented
as a mountain chart in the printed material.]
Blend:
35% S&P 1500 -
Touchstone Lehman Brothers 65% Lehman Brothers
Conservative Aggregate U.S. Aggregate
ETF Fund (Major Index) (Minor Index)
7/16/2004 10,000 10,000 10,000
7/31/2004 9,940 10,029 10,018
8/31/2004 10,040 10,220 10,153
9/30/2004 10,121 10,248 10,220
10/31/2004 10,231 10,334 10,331
11/30/2004 10,361 10,251 10,436
12/31/2004 10,523 10,345 10,624
1/31/2005 10,452 10,411 10,576
2/28/2005 10,534 10,349 10,619
3/31/2005 10,412 10,296 10,519
4/30/2005 10,402 10,435 10,530
5/31/2005 10,584 10,548 10,734
6/30/2005 10,655 10,606 10,790
7/31/2005 10,736 10,510 10,875
8/31/2005 10,777 10,644 10,929
9/30/2005 10,756 10,534 10,887
10/31/2005 10,624 10,451 10,764
11/30/2005 10,796 10,497 10,942
12/31/2005 10,871 10,597 11,012
Past performance is not indicative of future performance.
Performance information does not reflect fees that are paid by the separate
accounts through which shares of the Fund are sold. Inclusion of those fees
would reduce figures for all periods.
The Fund commenced operations on July 16, 2004.
49
----------------------------
TOUCHSTONE ENHANCED ETF FUND
----------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Since
Ended Inception
12/31/05 7/16/04
6.02% 13.42%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Since Inception
7/16/04
20.18%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
[The following table was represented
as a mountain chart in the printed material.]
Blend:
90% S&P 1500 -
Touchstone 10% Lehman Brothers
Enhanced S&P 1500 U.S. Aggregate
ETF Fund (Major Index) (Minor Index)
7/16/2004 10,000 10,000 10,000
7/31/2004 9,860 9,999 10,002
8/31/2004 9,820 10,029 10,048
9/30/2004 10,159 10,168 10,176
10/31/2004 10,329 10,326 10,327
11/30/2004 11,009 10,778 10,726
12/31/2004 11,334 11,147 11,066
1/31/2005 11,004 10,875 10,830
2/28/2005 11,304 11,119 11,042
3/31/2005 11,063 10,925 10,863
4/30/2005 10,722 10,684 10,662
5/31/2005 11,084 11,063 11,014
6/30/2005 11,324 11,113 11,065
7/31/2005 11,846 11,551 11,448
8/31/2005 11,716 11,441 11,364
9/30/2005 11,826 11,534 11,435
10/31/2005 11,475 11,330 11,244
11/30/2005 12,017 11,774 11,646
12/31/2005 12,018 11,781 11,663
Past performance is not indicative of future performance.
Performance information does not reflect fees that are paid by the separate
accounts through which shares of the Fund are sold. Inclusion of those fees
would reduce figures for all periods.
The Fund commenced operations on July 16, 2004.
50
- ----------------------------
TOUCHSTONE MODERATE ETF FUND
- ----------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Since
Ended Inception
12/31/05 7/16/04
3.93% 7.89%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Since Inception
7/16/04
11.73%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -------------------------------------------------------------------------------
[The following table was represented
as a mountain chart in the printed material.]
Blend:
60% S&P 1500 -
Touchstone 40% Lehman Brothers
Moderate S&P 1500 U.S. Aggregate
ETF Fund (Major Index) (Minor Index)
7/16/2004 10,000 10,000 10,000
7/31/2004 9,920 9,999 10,011
8/31/2004 10,000 10,029 10,105
9/30/2004 10,120 10,168 10,201
10/31/2004 10,241 10,326 10,329
11/30/2004 10,520 10,778 10,568
12/31/2004 10,751 11,147 10,824
1/31/2005 10,620 10,875 10,693
2/28/2005 10,750 11,119 10,811
3/31/2005 10,589 10,925 10,676
4/30/2005 10,488 10,684 10,592
5/31/2005 10,740 11,063 10,863
6/30/2005 10,821 11,113 10,917
7/31/2005 11,012 11,551 11,136
8/31/2005 11,012 11,441 11,129
9/30/2005 11,032 11,534 11,137
10/31/2005 10,861 11,330 10,984
11/30/2005 11,112 11,774 11,261
12/31/2005 11,173 11,781 11,308
Past performance is not indicative of future performance.
Performance information does not reflect fees that are paid by the separate
accounts through which shares of the Fund are sold. Inclusion of those fees
would reduce figures for all periods.
The Fund commenced operations on July 16, 2004.
51
------------------------------
TOUCHSTONE AGGRESSIVE ETF FUND
------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2005
Shares Value
EXCHANGE TRADED FUNDS -- 96.1%
28,060 iShares Lehman Aggregate
Bond Fund $ 2,822,555
10,340 iShares MSCI EAFE Index Fund 614,816
6,900 iShares S&P 500 Index Fund 860,016
47,960 iShares S&P 500/BARRA
Growth Index Fund 2,843,549
79,760 iShares S&P 500/BARRA
Value Index Fund 5,187,591
8,110 iShares S&P MidCap 400/BARRA
Growth Index Fund 613,359
10,530 iShares S&P MidCap 400/BARRA
Value Index Fund 743,102
1,220 iShares S&P SmallCap 600/BARRA
Growth Index Fund 141,691
6,890 iShares S&P SmallCap 600/BARRA
Value Index Fund 440,133
- --------------------------------------------------------------------------------
TOTAL EXCHANGE TRADED FUNDS $14,266,812
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 2.3%
335,235 Touchstone Institutional
Money Market Fund ^ $ 335,235
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 98.4%
(COST $14,153,814) $14,602,047
OTHER ASSETS IN EXCESS OF LIABILITIES -- (1.6%) 242,622
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $14,844,669
- --------------------------------------------------------------------------------
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
The accompanying notes are an integral part of the financial statements.
52
- --------------------------------
TOUCHSTONE CONSERVATIVE ETF FUND
- --------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2005
Shares Value
EXCHANGE TRADED FUNDS -- 98.6%
9,800 iShares Lehman 1-3 Year
Treasury Bond Fund $ 786,352
41,920 iShares Lehman Aggregate
Bond Fund 4,216,734
2,950 iShares MSCI EAFE Index Fund 175,407
2,680 iShares S&P 500 Index Fund 334,035
12,480 iShares S&P 500/BARRA
Growth Index Fund 739,939
18,980 iShares S&P 500/BARRA
Value Index Fund 1,234,459
2,280 iShares S&P MidCap 400/BARRA
Growth Index Fund 172,436
2,380 iShares S&P MidCap 400/BARRA
Value Index Fund 167,957
630 iShares S&P SmallCap 600/BARRA
Growth Index Fund 73,168
1,240 iShares S&P SmallCap 600/BARRA
Value Index Fund 79,211
- --------------------------------------------------------------------------------
TOTAL EXCHANGE TRADED FUNDS $ 7,979,698
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 2.4%
197,626 Touchstone Institutional
Money Market Fund ^ $ 197,626
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 101.0%
(COST $8,105,175) $ 8,177,324
LIABILITIES IN EXCESS OF OTHER ASSETS -- (1.0%) (79,636)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $ 8,097,688
^Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
The accompanying notes are an integral part of the financial statements.
53
----------------------------
TOUCHSTONE ENHANCED ETF FUND
----------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2005
Shares Value
EXCHANGE TRADED FUNDS -- 97.9%
7,610 iShares Lehman Aggregate
Bond Fund $ 765,490
14,010 iShares MSCI EAFE Index Fund 833,035
13,190 iShares S&P 500/BARRA
Growth Index Fund 782,035
12,040 iShares S&P 500/BARRA
Value Index Fund 783,082
78,370 iShares S&P MidCap 400/BARRA
Growth Index Fund 5,927,123
81,860 iShares S&P MidCap 400/BARRA
Value Index Fund 5,776,860
49,730 iShares S&P SmallCap 600/BARRA
Growth Index Fund 5,775,642
88,710 iShares S&P SmallCap 600/BARRA
Value Index Fund 5,666,795
- --------------------------------------------------------------------------------
TOTAL EXCHANGE TRADED FUNDS $ 26,310,062
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 2.6%
687,533 Touchstone Institutional
Money Market Fund ^ $ 687,533
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 100.5%
(COST $26,174,504) $ 26,997,595
LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.5%) (133,742)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $ 26,863,853
- --------------------------------------------------------------------------------
^Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
The accompanying notes are an integral part of the financial statements.
54
- ----------------------------
TOUCHSTONE MODERATE ETF FUND
- ----------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2005
Shares Value
EXCHANGE TRADED FUNDS -- 98.3%
75,630 iShares Lehman Aggregate
Bond Fund $ 7,607,623
10,130 iShares MSCI EAFE Index Fund 602,330
15,310 iShares S&P 500 Index Fund 1,908,238
38,460 iShares S&P 500/BARRA
Growth Index Fund 2,280,293
67,910 iShares S&P 500/BARRA
Value Index Fund 4,416,867
8,020 iShares S&P MidCap 400/BARRA
Growth Index Fund 606,553
11,290 iShares S&P MidCap 400/BARRA
Value Index Fund 796,735
1,710 iShares S&P SmallCap 600/BARRA
Growth Index Fund 198,599
6,080 iShares S&P SmallCap 600/BARRA
Value Index Fund 388,390
- --------------------------------------------------------------------------------
TOTAL EXCHANGE TRADED FUNDS $18,805,628
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 3.0%
573,281 Touchstone Institutional
Money Market Fund ^ $ 573,281
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 101.3%
(COST $19,011,372) $19,378,909
LIABILITIES IN EXCESS OF OTHER ASSETS -- (1.3%) (241,665)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $19,137,244
- --------------------------------------------------------------------------------
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
The accompanying notes are an integral part of the financial statements.
55
--------------------------------
Touchstone Variable Series Trust
--------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------
December 31, 2005
TOUCHSTONE TOUCHSTONE
TOUCHSTONE BARON TOUCHSTONE EAGLE CAPITAL
BALANCED SMALL CAP CORE BOND APPRECIATION
FUND FUND FUND FUND
ASSETS:
Investments, at cost $ 29,419,827 $ 22,007,276 $ 40,719,061 $ 29,448,917
- ------------------------------------------------------------------------------------------------------------------------------------
Affiliated securities at market value $ 1,768,177 $ 4,796,258 $ 3,691,857 $ 4,373,645
Non-affiliated securities at market value 29,881,669 26,650,382 36,612,631 27,308,312
- ------------------------------------------------------------------------------------------------------------------------------------
Investments, at value - including $1,134,232, $4,280,053 and $ 31,649,846 $ 31,446,640 $ 40,304,488 $ 31,681,957
$1,796,152 of securities loaned for the Balanced Fund,
the Baron Small Cap Fund and the Eagle Capital
Appreciation Fund, respectively
Cash -- 116,746 -- --
Receivables for:
Dividends 15,992 3,157 9,474 42,374
Interest 98,152 -- 274,341 --
Fund shares sold 424 18,802 463 77
Investments sold 202,852 345,363 -- --
Securities lending income 134 1,412 -- 24
Other assets -- -- -- 24
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets 31,967,400 31,932,120 40,588,766 31,724,456
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for:
Return of collateral for securities on loan 1,171,354 4,417,383 -- 1,858,941
Fund shares redeemed 1,587 166 493 8,292
Investments purchased 550,050 22,712 1,493,013 346,545
Payable to Investment Advisor 14,071 20,215 18,211 19,150
Payable to other affiliates 3,819 3,495 3,836 3,853
Payable to Trustees 2,176 2,176 2,176 2,177
Other accrued expenses 19,325 22,700 21,788 24,016
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 1,762,382 4,488,847 1,539,517 2,262,974
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 30,205,018 $ 27,443,273 $ 39,049,249 $ 29,461,482
- ------------------------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding
(unlimited number of shares authorized, no par value) 1,842,892 1,379,960 3,797,285 2,258,268
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per share $ 16.39 $ 19.89 $ 10.28 $ 13.05
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in capital $ 24,719,624 $ 17,171,353 $ 38,406,549 $ 34,836,554
Undistributed net investment income (loss) 521,447 -- 1,596,915 239,438
Accumulated net realized gains (losses) on investments
and foreign currency transactions 2,733,791 832,556 (539,642) (7,847,550)
Net unrealized appreciation (depreciation) on investments
and foreign currency transactions 2,230,156 9,439,364 (414,573) 2,233,040
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 30,205,018 $ 27,443,273 $ 39,049,249 $ 29,461,482
====================================================================================================================================
The accompanying notes are an integral part of the financial statements.
56
- --------------------------------
Touchstone Variable Series Trust
- --------------------------------
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities continued
TOUCHSTONE TOUCHSTONE TOUCHSTONE
EMERGING ENHANCED GROWTH & TOUCHSTONE
GROWTH DIVIDEND 30 INCOME HIGH YIELD
FUND FUND FUND FUND
ASSETS:
Investments, at cost $ 31,511,395 $ 27,177,064 $ 27,489,953 $ 39,696,030
- ------------------------------------------------------------------------------------------------------------------------------------
Affiliated securities at market value $ 6,294,048 $ 2,747,557 $ 11,998,685 $ 3,542,702
Non-affiliated securities at market value 32,286,964 24,525,056 16,853,246 36,613,238
- ------------------------------------------------------------------------------------------------------------------------------------
Investments, at value - including $4,983,820, $1,850,590, $484,852 $ 38,581,012 $ 27,272,613 $ 28,851,931 $ 40,155,940
and $714,748 of securities loaned for the Emerging
Growth Fund, the Enhanced Dividend 30 Fund, the
Growth & Income Fund and the High Yield Fund,
respectively
Cash 100,000 -- -- --
Receivables for:
Dividends 15,578 30,252 55,627 9,254
Interest -- -- -- 714,412
Fund shares sold 6,493 36 -- 2,108
Investments sold -- -- 196,394 --
Securities lending income 388 1,607 31 195
Other assets -- -- 156 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets 38,703,471 27,304,508 29,104,139 40,881,909
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for:
Return of collateral for securities on loan 5,140,258 1,903,932 494,833 732,163
Fund shares redeemed 69 926 1,918 2,045
Investments purchased -- -- -- 2,245,598
Payable to Investment Advisor 22,670 14,233 14,641 16,015
Payable to other affiliates 3,640 3,552 3,850 3,730
Payable to Trustees 2,176 2,176 1,877 2,176
Other accrued expenses 23,812 19,601 17,391 27,322
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 5,192,625 1,944,420 534,510 3,029,049
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 33,510,846 $ 25,360,088 $ 28,569,629 $ 37,852,860
- ------------------------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding
(unlimited number of shares authorized, no par value) 1,900,763 2,856,261 2,760,057 4,438,435
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per share $ 17.63 $ 8.88 $ 10.35 $ 8.53
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in capital $ 24,625,663 $ 26,136,495 $ 24,011,328 $ 36,701,903
Undistributed net investment income (loss) -- 583,832 500,307 2,695,173
Accumulated net realized gains (losses) on investments 1,815,566 (1,455,788) 2,696,016 (2,004,126)
Net unrealized appreciation on investments 7,069,617 95,549 1,361,978 459,910
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 33,510,846 $ 25,360,088 $ 28,569,629 $ 37,852,860
====================================================================================================================================
The accompanying notes are an integral part of the financial statements.
57
--------------------------------
Touchstone Variable Series Trust
--------------------------------
TOUCHSTONE TOUCHSTONE
MONEY THIRD AVENUE TOUCHSTONE
MARKET VALUE VALUE PLUS
FUND FUND FUND
ASSETS:
Investments, at cost $ 79,331,431 $ 83,404,071 $ 15,945,262
- -----------------------------------------------------------------------------------------------------------------------------------
Affiliated securities at market value $ -- $ 20,041,878 $ 1,316,751
Non-affiliated securities at market value 79,331,431 96,153,933 17,152,714
- -----------------------------------------------------------------------------------------------------------------------------------
Investments, at value - including $770,751 of securities loaned $ 79,331,431 $116,195,811 $ 18,469,465
for the Value Plus Fund
Cash 20,371 -- --
Receivables for:
Dividends -- 125,236 16,888
Interest 559,679 -- --
Foreign tax reclaims -- 32,304 --
Fund shares sold 93,278 146,595 435
Investments sold -- 1,225,978 --
Securities lending income -- -- 61
Other assets -- 666 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets 80,004,759 117,726,590 18,486,849
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for:
Return of collateral for securities on loan -- -- 786,617
Fund shares redeemed 3,245 137 6,673
Investments purchased -- 458,885 --
Payable to Investment Advisor 8,740 79,632 11,379
Payable to other affiliates 8,239 9,720 3,491
Payable to Trustees 2,175 2,251 2,176
Other accrued expenses 26,506 33,793 22,748
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 48,905 584,418 833,084
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 79,955,854 $117,142,172 $ 17,653,765
- -----------------------------------------------------------------------------------------------------------------------------------
PRICING OF CLASS A SHARES
Net assets attributable to Class A shares $ -- $117,142,172 $ 17,653,765
Shares of beneficial interest outstanding
(unlimited number of shares authorized, no par value) -- 4,355,886 1,626,330
Net asset value, offering price and redemption price per share $ -- $ 26.89 $ 10.85
PRICING OF CLASS I SHARES
Net assets attributable to Class I shares $ 42,613,557 $ -- $ --
Shares of beneficial interest outstanding
(unlimited number of shares authorized, no par value) 42,598,530 -- --
Net asset value, offering price and redemption price per share $ 1.00 $ -- $ --
PRICING OF CLASS SC SHARES
Net assets attributable to Class SC shares $ 37,342,297 $ -- $ --
Shares of beneficial interest outstanding
(unlimited number of shares authorized, no par value) 37,347,833 -- --
Net asset value, offering price and redemption price per share $ 1.00 $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in capital $ 80,398,655 $ 79,762,613 $ 20,990,342
Undistributed net investment income -- 480,115 150,839
Accumulated net realized gains (losses) on investments
and foreign currency transactions (442,801) 4,108,580 (6,011,619)
Net unrealized appreciation on investments
and foreign currency transactions -- 32,790,864 2,524,203
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 79,955,854 $117,142,172 $ 17,653,765
===================================================================================================================================
The accompanying notes are an integral part of the financial statements.
58
- --------------------------------
Touchstone Variable Series Trust
- --------------------------------
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities continued
TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE
AGGRESSIVE CONSERVATIVE ENHANCED MODERATE
ETF ETF ETF ETF
FUND FUND FUND FUND
ASSETS:
Investments, at cost $ 14,153,814 $ 8,105,175 $ 26,174,504 $ 19,011,372
- ------------------------------------------------------------------------------------------------------------------------------------
Affiliated securities at market value $ 335,235 $ 197,626 $ 687,533 $ 573,281
Non-affiliated securities at market value 14,266,812 7,979,698 26,310,062 18,805,628
- ------------------------------------------------------------------------------------------------------------------------------------
Investments, at value $ 14,602,047 $ 8,177,324 $ 26,997,595 $ 19,378,909
Receivables for:
Dividends 898 724 3,898 1,377
Interest 10,726 18,386 2,901 28,664
Fund shares sold 317,984 -- 95,214 --
Receivable from Advisor -- 4,712 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets 14,931,655 8,201,146 27,099,608 19,408,950
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for:
Fund shares redeemed 7,090 19,037 12,013 21,854
Investments purchased 54,779 62,022 196,706 225,772
Payable to Investment Advisor 2,430 -- 3,479 1,405
Payable to other affiliates 3,345 3,346 3,339 3,344
Payable to Trustees 2,176 2,176 2,176 2,176
Other accrued expenses 17,166 16,877 18,042 17,155
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 86,986 103,458 235,755 271,706
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 14,844,669 $ 8,097,688 $ 26,863,853 $ 19,137,244
- ------------------------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding
(unlimited number of shares authorized, no par value) 1,313,640 755,648 2,243,057 1,722,003
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per share $ 11.30 $ 10.72 $ 11.98 $ 11.11
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in capital $ 14,214,030 $ 7,897,042 $ 25,730,137 $ 18,517,763
Undistributed net investment income 170,869 120,685 117,649 247,656
Accumulated net realized gain on investments 11,537 7,812 192,976 4,288
Net unrealized appreciation on investments 448,233 72,149 823,091 367,537
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 14,844,669 $ 8,097,688 $ 26,863,853 $ 19,137,244
====================================================================================================================================
The accompanying notes are an integral part of the financial statements.
59
--------------------------------
Touchstone Variable Series Trust
--------------------------------
STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2005
TOUCHSTONE TOUCHSTONE
TOUCHSTONE BARON TOUCHSTONE EAGLE CAPITAL
BALANCED SMALL CAP CORE BOND APPRECIATION
FUND FUND FUND FUND
INVESTMENT INCOME:
Dividends from affiliated securities $ 10,432 $ 7,134 $ 22,431 $ 46,216
Dividends from non-affiliated securities (a) 289,598 77,368 -- 493,812
Interest 455,244 10,271 1,782,793 31,271
Income from securities loaned 4,075 7,678 218 1,563
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investment Income 759,349 102,451 1,805,442 572,862
- -----------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 245,790 269,681 219,948 238,220
Accounting and pricing fees 15,998 15,998 16,099 15,998
Administration fees 23,998 23,998 24,189 23,998
Compliance fees and expenses 971 470 1,009 1,023
Custody fees 7,474 5,472 5,762 6,126
Professional fees 16,327 16,297 17,022 16,127
Sponsor fees 61,448 51,368 79,982 63,526
Transfer agent fees 12,000 12,000 12,000 12,000
Trustee fees 4,152 4,267 4,154 3,343
Other expenses 13,935 9,344 16,076 6,870
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 402,093 408,895 396,241 387,231
Fees waived by the Advisor (51,516) -- (4,557) (3,497)
Fees reduced by Custodian (674) -- -- (1,523)
Waiver of Sponsor fees (61,448) -- (78,976) (36,787)
Fees waived by Transfer agent (12,000) (12,000) (12,000) (12,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net expenses 276,455 396,895 300,708 333,424
- -----------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 482,894 (294,444) 1,504,734 239,438
- -----------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 2,767,987 1,497,602 (152,011) 3,018,324
Foreign currency 11,452 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
2,779,439 1,497,602 (152,011) 3,018,324
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation on:
Investments (1,322,194) 658,459 (683,297) (3,280,303)
Foreign currency (14,509) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
(1,336,703) 658,459 (683,297) (3,280,303)
- -----------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) 1,442,736 2,156,061 (835,308) (261,979)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 1,925,630 $ 1,861,617 $ 669,426 $ (22,541)
===================================================================================================================================
(a) Net of foreign tax withholdings of: $ 43 $ 37 $ -- $ --
The accompanying notes are an integral part of the financial statements.
60
- --------------------------------
Touchstone Variable Series Trust
- --------------------------------
- --------------------------------------------------------------------------------
Statements of Operations continued
TOUCHSTONE TOUCHSTONE TOUCHSTONE
EMERGING ENHANCED GROWTH & TOUCHSTONE
GROWTH DIVIDEND 30 INCOME HIGH YIELD
FUND FUND FUND FUND
INVESTMENT INCOME:
Dividends from affiliated securities $ 13,302 $ 7,780 $ 98,940 $ 18,255
Dividends from non-affiliated securities (a) 172,562 739,985 651,026 --
Interest 13,615 4,760 5,085 2,988,546
Income from securities loaned 7,725 27,631 1,437 5,107
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investment Income 207,204 780,156 756,488 3,011,908
- -----------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 255,304 170,225 241,246 195,444
Accounting and pricing fees 15,998 15,998 15,998 16,475
Administration fees 23,998 23,998 23,998 24,671
Compliance fees and expenses 918 649 1,028 1,003
Custody fees 20,011 5,859 6,259 13,805
Professional fees 15,747 15,849 16,011 16,592
Sponsor fees 63,827 52,377 60,312 78,179
Transfer agent fees 12,000 12,000 12,000 12,000
Trustees fees 4,257 4,384 3,652 4,083
Other expenses 13,870 5,368 8,108 17,939
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 425,930 306,707 388,612 380,191
Fees waived by the Advisor (6,541) (48,205) (60,119) (2,276)
Waiver of Sponsor fees (40,406) (50,178) (60,312) (53,301)
Fees waived by Transfer agent (12,000) (12,000) (12,000) (12,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net expenses 366,983 196,324 256,181 312,614
- -----------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (159,779) 583,832 500,307 2,699,294
- -----------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments 2,042,860 (219,523) 3,081,149 791,421
Net change in unrealized appreciation/depreciation on investments 2,549,545 (1,293,062) (3,063,468) (2,269,658)
- -----------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) 4,592,405 (1,512,585) 17,681 (1,478,237)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 4,432,626 $ (928,753) $ 517,988 $ 1,221,057
===================================================================================================================================
(a) Net of foreign tax withholding of: $ 1,737 $ -- $ -- $ --
The accompanying notes are an integral part of the financial statements.
61
--------------------------------
Touchstone Variable Series Trust
--------------------------------
- --------------------------------------------------------------------------------
TOUCHSTONE TOUCHSTONE
MONEY THIRD AVENUE TOUCHSTONE
MARKET VALUE VALUE PLUS
FUND FUND FUND
INVESTMENT INCOME:
Dividends from affiliated securities $ -- $ 274,939 $ 5,970
Dividends from non-affiliated securities (a) -- 1,136,315 355,089
Interest 2,733,715 139,346 5,820
Income from securities loaned -- -- 254
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investment Income 2,733,715 1,550,600 367,133
- -----------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 143,760 810,112 141,100
Accounting and pricing fees 34,113 39,812 15,998
Administration fees 51,230 59,718 23,998
Compliance fees and expenses 2,508 2,548 463
Custody fees 14,363 14,900 7,129
Distribution expenses - Class SC 88,872 -- --
Professional fees 18,782 17,799 15,497
Sponsor fees 159,795 202,530 37,627
Transfer agent fees 12,000 12,000 12,000
Trustees fees 4,071 4,215 4,183
Other expenses 12,427 13,138 5,962
- -----------------------------------------------------------------------------------------------------------------------------------
Total Expenses 541,921 1,176,772 263,957
Fees waived and/or expenses reimbursed by the Advisor (54,123) -- (3,221)
Fees reduced by Custodian -- -- (2,587)
Waiver of Sponsor fees (159,540) (101,510) (29,855)
Fees waived by Transfer agent (12,000) (12,000) (12,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Expenses 316,258 1,063,262 216,294
- -----------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,417,457 487,338 150,839
- -----------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments -- 7,522,169 1,792,845
Foreign currency -- (7,223) --
- -----------------------------------------------------------------------------------------------------------------------------------
-- 7,514,946 1,792,845
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation on:
Investments -- 8,434,768 (1,590,203)
Foreign currency -- (4,915) --
- -----------------------------------------------------------------------------------------------------------------------------------
-- 8,429,853 (1,590,203)
- -----------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN -- 15,944,799 202,642
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,417,457 $ 16,432,137 $ 353,481
===================================================================================================================================
(a) Net of foreign tax withholdings of: $ -- $ 32,962 $ 306
The accompanying notes are an integral part of the financial statements.
62
- --------------------------------
Touchstone Variable Series Trust
- --------------------------------
- -------------------------------------------------------------------------------
Statements of Operations continued
TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE
AGGRESSIVE CONSERVATIVE ENHANCED MODERATE
ETF ETF ETF ETF
FUND FUND FUND FUND
INVESTMENT INCOME:
Dividends from affiliated securities $ 4,344 $ 2,934 $ 9,936 $ 6,700
Dividends from non-affiliated securities 8,224 2,816 -- 16,473
Interest 205,717 134,919 161,571 274,243
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Income 218,285 140,669 171,507 297,416
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 37,831 15,959 42,398 39,775
Accounting and pricing fees 15,998 15,998 15,998 15,998
Administration fees 23,998 23,998 23,998 23,998
Compliance fees and expenses 15 29 -- 15
Custody fees 5,100 4,353 5,300 4,934
Professional fees 14,649 14,557 14,513 13,851
Sponsor fees 18,916 7,980 21,401 19,884
Transfer agent fees 12,000 12,000 12,000 12,000
Trustees fees 4,551 4,551 4,551 4,537
Other expenses 5,224 4,968 6,290 5,596
- ------------------------------------------------------------------------------------------------------------------------------------
Total Expenses 138,282 104,393 146,449 140,588
Fees waived and/or expenses reimbursed by the Advisor (59,950) (64,429) (59,190) (58,944)
Waiver of Sponsor fees (18,916) (7,980) (21,401) (19,884)
Fees waived by Transfer agent (12,000) (12,000) (12,000) (12,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Expenses 47,416 19,984 53,858 49,760
- ------------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 170,869 120,685 117,649 247,656
- ------------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN:
Net realized gain on investments 11,537 7,830 192,976 4,288
Net change in unrealized appreciation/
depreciation on investments 409,543 47,946 748,809 325,512
- ------------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN 421,080 55,776 941,785 329,800
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 591,949 $ 176,461 $ 1,059,434 $ 577,456
====================================================================================================================================
The accompanying notes are an integral part of the financial statements.
63
--------------------------------
Touchstone Variable Series Trust
--------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
TOUCHSTONE TOUCHSTONE
BALANCED BARON SMALL
FUND CAP FUND
------------------------------ ------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 482,894 $ 503,333 $ (294,444) $ (232,116)
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on:
Investments 2,767,987 2,428,384 1,497,602 685,320
Foreign currency 11,452 (25,514) -- --
- ----------------------------------------------------------------------------------------------------------------------
2,779,439 2,402,870 1,497,602 685,320
- ----------------------------------------------------------------------------------------------------------------------
Net change in unrealized
appreciation/depreciation on:
Investments (1,322,194) (148,898) 658,459 4,357,115
Foreign currency (14,509) 19,085 -- --
- ----------------------------------------------------------------------------------------------------------------------
(1,336,703) (129,813) 658,459 4,357,115
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets
from operations 1,925,630 2,776,390 1,861,617 4,810,319
- ----------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income (325,521) (263,238) -- --
In excess of net investment income -- -- -- --
Realized capital gains (1,430,893) -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1,756,414) (263,238) -- --
- ----------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from shares sold 3,645,400 7,107,232 6,662,149 8,233,287
Reinvestment of dividends and distributions 1,756,413 263,238 -- --
Cost of shares redeemed (7,460,008) (4,804,935) (4,416,807) (5,840,559)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
from share transactions (2,058,195) 2,565,535 2,245,342 2,392,728
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease)
in net assets (1,888,979) 5,078,687 4,106,959 7,203,047
NET ASSETS:
Beginning of year 32,093,997 27,015,310 23,336,314 16,133,267
- ----------------------------------------------------------------------------------------------------------------------
End of year $ 30,205,018 $ 32,093,997 $ 27,443,273 $ 23,336,314
- ----------------------------------------------------------------------------------------------------------------------
Undistributed net investment income $ 521,447 $ 322,948 $ -- $ --
- ----------------------------------------------------------------------------------------------------------------------
<page>
TOUCHSTONE
CORE BOND
FUND
------------------------------
FOR THE FOR THE
YEAR YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2005 2004
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 1,504,734 $ 1,453,816
- ---------------------------------------------------------------------------------
Net realized gain (loss) on:
Investments (152,011) 67,671
Foreign currency -- --
- ---------------------------------------------------------------------------------
(152,011) 67,671
- ---------------------------------------------------------------------------------
Net change in unrealized
appreciation/depreciation on:
Investments (683,297) (221,488)
Foreign currency -- --
- ---------------------------------------------------------------------------------
(683,297) (221,488)
- ---------------------------------------------------------------------------------
Net increase in net assets
from operations 669,426 1,299,999
- ---------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income -- (1,453,818)
In excess of net investment income -- (132,634)
Realized capital gains -- --
- ---------------------------------------------------------------------------------
Total dividends and distributions -- (1,586,452)
- ---------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from shares sold 3,797,730 7,832,479
Reinvestment of dividends and distributions -- 1,586,452
Cost of shares redeemed (5,461,729) (11,669,039)
- ---------------------------------------------------------------------------------
Net increase (decrease)
from share transactions (1,663,999) (2,250,108)
- ---------------------------------------------------------------------------------
Total increase (decrease)
in net assets (994,573) (2,536,561)
NET ASSETS:
Beginning of year 40,043,822 42,580,383
- ---------------------------------------------------------------------------------
End of year $ 39,049,249 $ 40,043,822
- ---------------------------------------------------------------------------------
Undistributed net investment income $ 1,596,915 $ --
- ---------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
64
- --------------------------------
Touchstone Variable Series Trust
- --------------------------------
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets continued
TOUCHSTONE TOUCHSTONE TOUCHSTONE
EAGLE CAPITAL EMERGING GROWTH ENHANCED DIVIDEND
APPRECIATION FUND FUND 30 FUND
---------------------------- ---------------------------- ----------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004 2005 2004
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) $ 239,438 $ 311,003 $ (159,779) $ (252,150) $ 583,832 $ 608,734
Net realized gain (loss)
on investments 3,018,324 1,473,596 2,042,860 9,292,891 (219,523) 331,403
Net change in unrealized
appreciation/depreciation
on investments (3,280,303) 2,824,758 2,549,545 (4,431,197) (1,293,062) 482,603
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations (22,541) 4,609,357 4,432,626 4,609,544 (928,753) 1,422,740
- ----------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income (26,545) (314,691) -- -- -- (608,737)
Realized capital gains -- -- (9,006,025) (2,106,820) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (26,545) (314,691) (9,006,025) (2,106,820) -- (608,737)
- ----------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from shares sold 1,004,853 2,092,809 4,382,918 8,987,452 4,457,260 4,201,920
Reinvestment of dividends
and distributions 26,545 314,691 9,006,025 2,106,819 -- 608,737
Cost of shares redeemed (6,176,455) (5,943,726) (9,439,760) (16,999,273) (7,867,817) (6,182,929)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
from share transactions (5,145,057) (3,536,226) 3,949,183 (5,905,002) (3,410,557) (1,372,272)
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease)
in net assets (5,194,143) 758,440 (624,216) (3,402,278) (4,339,310) (558,269)
NET ASSETS:
Beginning of year 34,655,625 33,897,185 34,135,062 37,537,340 29,699,398 30,257,667
- ----------------------------------------------------------------------------------------------------------------------------------
End of year $ 29,461,482 $ 34,655,625 $ 33,510,846 $ 34,135,062 $ 25,360,088 $ 29,699,398
==================================================================================================================================
Undistributed net investment income $ 239,438 $ 26,545 $ -- $ -- $ 583,832 $ --
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
65
--------------------------------
Touchstone Variable Series Trust
--------------------------------
TOUCHSTONE TOUCHSTONE TOUCHSTONE
GROWTH & INCOME HIGH YIELD MONEY MARKET
FUND FUND FUND
--------------------------- --------------------------- ----------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004 2005 2004
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 500,307 $ 573,261 $ 2,699,294 $ 3,023,681 $ 2,417,457 $ 1,169,796
Net realized gain (loss) on investments 3,081,149 1,968,230 791,421 725,585 -- (130)
Net change in unrealized
appreciation/depreciation
on investments (3,063,468) 479,636 (2,269,658) (300,187) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase
in net assets from operations 517,988 3,021,127 1,221,057 3,449,079 2,417,457 1,169,666
- -----------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income, Class A -- (573,261) -- (3,023,703) -- --
Net investment income, Class I -- -- -- -- (1,388,785) (753,364)
Net investment income, Class SC -- -- -- -- (1,028,672) (416,432)
Realized capital gains (1,503,333) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1,503,333) (573,261) -- (3,023,703) (2,417,457) (1,169,796)
- -----------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
CLASS A
Proceeds from shares sold 1,250,276 3,609,267 20,102,785 26,612,341 -- --
Reinvestment of dividends
and distributions 1,503,333 573,261 -- 3,023,702 -- --
Cost of shares redeemed (5,989,804) (6,607,165) (25,799,142) (33,577,048) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net decrease from Class A
share transactions (3,236,195) (2,424,637) (5,696,357) (3,941,005) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS I
Proceeds from shares sold -- -- -- -- 63,118,368 72,270,487
Reinvestment of dividends -- -- -- -- 1,393,762 755,992
Cost of shares redeemed -- -- -- -- (60,086,304) (108,116,343)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
from Class I share transactions -- -- -- -- 4,425,826 (35,089,864)
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS SC
Proceeds from shares sold -- -- -- -- 84,397,097 143,079,361
Reinvestment of dividends -- -- -- -- 1,033,792 418,586
Cost of shares redeemed -- -- -- -- (73,815,889) (145,653,545)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
from Class SC share transactions -- -- -- -- 11,615,000 (2,155,598)
- -----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (4,221,540) 23,229 (4,475,300) (3,515,629) 16,040,826 (37,245,592)
NET ASSETS:
Beginning of year 32,791,169 32,767,940 42,328,160 45,843,789 63,915,028 101,160,620
- -----------------------------------------------------------------------------------------------------------------------------------
End of year $ 28,569,629 $ 32,791,169 $ 37,852,860 $ 42,328,160 $ 79,955,854 $ 63,915,028
===================================================================================================================================
Undistributed net investment income $ 500,307 $ -- $ 2,695,173 $ -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
66
- --------------------------------
Touchstone Variable Series Trust
- --------------------------------
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
TOUCHSTONE TOUCHSTONE
THIRD AVENUE VALUE PLUS
VALUE FUND FUND
---------------------------- -----------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 487,338 $ 209,920 $ 150,839 $ 146,467
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on:
Investments 7,522,169 6,027,837 1,792,845 510,964
Foreign currency (7,223) 7,817 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
7,514,946 6,035,654 1,792,845 510,964
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation/
depreciation on:
Investments 8,434,768 12,168,523 (1,590,203) 1,259,409
Foreign currency (4,915) 2,495 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
8,429,853 12,171,018 (1,590,203) 1,259,409
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase
in net assets from operations 16,432,137 18,416,592 353,481 1,916,840
- -----------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income (8,772) (204,994) -- (146,469)
Realized capital gains (3,013,717) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (3,022,489) (204,994) -- (146,469)
- -----------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from shares sold 24,203,421 18,812,226 2,304,536 2,444,416
Reinvestment of dividends and distributions 3,022,487 204,994 -- 146,468
Cost of shares redeemed (16,413,341) (15,909,118) (4,547,618) (4,378,708)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
from share transactions 10,812,567 3,108,102 (2,243,082) (1,787,824)
- -----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 24,222,215 21,319,700 (1,889,601) (17,453)
NET ASSETS:
Beginning of year 92,919,957 71,600,257 19,543,366 19,560,819
- -----------------------------------------------------------------------------------------------------------------------------------
End of year $117,142,172 $ 92,919,957 $ 17,653,765 $ 19,543,366
===================================================================================================================================
Undistributed net investment income $ 480,115 $ 8,772 $ 150,839 $ --
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
67
--------------------------------
Touchstone Variable Series Trust
--------------------------------
- --------------------------------------------------------------------------------
TOUCHSTONE TOUCHSTONE TOUCHSTONE
AGGRESSIVE CONSERVATIVE ENHANCED
ETF ETF ETF
FUND FUND FUND
--------------------------- --------------------------- ---------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR PERIOD YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 (a) 2005 2004 (a) 2005 2004 (a)
INCREASE IN
NET ASSETS:
OPERATIONS:
Net investment
income $ 170,869 $ 22,795 $ 120,685 $ 8,344 $ 117,649 $ 2,864
Net realized gain
on investments 11,537 -- 7,830 3,512 192,976 --
Net change in
unrealized
appreciation/
depreciation
on investments 409,543 38,690 47,946 24,203 748,809 74,282
- ---------------------------------------------------------------------------------------------------------------
Net increase in
net assets from
operations 591,949 61,485 176,461 36,059 1,059,434 77,146
- ---------------------------------------------------------------------------------------------------------------
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment
income -- (22,795) -- (8,346) -- (2,864)
Realized capital
gains -- -- (3,526) -- -- --
- ---------------------------------------------------------------------------------------------------------------
Total dividends and
distributions -- (22,795) (3,526) (8,346) -- (2,864)
- ---------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from
shares sold 12,934,043 4,420,049 8,165,512 1,066,676 26,723,320 1,437,928
Reinvestment of
dividends and
distributions -- 22,795 3,528 8,346 -- 2,864
Cost of shares
redeemed (2,680,527) (482,330) (864,225) (482,797) (1,822,841) (611,134)
- ---------------------------------------------------------------------------------------------------------------
Net increase
from share
transactions 10,253,516 3,960,514 7,304,815 592,225 24,900,479 829,658
- ---------------------------------------------------------------------------------------------------------------
Total increase in
net assets 10,845,465 3,999,204 7,477,750 619,938 25,959,913 903,940
NET ASSETS:
Beginning
of period 3,999,204 -- 619,938 -- 903,940 --
- ---------------------------------------------------------------------------------------------------------------
End of period $ 14,844,669 $ 3,999,204 $ 8,097,688 $ 619,938 $ 26,863,853 $ 903,940
===============================================================================================================
Undistributed net
investment
income $ 170,869 $ -- $ 120,685 $ -- $ 117,649 $ --
- ---------------------------------------------------------------------------------------------------------------
<page>
TOUCHSTONE
MODERATE
ETF
FUND
---------------------------
FOR THE FOR THE
YEAR PERIOD
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2005 2004 (a)
INCREASE IN
NET ASSETS:
OPERATIONS:
Net investment
income $ 247,656 $ 12,810
Net realized gain
on investments 4,288 --
Net change in
unrealized
appreciation/
depreciation
on investments 325,512 42,025
- ---------------------------------------------------
Net increase in
net assets from
operations 577,456 54,835
- ---------------------------------------------------
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment
income -- (12,814)
Realized capital
gains -- --
- ---------------------------------------------------
Total dividends and
distributions -- (12,814)
- ---------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from
shares sold 18,061,892 2,788,473
Reinvestment of
dividends and
distributions -- 12,814
Cost of shares
redeemed (1,789,919) (555,493)
- ---------------------------------------------------
Net increase
from share
transactions 16,271,973 2,245,794
- ---------------------------------------------------
Total increase in
net assets 16,849,429 2,287,815
NET ASSETS:
Beginning
of period 2,287,815 --
- ---------------------------------------------------
End of period $ 19,137,244 $ 2,287,815
===================================================
Undistributed net
investment
income $ 247,656 $ --
- ---------------------------------------------------
(a) Represents the period from commencement of operations (July 16, 2004)
through December 31, 2004.
The accompanying notes are an integral part of the financial statements.
68
- --------------------------------
Touchstone Variable Series Trust
- --------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share outstanding:
TOUCHSTONE BALANCED FUND
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2005 2004 2003 2002 2001(a)
NET ASSET VALUE, BEGINNING OF YEAR $ 16.32 $ 15.01 $ 12.42 $ 13.96 $ 14.24
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.27 0.25 0.22 0.30 0.38(b)
Net realized and unrealized gain (loss) on investments 0.80 1.20 2.46 (1.57) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.07 1.45 2.68 (1.27) 0.38
- ---------------------------------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.18) (0.14) (0.09) (0.27) (0.38)
In excess of net investment income -- -- -- -- (0.07)
Realized capital gains (0.82) -- -- -- (0.21)
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.00) (0.14) (0.09) (0.27) (0.66)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 16.39 $ 16.32 $ 15.01 $ 12.42 $ 13.96
=================================================================================================================================
TOTAL RETURN 6.61% 9.63% 21.57% (9.09%) 2.67%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $ 30,205 $ 32,094 $ 27,015 $ 23,616 $ 28,227
Ratios to average net assets:
Net expenses 0.90% 0.90% 0.90% 0.90% 0.90%
Net investment income 1.57% 1.73% 1.86% 2.22% 2.69%
Portfolio turnover 87% 66% 75% 86% 59%
- ---------------------------------------------------------------------------------------------------------------------------------
TOUCHSTONE BARON SMALL CAP FUND
FOR THE FOR THE FOR THE
YEAR YEAR SIX MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2003 (e)
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.47 $ 14.45 $ 12.40
- -------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss (0.21) (0.18) (0.09)
Net realized and unrealized gain
(loss) on investments 1.63 4.20 2.14
- -------------------------------------------------------------------------------------------------------
Total from investment operations 1.42 4.02 2.05
- -------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income -- -- --
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 19.89 $ 18.47 $ 14.45
=======================================================================================================
TOTAL RETURN 7.69% 27.82% 16.53%(c)
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $ 27,443 $ 23,336 $ 16,133
Ratios to average net assets:
Net expenses 1.54% 1.65% 1.65%(d)
Expenses before voluntary expense reimbursement NA NA NA
Net investment loss (1.15%) (1.24%) (1.44%)(d)
Loss before voluntary expense reimbursement NA NA NA
Portfolio turnover 14% 23% 32%(d)
- -------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
--------------------------------------------
2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.53 $ 12.90 $ 11.64
- ------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss (0.16) (0.13) (0.03)
Net realized and unrealized gain
(loss) on investments 0.03 (0.24) 1.51
- ------------------------------------------------------------------------------------------------
Total from investment operations (0.13) (0.37) 1.48
- ------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income -- -- (0.22)
- ------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.40 $ 12.53 $ 12.90
================================================================================================
TOTAL RETURN (1.04%) (2.87%) 12.83%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $ 11,926 $ 11,978 $ 6,698
Ratios to average net assets:
Net expenses 1.62% 1.55% 1.55%
Expenses before voluntary expense reimbursement 2.44% 2.32% 3.10%
Net investment loss (1.49%) (1.33%) (0.33%)
Loss before voluntary expense reimbursement (2.32%) (2.10%) (1.88%)
Portfolio turnover 29% 91% 221%
- ------------------------------------------------------------------------------------------------
See Notes to Financial Highlights on page 75
The accompanying notes are an integral part of the financial statements.
69
--------------------------------
Touchstone Variable Series Trust
--------------------------------
TOUCHSTONE CORE BOND FUND
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2005 2004 2003 2002 2001 (a)
NET ASSET VALUE, BEGINNING OF YEAR $ 10.11 $ 10.19 $ 10.23 $ 10.38 $ 10.25
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.40 0.38 0.40 0.40 0.60(b)
Net realized and unrealized gain (loss) on investments (0.23) (0.04) (0.04) 0.42 0.20
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.17 0.34 0.36 0.82 0.80
- -----------------------------------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income -- (0.39) (0.39) (0.97) (0.67)
In excess of net investment income -- (0.03) (0.01) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions -- (0.42) (0.40) (0.97) (0.67)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 10.28 $ 10.11 $ 10.19 $ 10.23 $ 10.38
===================================================================================================================================
TOTAL RETURN 1.68% 3.31% 3.49% 7.93% 7.85%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $ 39,049 $ 40,044 $ 42,580 $ 41,924 $ 34,838
Ratios to average net assets:
Net expenses 0.75% 0.75% 0.75% 0.75% 0.75%
Net investment income 3.76% 3.50% 3.62% 4.57% 5.59%
Portfolio turnover 149% 144% 287% 152% 92%
- -----------------------------------------------------------------------------------------------------------------------------------
TOUCHSTONE EAGLE CAPITAL APPRECIATION FUND
FOR THE FOR THE FOR THE
YEAR YEAR SIX MONTHS
ENDED ENDED ENDED FOR THE YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------------------------
2005 2004 2003 (e) 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.05 $ 11.46 $ 9.83 $ 9.85 $ 15.93 $ 30.25
- ------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.11 0.11 0.03 (0.01) (0.04) (0.10)
Net realized and unrealized gain (loss)
on investments (0.10) 1.60 1.61 (0.01) (4.73) (9.42)
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.01 1.71 1.64 (0.02) (4.77) (9.52)
- ------------------------------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income (0.01) (0.12) (0.01) -- -- --
Realized capital gains -- -- -- -- (1.31) (4.80)
- ------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.01) (0.12) (0.01) -- (1.31) (4.80)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.05 $ 13.05 $ 11.46 $ 9.83 $ 9.85 $ 15.93
==============================================================================================================================
TOTAL RETURN 0.05% 14.89% 16.70%(c) (0.16%) (30.55%) (37.42%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $ 29,461 $ 34,656 $ 33,897 $ 28,623 $ 20,309 $ 32,008
Ratios to average net assets:
Net expenses 1.05% 1.05% 1.05%(d) 1.16% 1.15% 1.07%
Expenses before voluntary expense
reimbursement NA NA NA 1.51% 1.17% 1.07%
Net investment income (loss) 0.75% 0.94% 0.52%(d) (0.19%) (0.33%) (0.45%)
Loss before voluntary expense reimbursement NA NA NA (0.54%) (0.35%) (0.45%)
Portfolio turnover 51% 40% 241%(d) 70% 31% 47%
- ------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Highlights on page 75
The accompanying notes are an integral part of the financial statements.
70
- --------------------------------
Touchstone Variable Series Trust
- --------------------------------
- --------------------------------------------------------------------------------
Financial Highlights continued
Selected data for a share outstanding:
TOUCHSTONE EMERGING GROWTH FUND
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF YEAR $ 20.89 $ 19.64 $ 13.45 $ 18.14 $ 20.22
- --------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss (0.08) (0.15) (0.12) (0.14) (0.13)
Net realized and unrealized gain (loss) on investments 3.28 2.48 6.47 (3.90) (0.39)
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations 3.20 2.33 6.35 (4.04) (0.52)
- --------------------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Realized capital gains (6.46) (1.08) (0.16) (0.65) (1.56)
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 17.63 $ 20.89 $ 19.64 $ 13.45 $ 18.14
====================================================================================================================
TOTAL RETURN 15.29% 12.06% 47.26% (22.31%) (2.62%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $33,511 $34,135 $37,537 $25,408 $36,305
Ratios to average net assets:
Net expenses 1.15% 1.15% 1.15% 1.15% 1.15%
Net investment loss (0.50%) (0.65%) (0.74%) (0.89%) (0.72%)
Portfolio turnover 70% 134% 88% 63% 85%
- --------------------------------------------------------------------------------------------------------------------
TOUCHSTONE ENHANCED DIVIDEND 30 FUND
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF YEAR $ 9.16 $ 8.90 $ 6.81 $ 8.93 $ 10.18
- --------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.20 0.19 0.09 0.10 0.09
Net realized and unrealized gain (loss) on investments (0.48) 0.26 2.09 (2.12) (1.25)
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.28) 0.45 2.18 (2.02) (1.16)
- --------------------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (0.19) (0.09) (0.10) (0.09)
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 8.88 $ 9.16 $ 8.90 $ 6.81 $ 8.93
====================================================================================================================
TOTAL RETURN (3.06%) 5.08% 32.00% (22.67%) (11.45%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $25,360 $29,699 $30,258 $ 7,561 $11,020
Ratios to average net assets:
Net expenses 0.75% 0.75% 0.75% 0.75% 0.75%
Net investment income 2.23% 2.15% 1.57% 1.10% 0.90%
Portfolio turnover 48% 60% 140% 27% 6%
- --------------------------------------------------------------------------------------------------------------------
See Notes to Financial Highlights on page 75
The accompanying notes are an integral part of the financial statements.
71
--------------------------------
Touchstone Variable Series Trust
--------------------------------
TOUCHSTONE GROWTH & INCOME FUND
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF YEAR $ 10.72 $ 9.91 $ 7.78 $ 9.93 $ 11.26
- --------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.18 0.19 0.16 0.19 0.23
Net realized and unrealized gain (loss) on investments 0.02 0.81 2.38 (1.67) (0.82)
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.20 1.00 2.54 (1.48) (0.59)
- --------------------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (0.19) (0.16) (0.33) (0.23)
Realized capital gains (0.57) -- (0.25) (0.34) (0.51)
- --------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.57) (0.19) (0.41) (0.67) (0.74)
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 10.35 $ 10.72 $ 9.91 $ 7.78 $ 9.93
====================================================================================================================
TOTAL RETURN 1.86% 10.10% 32.84% (14.90%) (5.28%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $28,570 $32,791 $32,768 $25,263 $34,123
Ratios to average net assets:
Net expenses 0.85% 0.85% 0.85% 0.85% 0.85%
Net investment income 1.66% 1.78% 1.85% 1.78% 1.13%
Portfolio turnover 48% 43% 58% 69% 149%
- --------------------------------------------------------------------------------------------------------------------
TOUCHSTONE HIGH YIELD FUND
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2005 2004 2003 2002 2001(f)
NET ASSET VALUE, BEGINNING OF YEAR $ 8.26 $ 8.12 $ 7.13 $ 7.47 $ 7.73
- --------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.61 0.64 0.72 0.58 0.78(b)
Net realized and unrealized gain (loss) on investments (0.34) 0.14 0.99 (0.37) (0.25)
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.27 0.78 1.71 0.21 0.53
- --------------------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (0.64) (0.72) (0.55) (0.78)
In excess of net investment income -- -- -- -- (0.01)
- --------------------------------------------------------------------------------------------------------------------
Total dividends and distributions -- (0.64) (0.72) (0.55) (0.79)
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 8.53 $ 8.26 $ 8.12 $ 7.13 $ 7.47
====================================================================================================================
TOTAL RETURN 3.27% 9.55% 23.99% 2.82% 6.93%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $37,853 $42,328 $45,844 $32,529 $18,024
Ratios to average net assets:
Net expenses 0.80% 0.80% 0.74%(g) 0.80% 0.80%
Net investment income 6.91% 7.30% 8.16% 9.72% 9.59%
Portfolio turnover 69% 55% 101% 40% 25%
- --------------------------------------------------------------------------------------------------------------------
See Notes to Financial Highlights on page 75
The accompanying notes are an integral part of the financial statements.
72
- --------------------------------
Touchstone Variable Series Trust
- --------------------------------
- --------------------------------------------------------------------------------
Financial Highlights continued
Selected data for a share outstanding:
TOUCHSTONE MONEY MARKET FUND - CLASS I
FOR THE
PERIOD
FOR THE YEAR ENDED DECEMBER 31, ENDED
------------------------------------------- DECEMBER 31,
2005 2004 2003 2002 2001(h)
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.03 0.01 0.01 0.02 0.02(b)
Net realized and unrealized gain on investments -- -- -- -- 0.00(i)
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.03 0.01 0.01 0.02 0.02
- ---------------------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.03) (0.01) (0.01) (0.02) (0.02)
Realized capital gains -- -- -- -- (0.00)(i)
- ---------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.03) (0.01) (0.01) (0.02) (0.02)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=====================================================================================================================
TOTAL RETURN 3.16% 1.35% 1.01% 1.58% 2.09%(c)
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $42,614 $38,188 $73,278 $ 9,482 $10,300
Ratios to average net assets:
Net expenses 0.28% 0.28% 0.30% 0.60% 0.60%(d)
Net investment income 3.13% 1.28% 0.91% 1.53% 2.95%(d)
- ---------------------------------------------------------------------------------------------------------------------
TOUCHSTONE MONEY MARKET FUND - CLASS SC
FOR THE FOR THE FOR THE
YEAR YEAR PERIOD
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2003(j)
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.03 0.01 0.00(i)
- ---------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.03) (0.01) (0.00)(i)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------
TOTAL RETURN 2.90% 1.08% 0.28%(c)
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $37,342 $25,727 $27,883
Ratios to average net assets:
Net expenses 0.54% 0.54% 0.53%(d)
Net investment income 2.89% 1.06% 0.63%(d)
- ---------------------------------------------------------------------------------------------------------
See Notes to Financial Highlights on page 75
The accompanying notes are an integral part of the financial statements.
73
--------------------------------
Touchstone Variable Series Trust
--------------------------------
TOUCHSTONE THIRD AVENUE VALUE FUND
FOR THE FOR THE FOR THE
YEAR YEAR SIX MONTHS
ENDED ENDED ENDED FOR THE YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, DECEMBER 31, ----------------------------------
2005 2004 2003(e) 2003 2002 2001
NET ASSET VALUE, BEGINNING OF PERIOD $ 23.51 $ 18.71 $ 14.65 $ 16.08 $ 16.79 $ 13.97
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.11 0.05 (0.00)(i) 0.05 0.02 0.15
Net realized and unrealized gain
(loss) on investments 3.98 4.80 4.06 (1.17) (0.61) 4.31
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 4.09 4.85 4.06 (1.12) (0.59) 4.46
- -----------------------------------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income (0.00)(i) (0.05) -- (0.09) (0.12) (0.40)
Realized capital gains (0.71) -- -- (0.22) -- (1.24)
- -----------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.71) (0.05) -- (0.31) (0.12) (1.64)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 26.89 $ 23.51 $ 18.71 $ 14.65 $ 16.08 $ 16.79
===================================================================================================================================
TOTAL RETURN 17.41% 25.93% 27.72%(c) (6.78%) (3.45%) 35.66%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $117,142 $ 92,920 $ 71,600 $ 50,499 $ 48,221 $ 35,066
Ratios to average net assets:
Net expenses 1.05% 1.05% 1.05%(d) 1.10% 1.08% 1.15%
Expenses before voluntary
expense reimbursement NA NA NA 1.15% 1.08% 1.21%
Net investment income (loss) 0.48% 0.27% (0.01%)(d) 0.41% 0.23% 1.15%
Income before voluntary
expense reimbursement NA NA NA 0.36% 0.23% 1.09%
Portfolio turnover 17% 30% 23%(d) 23% 23% 128%
- -----------------------------------------------------------------------------------------------------------------------------------
TOUCHSTONE VALUE PLUS FUND
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2005 2004 2003 2002 2001
NET ASSET VALUE, BEGINNING OF YEAR $ 10.62 $ 9.68 $ 7.53 $ 10.40 $ 10.61
- ---------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.09 0.08 0.08 0.05 0.04
Net realized and unrealized gain (loss) on investments 0.14 0.94 2.15 (2.83) (0.13)
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.23 1.02 2.23 (2.78) (0.09)
- ---------------------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (0.08) (0.08) (0.09) --
Realized capital gains -- -- -- -- (0.12)
- ---------------------------------------------------------------------------------------------------------------------
Total dividends and distributions -- (0.08) (0.08) (0.09) (0.12)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 10.85 $ 10.62 $ 9.68 $ 7.53 $ 10.40
=====================================================================================================================
TOTAL RETURN 2.17% 10.54% 29.72% (26.65%) (0.88%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $17,654 $19,543 $19,561 $ 5,144 $ 7,175
Ratios to average net assets:
Net expenses 1.15% 1.15% 1.15% 1.15% 1.15%
Net investment income 0.80% 0.76% 0.98% 0.59% 0.43%
Portfolio turnover 48% 27% 97% 68% 50%
- ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Highlights on page 75
The accompanying notes are an integral part of the financial statements.
74
- --------------------------------
Touchstone Variable Series Trust
- --------------------------------
- --------------------------------------------------------------------------------
Financial Highlights continued
Selected data for a share outstanding:
TOUCHSTONE TOUCHSTONE
AGGRESSIVE ETF CONSERVATIVE ETF
FUND FUND
FOR THE FOR THE FOR THE FOR THE
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004(k) 2005 2004(k)
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.80 $ 10.00 $ 10.38 $ 10.00
- ---------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.13 0.06 0.16 0.14
Net realized and unrealized gain on investments 0.37 0.80 0.19 0.38
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.50 0.86 0.35 0.52
- ---------------------------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (0.06) -- (0.14)
Realized capital gains -- -- (0.01) --
- ---------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions -- (0.06) (0.01) (0.14)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.30 $ 10.80 $ 10.72 $ 10.38
===========================================================================================================================
TOTAL RETURN 4.63% 8.62%(c) 3.32% 5.22%(c)
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $14,845 $ 3,999 $ 8,098 $ 620
Ratios to average net assets:
Net expenses 0.50% 0.50%(d) 0.50% 0.50%(d)
Net investment income 1.80% 7.08%(d) 3.01% 2.54%(d)
Portfolio turnover 38% 0%(d) 19% 37%(d)
- ---------------------------------------------------------------------------------------------------------------------------
TOUCHSTONE TOUCHSTONE
ENHANCED ETF MODERATE ETF
FUND FUND
FOR THE FOR THE FOR THE FOR THE
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004(k) 2005 2004(k)
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.30 $ 10.00 $ 10.69 $ 10.00
- ---------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.05 0.04 0.14 0.06
Net realized and unrealized gain on investments 0.63 1.30 0.28 0.69
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.68 1.34 0.42 0.75
- ---------------------------------------------------------------------------------------------------------------------------
LESS: DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (0.04) -- (0.06)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.98 $ 11.30 $ 11.11 $ 10.69
===========================================================================================================================
TOTAL RETURN 6.02% 13.36%(c) 3.93% 7.51%(c)
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $26,864 $ 904 $19,137 $ 2,288
Ratios to average net assets:
Net expenses 0.50% 0.50%(d) 0.50% 0.50%(d)
Net investment income 1.09% 1.06%(d) 2.48% 3.91%(d)
Portfolio turnover 64% 0%(d) 21% 0%(d)
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Highlights on page 75
The accompanying notes are an integral part of the financial statements.
75
--------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
--------------------------------
NOTES TO FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(a) The Funds adopted the provisions of the AICPA Audit and Accounting Guide
for Investment Companies in 2001 and began amortizing premiums and
discounts on debt securities using the daily, effective yield method. The
effect of the change for the year ended December 31, 2001, for the
Touchstone Balanced Fund and the Touchstone Core Bond Fund was a decrease
in net investment income of $.013, for each Fund, an increase in net
realized and unrealized gains of $.013, for each Fund, and a decrease in
the ratio of net investment income from 2.78% and 5.72%, to 2.69% and
5.59%, respectively.
(b) Calculated using average shares outstanding throughout the period.
(c) Not annualized.
(d) Annualized.
(e) Effective August 20, 2003, the Fund changed its fiscal year end to
December 31.
(f) The Funds adopted the provisions of the AICPA Audit and Accounting Guide
for Investment Companies in 2001 and began amortizing premiums and
discounts on debt securities using the daily, effective yield method. The
effect of the change for the year ended December 31, 2001, for the
Touchstone High Yield Fund was a decrease in net investment income of
$.014, an increase in net realized and unrealized gains of $.014 and a
decrease in the ratio of net investment income from 9.78% to 9.59%.
(g) Absent voluntary fee waivers by the Advisor, the ratio of expenses to
average net assets would have been 0.80%.
(h) The Fund commenced operations on May 1, 2001.
(i) Less than $0.01 per share.
(j) This Class commenced operations on July 15, 2003.
(k) Represents the period from commencement of operations (July 16, 2004)
through December 31, 2004.
The accompanying notes are an integral part of the financial statements.
76
- --------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
- --------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 2005
1.ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Touchstone Variable Series Trust (the 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. The Trust consists of: Touchstone Balanced Fund, Touchstone Baron Small
Cap Fund, Touchstone Core Bond Fund, Touchstone Eagle Capital Appreciation Fund,
Touchstone Emerging Growth Fund, Touchstone Enhanced Dividend 30 Fund,
Touchstone Growth & Income Fund, Touchstone High Yield Fund, Touchstone Money
Market Fund, Touchstone Third Avenue Value Fund, Touchstone Value Plus Fund,
Touchstone Aggressive ETF Fund, Touchstone Conservative ETF Fund, Touchstone
Enhanced ETF Fund, and Touchstone Moderate ETF Fund (individually a "Fund" and
collectively the "Funds").
The Declaration of Trust permits the Trust to issue an unlimited number of
shares of beneficial interest of each Fund. Shares of beneficial interest of
each Fund are available as a funding vehicle for the separate accounts of life
insurance companies issuing variable annuity and variable life insurance
policies. As of December 31, 2005, outstanding shares were issued to separate
accounts of Western-Southern Life Assurance Company, Integrity Life Insurance
Company, National Integrity Life Insurance Company and Columbus Life Insurance
Company, which are all part of the Western & Southern Financial Group
(Western-Southern), and 100% of the outstanding shares of the Trust were
collectively owned by affiliates of Western-Southern and certain supplemental
executive retirement plans sponsored by Western-Southern and its affiliates.
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 income and expenses during the reporting
period. Actual results could differ from those estimates.
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 approved 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.
77
--------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
--------------------------------
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.
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date except
that certain dividends from foreign securities are recorded as soon as the Trust
is informed of the ex-dividend date. Interest income, which includes the
amortization of premium and accretion of discount, if any, is recorded on an
accrual basis. Dividend and interest income is recorded net of foreign taxes
where recovery of such taxes is not assured.
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. For the year ended
December 31, 2005, 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.
PORTFOLIO SECURITIES LOANED. Each Fund may lend its portfolio securities.
Lending portfolio securities exposes a Fund to the risk that the borrower may
fail to return the loaned securities or may not be able to provide additional
collateral or that the Fund may experience delays in recovery of the loaned
securities or loss of rights in the collateral if the borrower fails
financially. To minimize these risks, the borrower must agree to maintain
collateral marked to market daily, in the form of cash and/or liquid securities,
with the Fund's custodian in an amount at least equal to the market value of the
loaned securities. As of December 31, 2005, the following Funds loaned
securities and received collateral as follows:
Fair Value of Value of
Fund Securities Loaned Collateral Received
- -------------------------------------------------------------------------------------
Touchstone Balanced Fund $1,134,232 $1,171,354
Touchstone Baron Small Cap Fund $4,280,053 $4,417,383
Touchstone Eagle Capital Appreciation Fund $1,796,152 $1,858,941
Touchstone Emerging Growth Fund $4,983,820 $5,140,258
Touchstone Enhanced Dividend 30 Fund $1,850,590 $1,903,932
Touchstone Growth & Income Fund $ 484,852 $ 494,833
Touchstone High Yield Fund $ 714,748 $ 732,163
Touchstone Value Plus Fund $ 770,751 $ 786,617
78
- --------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
- --------------------------------
- --------------------------------------------------------------------------------
Notes to Financial Statements continued
All collateral received as cash and securities is received, held and
administered by the Funds' custodian for the benefit of the Funds in the
applicable custody account or other account established for the purpose of
holding collateral.
The Funds receive compensation in the form of fees, or they retain a portion of
interest on the investment of any cash received as collateral. The Funds also
continue 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 Funds have the right under the lending agreement to
recover the securities from the borrower on demand.
DIVIDENDS AND DISTRIBUTIONS. Income dividends to shareholders for all Funds in
the Trust, except the Touchstone Money Market Fund, are declared and paid by
each Fund annually. The Touchstone Money Market Fund will declare dividends
daily and pay dividends monthly. Distributions to shareholders of net realized
capital gains, if any, are declared and paid annually. Income dividends and
capital gain distributions are determined in accordance with Federal income tax
regulations.
FEDERAL INCOME TAX. It is each Fund's policy to continue to comply with the
special provisions of the Internal Revenue Code applicable to regulated
investment companies. As provided therein, in any fiscal year in which a Fund so
qualifies and distributes at least 90% of its taxable net income, the Fund (but
not the shareholders) will be relieved of Federal income tax on the income
distributed. Accordingly, no provision for income tax has been made.
FORWARD FOREIGN CURRENCY AND SPOT CONTRACTS. A Fund may enter into forward
foreign currency and spot contracts to protect securities and related
receivables and payables against fluctuations in foreign currency rates. A
forward foreign currency contract is an agreement to buy or sell currencies of
different countries on a specified future date at a specified rate.
Risks associated with such contracts include the movement in the value of the
foreign currency relative to the U.S. dollar and the ability of the counterparty
to perform. The market value of the contract will fluctuate with changes in
currency exchange rates. Contracts are valued daily based on procedures
established by and under the general supervision of the Board of Trustees of the
Trust and the change in the market value is recorded by the Funds as unrealized
appreciation or depreciation of forward foreign currency contracts. For the year
ended December 31, 2005, the following Fund had the following open forward
foreign currency contract:
Contracts To In Exchange Unrealized
Fund Name Maturity Deliver For Value Appreciation
Touchstone
Balanced Fund
Sales 02/22/06 GBP 117,800 $202,852 $202,702 $150
- --------------------------------------------------------------------------------
GBP -- Great Britain Pound
REPURCHASE AGREEMENTS. In connection with transactions in repurchase agreements,
it is each Fund's policy that its 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.
79
--------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
--------------------------------
DOLLAR ROLL TRANSACTIONS. The Touchstone Core Bond Fund may enter into dollar
roll transactions with financial institutions to take advantage of opportunities
in the mortgage market. A dollar roll transaction involves a sale by the Fund of
securities that it holds with an agreement by the Fund to repurchase similar
securities at an agreed upon price and date. The securities repurchased will
bear the same interest or yield as those sold, but generally will be
collateralized at the time of delivery by different pools of mortgages with
different prepayment histories than those securities sold. During the period
between the sale and repurchase, the Fund will not be entitled to receive
interest and principal payments on the securities sold. Dollar roll transactions
involve the risk that the buyer of the securities sold by the Fund may be unable
to deliver the securities when the Fund seeks to repurchase them. The potential
loss is limited, however, to the excess of the market price gain over the cash
proceeds from the sale.
SECURITIES TRANSACTIONS. Security transactions are accounted for on trade date.
Securities sold are determined on a specific identification basis.
ALLOCATIONS. Investment income earned, realized capital gains and losses, and
unrealized appreciation and depreciation for the Funds are allocated daily to
each class of shares based upon its proportionate share of total net assets of
the Fund. Class specific expenses are charged directly to the class incurring
the expense. Common expenses, which are not attributable to a specific class,
are allocated daily to each class of shares based upon its proportionate share
of total net assets of the Fund. Expenses not directly billed to a Fund are
allocated proportionally among all Funds daily in relation to net assets of each
Fund or another reasonable measure.
2. RISKS ASSOCIATED WITH FOREIGN INVESTMENTS
Some of the Funds may invest in the securities of foreign issuers. Investing in
securities issued by companies whose principal business activities are outside
the U.S. may involve significant risks not present in domestic investments. For
example, there is generally less publicly available information about foreign
companies, particularly those not subject to the disclosure and reporting
requirements of the U.S. securities laws. Foreign issuers are generally not
bound by uniform accounting, auditing, financial reporting requirements and
standards of practice comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of
the Fund, political or financial instability or diplomatic and other
developments which could affect such investments. Foreign stock markets, while
growing in volume and sophistication, are generally not as developed as those in
the U.S., and securities of some foreign issuers (particularly those located in
developing countries) may be less liquid and more volatile than securities of
comparable U.S. companies. In general, there is less overall governmental
supervision and regulation of foreign securities markets, broker-dealers, and
issuers than in the U.S.
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISOR. The President and certain other officers of the Trust are
also officers of Touchstone Advisors, Inc. (the Advisor), the Trust's investment
advisor, Touchstone Securities, Inc. (the Underwriter), the Trust's principal
underwriter, or Integrated Fund Services, Inc. (Integrated), the Trust's
administrator, transfer agent and accounting services agent. The Advisor, the
Underwriter and Integrated are each wholly-owned, indirect subsidiaries of The
Western and Southern Life Insurance Company.
80
- --------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
- --------------------------------
- --------------------------------------------------------------------------------
Notes to Financial Statements continued
Under the terms of the Investment Advisory Agreement, each Fund pays an
investment advisory fee that is computed daily and paid monthly based on a
percentage of each Fund's average daily net assets as listed below:
Touchstone Touchstone
Touchstone Touchstone Touchstone Eagle Capital Touchstone Enhanced
Balanced Baron Small Core Bond Appreciation Emerging Dividend 30
Fund Cap Fund Fund Fund Growth Fund Fund
Rate 0.80% 1.05% 0.55% 0.75% 0.80% 0.65%
- --------------------------------------------------------------------------------------------------
Touchstone Touchstone Touchstone Touchstone Touchstone
Growth & High Yield Money Market Third Avenue Value Plus
Income Fund Fund Fund Value Fund Fund
Rate 0.80% 0.50% 0.18% 0.80% 0.75%
- --------------------------------------------------------------------------------------------------
Touchstone Touchstone Touchstone Touchstone
Aggressive Conservative Enhanced Moderate
ETF Fund ETF Fund ETF Fund ETF Fund
Rate 0.40% 0.40% 0.40% 0.40%
- --------------------------------------------------------------------------------------------------
Subject to review and approval by the Board of Trustees, the Advisor has entered
into certain sub-advisory agreements for the investment advisory services in
connection with the management of each of the Funds. The Advisor (not the Fund)
pays each sub-advisor a fee that is computed daily and paid monthly based on
average daily net assets, for services provided. For the year ended December 31,
2005, the following sub-advisory agreements are in place:
TOUCHSTONE BALANCED FUND Oppenheimer Capital LLC*
TOUCHSTONE BARON SMALL CAP FUND BAMCO, Inc.
TOUCHSTONE CORE BOND FUND Fort Washington Investment Advisors, Inc.
TOUCHSTONE EAGLE CAPITAL Eagle Asset Management, Inc.
APPRECIATION FUND
TOUCHSTONE EMERGING TCW Investment Management Company LLC
GROWTH FUND and Westfield Capital Management Company
LLC
TOUCHSTONE ENHANCED Todd Investment Advisors, Inc.
DIVIDEND 30 FUND
TOUCHSTONE GROWTH & Deutsche Investment Management
INCOME FUND Americas Inc.
TOUCHSTONE HIGH YIELD FUND Fort Washington Investment Advisors, Inc.
TOUCHSTONE MONEY MARKET FUND Fort Washington Investment Advisors, Inc.
TOUCHSTONE THIRD AVENUE Third Avenue Management LLC
VALUE FUND
TOUCHSTONE VALUE PLUS FUND Fort Washington Investment Advisors, Inc.
TOUCHSTONE AGGRESSIVE ETF FUND Todd Investment Advisors, Inc.
TOUCHSTONE CONSERVATIVE ETF FUND Todd Investment Advisors, Inc.
TOUCHSTONE ENHANCED ETF FUND Todd Investment Advisors, Inc.
TOUCHSTONE MODERATE ETF FUND Todd Investment Advisors, Inc.
* On June 28, 2005, the Balanced Fund changed its sub-advisor from OpCap
Advisors LLC to OpCap's parent company, Oppenheimer Capital LLC.
Fort Washington Investment Advisors, Inc. and Todd Investment Advisors, Inc. are
affiliates of the Advisor and of Western-Southern.
81
--------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
--------------------------------
SPONSOR. The Trust, on behalf of each Fund, has entered into a Sponsor Agreement
with the Advisor. The Advisor provides oversight of the various service
providers to the Trust, including the Trust's administrator, custodian and
transfer agent. The Advisor receives a fee from each Fund equal on an annual
basis to 0.20% of the average daily net assets of that Fund. The Advisor has
waived all fees under the Sponsor Agreement for the year ended December 31, 2005
on all Funds except as follows:
Net Sponsor Fees
Fund Paid by Fund
------------------------------------------------------------------------
Touchstone Baron Small Cap Fund $ 51,368
Touchstone Core Bond Fund $ 1,006
Touchstone Eagle Capital Appreciation Fund $ 26,739
Touchstone Emerging Growth Fund $ 23,421
Touchstone Enhanced Dividend 30 Fund $ 2,199
Touchstone High Yield Fund $ 24,878
Touchstone Money Market Fund $ 255
Touchstone Third Avenue Value Fund $101,020
Touchstone Value Plus Fund $ 7,772
The Sponsor Agreement may be terminated by the Advisor or by the Trust on not
less than 30 days prior written notice. See Note 5 for further information
regarding the Sponsor Agreement.
ADMINISTRATION, ACCOUNTING SERVICES AND TRANSFER AGENCY AGREEMENT. Under the
terms of the Administration, Accounting Services and Transfer Agency Agreement
between the Trust and Integrated, Integrated supplies non-investment related
administrative and compliance services for the Funds. Integrated supervises the
preparation of tax returns, reports to shareholders, reports to and filings with
the Securities and Exchange Commission and state securities commissions and
materials for meetings of the Board of Trustees. Integrated calculates the daily
net asset value per share and maintains the financial books and records.
Integrated performs transfer agent and other shareholder services for the Trust.
For these services, Integrated receives a monthly fee from each Fund based on
average daily net assets, subject to a minimum monthly fee. Integrated has
waived all fees in connection with the transfer agency services it provides. In
addition, each Fund pays Integrated certain out-of-pocket expenses incurred by
Integrated in obtaining valuations of such Fund's portfolio securities.
UNDERWRITING AGREEMENT. The Underwriter acts as exclusive agent for the
distribution of the Funds' shares. The Underwriter receives no compensation
under this agreement.
PLAN OF DISTRIBUTION. The Trust has a Plan of Distribution (Class SC Plan) under
which shares of the Touchstone Money Market Fund Class SC may directly incur or
reimburse the Advisor or the Underwriter for expenses related to the
distribution and promotion of shares. The annual limitation for payment of such
expenses under the Class SC Plan is 0.25% of average daily net assets
attributable to such shares.
COMPLIANCE SERVICES AGREEMENT. Under the terms of the Compliance Services
Agreement between the Trust and Integrated, Integrated provides certain
compliance services to the Trust, including developing and assisting in
implementing a compliance program for Integrated on behalf of the Funds and
providing administrative support services to the Funds' Compliance Program and
Chief Compliance Officer. For these services, Integrated receives a quarterly
fee from each Fund.
82
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TOUCHSTONE VARIABLE SERIES TRUST
- --------------------------------
- --------------------------------------------------------------------------------
Notes to Financial Statements continued
AFFILIATED TRANSACTIONS. Each Fund, except the Touchstone Money Market Fund, may
invest in the Touchstone Institutional Money Market Fund, subject to compliance
with the several conditions set forth in an order received by the Trust from the
Securities and Exchange Commission. To the extent that the other Touchstone
Funds are invested in the Touchstone Institutional Money Market Fund, the
Advisor and administrator will be paid additional fees from the Touchstone
Institutional Money Market Fund that may not be waived or reimbursed.
A summary of each Fund's investment in the Touchstone Institutional Money Market
Fund, for the year ended December 31, 2005, is noted below:
SHARE ACTIVITY
-----------------------------------------------------
Balance Balance Value
12/31/04 Purchases Sales 12/31/05 Dividends 12/31/05
- ------------------------------------------------------------------------------------------------------------------------------------
Touchstone Balanced Fund
Touchstone Institutional
Money Market Fund -- 5,792,448 5,195,625 596,823 $ 10,432 $ 596,823
Touchstone Baron Small Cap Fund
Touchstone Institutional
Money Market Fund -- 3,983,110 3,604,235 378,875 $ 7,134 $ 378,875
Touchstone Core Bond Fund
Touchstone Institutional
Money Market Fund -- 14,277,583 10,585,726 3,691,857 $ 22,431 $ 3,691,857
Touchstone Eagle Capital Appreciation Fund
Touchstone Institutional
Money Market Fund -- 9,046,239 6,531,535 2,514,704 $ 46,216 $ 2,514,704
Touchstone Emerging Growth Fund
Touchstone Institutional
Money Market Fund -- 8,542,583 7,388,793 1,153,790 $ 13,302 $ 1,153,790
Touchstone Enhanced Dividend 30 Fund
Touchstone Institutional
Money Market Fund -- 5,651,307 4,807,682 843,625 $ 7,780 $ 843,625
Touchstone Growth & Income Fund
Touchstone Institutional
Money Market Fund -- 14,252,484 2,748,632 11,503,852 $ 98,940 $11,503,852
Touchstone High Yield Fund
Touchstone Institutional
Money Market Fund -- 10,815,746 8,005,207 2,810,539 $ 18,255 $ 2,810,539
Touchstone Third Avenue Value Fund
Touchstone Institutional
Money Market Fund -- 29,935,070 9,893,192 20,041,878 $ 274,939 $20,041,878
Touchstone Value Plus Fund
Touchstone Institutional
Money Market Fund -- 2,239,562 1,709,428 530,134 $ 5,970 $ 530,134
Touchstone Aggressive ETF Fund
Touchstone Institutional
Money Market Fund -- 3,456,311 3,121,076 335,235 $ 4,344 $ 335,235
Touchstone Conservative ETF Fund
Touchstone Institutional
Money Market Fund -- 2,815,046 2,617,420 197,626 $ 2,934 $ 197,626
Touchstone Enhanced ETF Fund
Touchstone Institutional
Money Market Fund -- 8,807,960 8,120,427 687,533 $ 9,936 $ 687,533
Touchstone Moderate ETF Fund
Touchstone Institutional
Money Market Fund -- 5,762,250 5,188,969 573,281 $ 6,700 $ 573,281
83
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4. CAPITAL SHARE TRANSACTIONS
Capital share transactions for the Touchstone Money Market Fund are identical to
the dollar value of those transactions as shown in the Statements of Changes in
Net Assets. Proceeds and payments on capital shares as shown in the Statements
of Changes in Net Assets are the result of the following capital share
transactions for the periods shown.
Touchstone Balanced Touchstone Baron
Fund Small Cap Fund
For the For the For the For the
Year Year Year Year
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2005 2004 2005 2004
Shares issued 221,240 460,536 350,319 520,230
Shares reinvested 107,217 16,130 -- --
Shares redeemed (452,511) (309,205) (233,860) (373,219)
-------------------------------------------------------------
Net increase (decrease) in shares
outstanding (124,054) 167,461 116,459 147,011
Shares outstanding, beginning of year 1,966,946 1,799,485 1,263,501 1,116,490
-------------------------------------------------------------
Shares outstanding, end of year 1,842,892 1,966,946 1,379,960 1,263,501
Touchstone Core Touchstone Eagle Capital
Bond Fund Appreciation Fund
For the For the For the For the
Year Year Year Year
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2005 2004 2005 2004
Shares issued 372,178 757,664 77,605 180,228
Shares reinvested -- 156,919 2,034 24,114
Shares redeemed (535,835) (1,132,118) (476,687) (505,965)
-------------------------------------------------------------
Net decrease in shares outstanding (163,657) (217,535) (397,048) (301,623)
Shares outstanding, beginning of year 3,960,942 4,178,477 2,655,316 2,956,939
-------------------------------------------------------------
Shares outstanding, end of year 3,797,285 3,960,942 2,258,268 2,655,316
Touchstone Emerging Touchstone Enhanced
Growth Fund Dividend 30 Fund
For the For the For the For the
Year Year Year Year
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2005 2004 2005 2004
Shares issued 205,023 445,834 502,702 476,879
Shares reinvested 510,256 105,026 -- 66,456
Shares redeemed (448,567) (828,071) (887,517) (703,854)
-------------------------------------------------------------
Net increase (decrease) in shares
outstanding 266,712 (277,211) (384,815) (160,519)
Shares outstanding, beginning of year 1,634,051 1,911,262 3,241,076 3,401,595
-------------------------------------------------------------
Shares outstanding, end of year 1,900,763 1,634,051 2,856,261 3,241,076
Touchstone Growth Touchstone High
& Income Fund Yield Fund
For the For the For the For the
Year Year Year Year
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2005 2004 2005 2004
Shares issued 117,609 354,687 2,417,219 3,173,604
Shares reinvested 144,551 53,476 -- 366,066
Shares redeemed (562,238) (653,404) (3,104,305) (4,058,379)
-------------------------------------------------------------
Net decrease in shares outstanding (300,078) (245,241) (687,086) (518,709)
Shares outstanding, beginning of year 3,060,135 3,305,376 5,125,521 5,644,230
-------------------------------------------------------------
Shares outstanding, end of year 2,760,057 3,060,135 4,438,435 5,125,521
84
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TOUCHSTONE VARIABLE SERIES TRUST
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- --------------------------------------------------------------------------------
Notes to Financial Statements continued
Touchstone Third Touchstone Value
Avenue Value Fund Plus Fund
For the For the For the For the
Year Year Year Year
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2005 2004 2005 2004
Shares issued 954,865 909,709 218,558 246,424
Shares reinvested 111,946 8,719 -- 13,792
Shares redeemed (663,115) (792,942) (432,857) (441,342)
-------------------------------------------------------------
Net increase (decrease) in shares
outstanding 403,696 125,486 (214,299) (181,126)
Shares outstanding, beginning of year 3,952,190 3,826,704 1,840,629 2,021,755
-------------------------------------------------------------
Shares outstanding, end of year 4,355,886 3,952,190 1,626,330 1,840,629
Touchstone Touchstone
Aggressive Conservative
ETF Fund ETF Fund
For the For the For the For the
Year Period Year Period
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2005 2004(a) 2005 2004(a)
Shares issued 1,185,928 413,251 778,609 105,122
Shares reinvested -- 2,111 330 804
Shares redeemed (242,515) (45,135) (83,036) (46,181)
-------------------------------------------------------------
Net increase in shares outstanding 943,413 370,227 695,903 59,745
Shares outstanding, beginning of period 370,227 -- 59,745 --
-------------------------------------------------------------
Shares outstanding, end of period 1,313,640 370,227 755,648 59,745
Touchstone Touchstone
Enhanced Moderate
ETF Fund ETF Fund
For the For the For the For the
Year Period Year Period
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2005 2004(a) 2005 2004(a)
Shares issued 2,323,299 134,808 1,673,453 265,916
Shares reinvested -- 253 -- 1,199
Shares redeemed (160,264) (55,039) (165,563) (53,002)
-------------------------------------------------------------
Net increase in shares outstanding 2,163,035 80,022 1,507,890 214,113
Shares outstanding, beginning of period 80,022 -- 214,113 --
-------------------------------------------------------------
Shares outstanding, end of period 2,243,057 80,022 1,722,003 214,113
(a) Represents the period from the commencement of operations (July 16, 2004)
through December 31, 2004.
85
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TOUCHSTONE VARIABLE SERIES TRUST
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5. EXPENSE REIMBURSEMENTS
The Advisor has contractually agreed to waive its fees under the Sponsor
Agreement or reimburse certain other fees and expenses of each Fund, such that
after such waivers and reimbursements, the aggregate operating expenses of each
Fund do not exceed that Fund's expense cap (the Expense Cap). For this purpose,
operating expenses are exclusive of interest, taxes, brokerage commissions and
other portfolio transaction expenses, capital expenditures and extraordinary
expenses. For financial reporting purposes for the year ended December 31, 2005,
Custodian fees reduced by the Custodian were $674, $1,523 and $2,587 for the
Touchstone Balanced Fund, the Touchstone Eagle Capital Appreciation Fund and the
Touchstone Value Plus Fund, respectively. There was no effect on net investment
income. Each Fund's Expense Cap, as calculated on an annual basis, and as a
percentage of average daily net assets of the Fund, is listed below. Also listed
are the amounts of Sponsor fees waived by the Advisor under the Sponsor
Agreement, the amount of Advisory fees waived and other expenses reimbursed by
the Advisor and the amount of Transfer agent fees waived by the Transfer agent
for each Fund for the year ended December 31, 2005:
Touchstone Touchstone Touchstone Touchstone
Touchstone Baron Touchstone Eagle Capital Emerging Enhanced
Balanced Small Cap Core Bond Appreciation Growth Dividend 30
Fund Fund Fund Fund Fund Fund
Expense cap 0.90% 1.65% 0.75% 1.05% 1.15% 0.75%
Sponsor fees waived $ 61,448 $ -- $ 78,976 $36,787 $40,406 $50,178
Advisory fees waived $ 51,516 $ -- $ 4,557 $ 3,497 $ 6,541 $48,205
Fees reduced by Custodian $ 674 $ -- $ -- $ 1,523 $ -- $ --
Transfer agent fees waived $ 12,000 $ 12,000 $ 12,000 $12,000 $12,000 $12,000
- ------------------------------------------------------------------------------------------------------------------------------
Touchstone Touchstone Touchstone Touchstone
Growth & Touchstone Money Market - Money Market - Third Avenue Touchstone
Income High Yield Class I Class SC Value Value Plus
Fund Fund Fund Fund Fund Fund
Expense cap 0.85% 0.80% 0.28% 0.54% 1.05% 1.15%
Sponsor fees waived $ 60,312 $ 53,301 $ 88,625 $70,915 $101,510 $29,855
Advisory fees waived $ 60,119 $ 2,276 $ 32,270 $21,853 $ -- $ 3,221
Fees reduced by Custodian $ -- $ -- $ -- $ -- $ -- $ 2,587
Transfer agent fees waived $ 12,000 $ 12,000 $ 6,000 $ 6,000 $12,000 $12,000
- ------------------------------------------------------------------------------------------------------------------------------
Touchstone Touchstone Touchstone Touchstone
Aggressive Conservative Enhanced Moderate
ETF Fund ETF Fund ETF Fund ETF Fund
Expense cap 0.50% 0.50% 0.50% 0.50%
Sponsor fees waived $ 18,916 $ 7,980 $ 21,401 $19,884
Advisory fees waived and/or
expenses reimbursed $ 59,950 $ 64,429 $ 59,190 $58,944
Transfer agent fees waived $ 12,000 $ 12,000 $ 12,000 $12,000
- ------------------------------------------------------------------------------------------------------------------------------
86
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- --------------------------------------------------------------------------------
Notes to Financial Statements continued
6. PURCHASES AND SALES OF INVESTMENT SECURITIES
Investment transactions (excluding purchases and sales of U.S. government
obligations, U.S. government agency obligations and short-term investments) for
the year ended December 31, 2005 were as follows:
Touchstone Touchstone Touchstone
Touchstone Baron Touchstone Eagle Capital Emerging
Balanced Small Cap Core Bond Appreciation Growth
Fund Fund Fund Fund Fund
Cost of Purchases $26,138,376 $ 5,755,816 $53,441,165 $14,790,019 $21,785,490
Proceeds from Sales $29,356,650 $ 3,529,035 $52,244,910 $19,004,945 $25,671,593
- --------------------------------------------------------------------------------------------------------
Touchstone Touchstone Touchstone
Enhanced Growth & Touchstone Third Avenue Touchstone
Dividend 30 Income High Yield Value Value Plus
Fund Fund Fund Fund Fund
Cost of Purchases $12,401,064 $12,909,411 $25,554,241 $15,601,159 $ 8,799,058
Proceeds from Sales $15,309,700 $28,612,245 $28,160,835 $15,203,983 $11,279,092
- --------------------------------------------------------------------------------------------------------
Touchstone Touchstone Touchstone Touchstone
Aggressive Conservative Enhanced Moderate
ETF Fund ETF Fund ETF Fund ETF Fund
Cost of Purchases $13,480,908 $ 8,071,612 $31,305,305 $18,341,397
Proceeds from Sales $ 3,538,740 $ 748,743 $ 6,807,819 $ 2,076,026
- --------------------------------------------------------------------------------------------------------
7. FEDERAL TAX INFORMATION
The tax character of distributions paid for the periods ended December 31, 2005
and 2004 was as follows:
Touchstone
Touchstone Touchstone Touchstone Eagle Capital
Balanced Baron Small Cap Core Bond Appreciation
Fund Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2005 2004 2005 2004 2005 2004
From ordinary income $ 423,860 $ 263,238 $ -- $ -- $ -- $1,586,452 $ 26,545 $ 314,691
From long-term capital gains 1,332,554 -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
$1,756,414 $ 263,238 $ -- $ -- $ -- $1,586,452 $ 26,545 $ 314,691
====================================================================================================================================
Touchstone Touchstone Touchstone Touchstone
Emerging Enhanced Growth & High
Growth Dividend 30 Income Yield
Fund Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2005 2004 2005 2004 2005 2004
From ordinary income $1,573,854 $ 764,305 $ -- $ 608,737 $ 9,376 $ 573,261 $ -- $3,023,703
From long-term capital gains 7,432,171 1,342,515 -- -- 1,493,657 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
$9,006,025 $2,106,820 $ -- $ 608,737 $1,503,333 $ 573,261 $ -- $3,023,703
====================================================================================================================================
<page>
Touchstone Touchstone Touchstone
Money Third Avenue Value
Market Value Plus
Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2005 2004 2005 2004
From ordinary income $2,417,457 $1,169,796 $ 865,653 $ 204,994 $ -- $ 146,469
From long-term capital gains -- -- 2,156,836 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
$2,417,457 $1,169,796 $3,022,489 $ 204,994 $ -- $ 146,469
====================================================================================================================================
Touchstone Touchstone Touchstone Touchstone
Aggressive Conservative Enhanced Moderate
ETF ETF ETF ETF
Fund Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2005 2004 2005 2004 2005 2004
From ordinary income $ -- $ 22,795 $ 3,526 $ 8,346 $ -- $ 2,864 $ -- $ 12,814
- ------------------------------------------------------------------------------------------------------------------------------------
87
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The following information is computed on a tax basis for each item as of
December 31, 2005:
Touchstone Touchstone Touchstone
Touchstone Touchstone Core Eagle Capital Emerging
Balanced Baron Small Cap Bond Appreciation Growth
Fund Fund Fund Fund Fund
Cost of portfolio investments $29,419,827 $22,022,003 $40,719,061 $29,469,839 $31,614,442
- ----------------------------------------------------------------------------------------------------------------------
Gross unrealized appreciation 2,672,395 9,833,346 79,866 2,549,577 7,508,970
Gross unrealized depreciation (442,239) (408,709) (494,439) (337,459) (542,400)
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) 2,230,156 9,424,637 (414,573) 2,212,118 6,966,570
Capital loss carryforward -- -- (362,634) (7,826,628) --
Post-October losses -- -- (177,008) -- --
Undistributed ordinary income 530,005 -- 1,596,915 239,438 --
Undistributed long-term gains 2,725,233 847,283 -- 1,918,613
- ----------------------------------------------------------------------------------------------------------------------
Accumulated earnings (deficit) $ 5,485,394 $10,271,920 $ 642,700 $(5,375,072) $ 8,885,183
- ----------------------------------------------------------------------------------------------------------------------
Touchstone Touchstone Touchstone Touchstone
Enhanced Growth & Touchstone Money Third Avenue Touchstone
Dividend 30 Income High Yield Market Value Value Plus
Fund Fund Fund Fund Fund Fund
Cost of portfolio
investments $28,224,642 $27,498,837 $39,696,030 $79,331,431 $83,404,071 $16,041,618
- ----------------------------------------------------------------------------------------------------------------------
Gross unrealized
appreciation 1,540,791 1,700,222 1,001,666 -- 34,581,883 2,969,412
Gross unrealized
depreciation (2,492,820) (347,128) (541,756) -- (1,791,019) (541,565)
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized
appreciation
(depreciation) (952,029) 1,353,094 459,910 -- 32,790,864 2,427,847
Capital loss
carryforward (408,210) -- (1,936,164) (442,801) (3,362,272) (5,915,263)
Post-October losses -- -- (67,962) -- (8,994) --
Undistributed ordinary
income 583,832 648,768 2,695,173 -- 1,428,869 150,839
Undistributed
long-term gains -- 2,556,439 -- -- 6,531,092 --
- ----------------------------------------------------------------------------------------------------------------------
Accumulated
earnings (deficit) $ (776,407) $ 4,558,301 $ 1,150,957 $ (442,801) $37,379,559 $(3,336,577)
- ----------------------------------------------------------------------------------------------------------------------
Touchstone Touchstone Touchstone Touchstone
Aggressive Conservative Enhanced Moderate
ETF ETF ETF ETF
Fund Fund Fund Fund
Cost of portfolio investments $14,234,708 $ 8,115,495 $26,190,628 $19,047,279
- ----------------------------------------------------------------------------------------------------------------------
Gross unrealized appreciation 455,374 126,636 924,987 463,952
Gross unrealized depreciation (88,035) (64,807) (118,020) (132,322)
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation 367,339 61,829 806,967 331,630
Undistributed ordinary income 263,300 136,922 326,749 286,645
Undistributed long-term gains -- 1,895 -- 1,206
- ----------------------------------------------------------------------------------------------------------------------
Accumulated earnings $ 630,639 $ 200,646 $ 1,133,716 $ 619,481
- ----------------------------------------------------------------------------------------------------------------------
The difference between the tax cost of portfolio investments and the financial
statement cost is primarily due to wash sales.
88
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TOUCHSTONE VARIABLE SERIES TRUST
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- --------------------------------------------------------------------------------
Notes to Financial Statements continued
During the year ended December 31, 2005, the following Funds utilized capital
loss carryforwards as follows:
Amount
Touchstone Baron Small Cap Fund $ 589,471
Touchstone Eagle Capital Appreciation Fund 3,039,246
Touchstone Enhanced Dividend 30 Fund 609,883
Touchstone High Yield Fund 543,103
Touchstone Value Plus Fund 1,673,457
The capital loss carryforwards as of December 31, 2005 in the table above expire
as follows:
Amount Expiration Date
Touchstone Core Bond Fund $ 229,038 December 31, 2008
22 December 31, 2011
59,279 December 31, 2012
74,295 December 31, 2013
Touchstone Eagle Capital Appreciation Fund* $ 716,783 December 31, 2009
7,109,845 December 31, 2010
Touchstone Enhanced Dividend 30 Fund $ 408,210 December 31, 2011
Touchstone High Yield Fund $ 269,922 December 31, 2008
6,124 December 31, 2009
283,470 December 31, 2010
1,376,648 December 31, 2011
Touchstone Money Market Fund* $ 35,009 December 31, 2006
58,431 December 31, 2007
104,616 December 31, 2008
244,587 December 31, 2009
28 December 31, 2010
130 December 31, 2012
Touchstone Third Avenue Value Fund* $3,123,630 December 31, 2010
216,360 December 31, 2011
22,282 December 31, 2012
Touchstone Value Plus Fund* $3,338,978 December 31, 2010
2,576,285 December 31, 2011
The capital loss carryforwards may be utilized in future years to offset net
realized capital gains, if any, prior to distributing such gains to
shareholders.
* A portion of the capital losses may be limited under tax regulations.
From November 1, 2005 to December 31, 2005, the following Funds incurred the
following net losses. The Funds intend to elect to defer these losses and treat
them as arising on January 1, 2006:
Amount
Touchstone Core Bond Fund $177,008
Touchstone High Yield Fund 67,962
Touchstone Third Avenue Value Fund 8,994
Reclassification of capital accounts - Reclassifications result primarily from
the differencein the tax treatment of paydown securities, expiration of capital
loss carryforwards and net investment losses.
89
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TOUCHSTONE VARIABLE SERIES TRUST
--------------------------------
These reclassifications have no impact on the net assets or net assets per share
of the Funds and are designed to present to the Funds capital accounts on a tax
basis.
Undistributed
Net Investment Realized Paid-In
Income Gain/Loss Capital
Touchstone Balanced Fund $ 41,126 $ (41,126) $ --
Touchstone Baron Small Cap Fund 294,444 (60,848) (233,596)
Touchstone Core Bond Fund 92,181 (92,181) --
Touchstone Emerging Growth Fund 159,779 (17,691) (142,088)
Touchstone High Yield (4,121) 4,121 --
Touchstone Third Avenue Value Fund (7,223) 7,223 --
Touchstone Conservative ETF Fund -- (2) 2
8. COMMITMENTS AND CONTINGENCIES
The Funds indemnify the Trust's Officers and Trustees for certain liabilities
that might arise from their performance of their duties to the Funds.
Additionally, in the normal course of business, the Funds enter into contracts
that contain a variety of representations and warranties and which provide
general indemnifications. The Funds' maximum exposure under these arrangements
is unknown, as this would involve future claims that may be against the Funds
that have not yet occurred. However, based on experience, the Funds expect the
risk of loss to be remote.
90
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TOUCHSTONE VARIABLE SERIES TRUST
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REPORT OF INDEPENDENT REGISTERED
- --------------------------------------------------------------------------------
PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of Touchstone Variable Series Trust
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Touchstone Variable Series Trust (comprised of
the Balanced Fund, Baron Small Cap Fund, Core Bond Fund, Eagle Capital
Appreciation Fund, Emerging Growth Fund, Enhanced Dividend 30 Fund, Growth &
Income Fund, High Yield Fund, Money Market Fund,Third Avenue Value Fund,Value
Plus Fund, Aggressive ETF Fund, Conservative ETF Fund, Enhanced ETF Fund, and
Moderate ETF Fund) (the "Funds") as of December 31, 2005, and the related
statements 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 financial
highlights for each of the periods indicated therein.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 the standards of the Public Company
Accounting Oversight Board (United States).Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement.We were not engaged to
perform an audit of the Funds' 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
Funds' 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, and
evaluating the overall financial statement presentation. Our procedures included
confirmation of securities owned as of December 31, 2005, by correspondence with
the custodian and brokers, or by other appropriate auditing procedures where
replies from brokers were not received. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios comprising Touchstone Variable Series Trust at
December 31, 2005, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended
and their financial highlights for each of the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Cincinnati, Ohio
February 14, 2006
91
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OTHER ITEMS (UNAUDITED)
- --------------------------------------------------------------------------------
December 31, 2005
PROXY VOTING GUIDELINES
The Sub-Advisors are responsible for exercising the voting rights associated
with the securities purchased and held by the Funds. A description of the
policies and procedures that the Sub-Advisors use in fulfilling this
responsibility and information regarding how those proxies were voted during the
twelve month period ended June 30 is available without charge upon request by
calling toll free 1.800.543.0407. These items are also available on the
Securities and Exchange Commission's website at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The Trust files a complete listing of portfolio holdings for each Fund as of the
end of the first and third quarters of each fiscal year on Form N-Q. The
complete listing (i) is available on the Commission's website; (ii) may be
reviewed and copied at the Commission's Public Reference Room in Washington, DC;
and (iii) will be made available to shareholders upon request by calling
1.800.543.0407. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330.
DIVIDEND RECEIVED DEDUCTION
For corporate shareholders, the following ordinary distributions paid during the
current fiscal year ended December 31, 2005 qualifiy for the corporate dividends
received deduction:
Touchstone Balanced Fund 62%
Touchstone Eagle Capital Appreciation Fund 90%
Touchstone Emerging Growth Fund 10%
Touchstone Growth & Income Fund 100%
Touchstone Third Avenue Value Fund 72%
Touchstone Conservative ETF Fund 83%
SCHEDULE OF SHAREHOLDER EXPENSES
As a shareholder of the Funds, you incur two types of costs: (1) transaction
costs, including reinvested dividends or other distributions; and (2) ongoing
costs, including investment advisory fees; distribution (12b-1) fees; and other
Fund expenses. This example is intended to help you understand your ongoing
costs (in dollars) of investing in the Funds and to compare these costs with the
ongoing costs of investing in other mutual funds.
ACTUAL EXPENSES
The first line of the table below 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 the Six
Months Ended December 31, 2005" to estimate the expenses you paid on your
account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
account values and hypothetical expenses based on the Funds' actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Funds' 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 Funds 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.
92
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- --------------------------------
- --------------------------------------------------------------------------------
Other Items continued
Expenses
Net Expense Beginning Ending Paid During the
Ratio Account Account Six Months
Annualized Value Value Ended
December 31, July 1, December 31, December 31,
2005 2005* 2005 2005**
TOUCHSTONE BALANCED FUND
Actual 0.90% $1,000.00 $1,062.90 $4.68
Hypothetical 0.90% $1,000.00 $1,020.67 $4.58
TOUCHSTONE BARON SMALL CAP FUND
Actual 1.50% $1,000.00 $1,038.60 $7.71
Hypothetical 1.50% $1,000.00 $1,017.64 $7.63
TOUCHSTONE CORE BOND FUND
Actual 0.75% $1,000.00 $ 998.10 $3.78
Hypothetical 0.75% $1,000.00 $1,021.42 $3.82
TOUCHSTONE EAGLE CAPITAL APPRECIATION FUND
Actual 1.05% $1,000.00 $1,016.00 $5.34
Hypothetical 1.05% $1,000.00 $1,019.91 $5.35
TOUCHSTONE EMERGING GROWTH FUND
Actual 1.15% $1,000.00 $1,131.80 $6.18
Hypothetical 1.15% $1,000.00 $1,019.41 $5.85
TOUCHSTONE ENHANCED DIVIDEND 30 FUND
Actual 0.75% $1,000.00 $1,002.30 $3.79
Hypothetical 0.75% $1,000.00 $1,021.42 $3.82
TOUCHSTONE GROWTH & INCOME FUND
Actual 0.85% $1,000.00 $1,038.90 $4.37
Hypothetical 0.85% $1,000.00 $1,020.92 $4.33
TOUCHSTONE HIGH YIELD FUND
Actual 0.80% $1,000.00 $1,020.30 $4.07
Hypothetical 0.80% $1,000.00 $1,021.17 $4.08
TOUCHSTONE MONEY MARKET FUND
Class I Actual 0.28% $1,000.00 $1,018.50 $1.42
Class I Hypothetical 0.28% $1,000.00 $1,023.79 $1.43
Class SC Actual 0.54% $1,000.00 $1,017.20 $2.75
Class SC Hypothetical 0.54% $1,000.00 $1,022.48 $2.75
TOUCHSTONE THIRD AVENUE VALUE FUND
Actual 1.05% $1,000.00 $1,106.80 $5.58
Hypothetical 1.05% $1,000.00 $1,019.91 $5.35
TOUCHSTONE VALUE PLUS FUND
Actual 1.15% $1,000.00 $1,041.30 $5.92
Hypothetical 1.15% $1,000.00 $1,019.41 $5.85
TOUCHSTONE AGGRESSIVE ETF FUND
Actual 0.50% $1,000.00 $1,047.30 $2.58
Hypothetical 0.50% $1,000.00 $1,022.68 $2.55
TOUCHSTONE CONSERVATIVE ETF FUND
Actual 0.50% $1,000.00 $1,020.50 $2.55
Hypothetical 0.50% $1,000.00 $1,022.68 $2.55
TOUCHSTONE ENHANCED ETF FUND
Actual 0.50% $1,000.00 $1,061.10 $2.60
Hypothetical 0.50% $1,000.00 $1,022.68 $2.55
TOUCHSTONE MODERATE ETF FUND
Actual 0.50% $1,000.00 $1,032.50 $2.56
Hypothetical 0.50% $1,000.00 $1,022.68 $2.55
* 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, 2005 through
December 31, 2005.)
** Expenses are equal to the Fund's annualized expense ratio, multiplied by
the average account value over the period, multiplied by [number of days
in most recent fiscal half-year/365] (to reflect the one-half year
period).
93
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TOUCHSTONE VARIABLE SERIES TRUST
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ADVISORY AGREEMENT APPROVAL DISCLOSURE
The Board of Trustees (the "Board") of the Touchstone Variable Series Trust
("TVST")(the "Trust"), and by a separate vote, the Independent Trustees of the
Trust, approved the continuance of the Advisory Agreement between the Trust and
the Advisor with respect to each Fund and the Sub-Advisory Agreement with
respect to each Fund at a meeting held on November 17, 2005.
In determining whether to approve the continuation of the Advisory Agreement and
the Sub-Advisory Agreement for the Funds, the Advisor furnished information
necessary for a majority of the Independent Trustees to make the determination
that the continuance of the Advisory Agreement and of the Sub-Advisory Agreement
is in the interests of each of the Funds and its respective shareholders. The
information provided to the Board included: (1) industry data comparing advisory
fees and expense ratios of comparable investment companies; (2) comparative
performance information; (3) the Advisor's revenues and costs of providing
services to the Funds; and (4) information about the Advisor's and Sub-Advisor's
personnel. Prior to voting, the Independent Trustees reviewed the proposed
continuance of the Advisory Agreement and the Sub-Advisory Agreements with
management and with experienced independent counsel and received materials from
such counsel discussing the legal standards for their consideration of the
proposed continuation of the Advisory Agreement and the Sub-Advisory Agreements
with respect to each Fund. The Independent Trustees also reviewed the proposed
continuation of the Advisory Agreement and the Sub-Advisory Agreement with
respect to each of the Funds in private sessions with counsel at which no
representatives of management were present.
In approving the Funds' Advisory Agreement, the Board considered various
factors, among them: (1) the nature, extent and quality of services provided to
the Funds including the personnel providing services; (2) the Advisor's
compensation and profitability; (3) comparison of fees and performance with
other advisers; (4) economies of scale; and (5) the terms of the Advisory
Agreement. The Board's analysis of these factors is set forth below. The
Independent Trustees were advised by independent legal counsel throughout the
process.
NATURE, EXTENT AND QUALITY OF ADVISOR SERVICES. The Board considered the level
and depth of knowledge of the Advisor, including the professional experience and
qualifications of senior personnel. The Board discussed the Advisor's
effectiveness in monitoring the performance of the Sub-Advisors and its
timeliness in responding to performance issues. In evaluating the quality of
services provided by the Advisor, the Board took into account its familiarity
with the Advisor's senior management through Board meetings, discussions and
reports during the preceding year. The Board took into account the Advisor's
willingness to consider and implement organizational and operational changes
designed to improve investment results. The Board also took into account the
Advisor's compliance policies and procedures. The quality of administrative and
other services, including the Advisor's role in coordinating the activities of
the Funds' other service providers, was also considered. The Board also
considered the Advisor's relationship with its affiliates and the resources
available to them, as well as any potential conflicts of interest. The Trustees
concluded that they were satisfied with the nature, extent and quality of
services provided to each of the Funds under the Advisory Agreement.
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Other Items continued
ADVISOR'S COMPENSATION AND PROFITABILITY. The Board took into consideration the
financial condition and profitability of the Advisor and its affiliates and the
direct and indirect benefits derived by the Advisor and its affiliates from the
Advisor's relationship with the Funds. The information considered by the Board
included operating profit margin information for the Advisor's business as a
whole. The Trustees also considered Fund-by-Fund profitability data that they
received from management, which indicated the relative profit and loss of each
of the Funds. The Board noted that the Advisor has waived advisory fees and
reimbursed expenses for certain of the Funds and also pays the sub-advisory fees
out of the advisory fees the Advisor receives from the Funds. The Trustees
reviewed the profitability of the Advisor's relationship with the Funds both
before and after tax expenses and whether the Advisor had the financial
wherewithal to continue to provide a high level of services to the Funds, noting
the ongoing commitment of the Advisor's parent with respect to providing support
and resources as needed. The Trustees also considered that the Funds'
distributor, an affiliate of the Advisor, received Rule 12b-1 distribution fees
from the Funds. The Trustees also noted that the Advisor derives reputational
and other benefits from its association with the Funds.
The Trustees recognized that the Advisor should be entitled to earn a reasonable
level of profits in exchange for the level of services it provides to each Fund
and the entrepreneurial risk that it assumes as Advisor. Based upon their
review, the Trustees concluded that the Advisor's level of profitability, if
any, from its relationship with each Fund was reasonable and not excessive.
EXPENSES AND PERFORMANCE. The Board compared the advisory fees and total expense
ratios for the Funds with various comparative data, including the industry
median and average advisory fees and expense ratios in each Fund's respective
peer group. The Board also considered the Funds' performance results during the
six-months, twelve-months, twenty-four months and thirty-six months ended
September 30, 2005, as applicable, and noted that the Board reviews on a
quarterly basis detailed information about the Funds' performance results,
portfolio composition and investment strategies.
The Board also considered the effect of each Fund's growth and size on its
performance and expenses. The Board further noted that the Advisor has waived
advisory fees and/or reimbursed expenses for certain of the Funds as necessary
to reduce their operating expenses to targeted levels. The Board noted that the
fees under the Sub-Advisory Agreement for each Fund are paid by the Advisor out
of the advisory fee it receives from the Fund and the impact of such
sub-advisory fees on the profitability of the Advisor. In reviewing the expense
ratios and performance of the Funds, the Board also took into account the
nature, extent and quality of the services provided by the Advisor and its
affiliates.
The Trustees considered, among other data, the specific factors and related
conclusions set forth below with respect to each Fund:
TOUCHSTONE BALANCED FUND. The Fund's advisory fee and total expense ratio (net
of applicable expense waivers) were at the median and below the median,
respectively, of its peer group. The Board noted that the Advisor was currently
waiving a portion of its advisory fee. The Fund's performance for the six-months
ended September 30, 2005 was in the 4th quartile of the Fund's peer group, in
the 2nd quartile for the twelve-months ended September 30, 2005 and in the 1st
quartile for the twenty-four and thirty-six month periods. Based upon their
review, the Trustees concluded that the Fund's performance over time was
satisfactory and that the advisory fee was reasonable in light of the high
quality of services received by the Fund and the other factors considered.
95
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TOUCHSTONE VARIABLE SERIES TRUST
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TOUCHSTONE BARON SMALL CAP FUND. The Fund's advisory fee and total expense ratio
were above the median of its peer group. The Fund's performance for the
six-months ended September 30, 2005 was in the 4th quartile of the Fund's peer
group, in the 3rd quartile for the twelve-months ended September 30, 2005 and in
the 1st quartile for the twenty-four-month period and in the 3rd quartile for
the thirty-six month period. The Board noted management's discussion of the
Fund's performance and expenses and its continued monitoring of the Fund. Based
upon their review, the Trustees concluded that the Fund's performance was being
addressed and that the advisory fee was reasonable in light of the high quality
of services received by the Fund and the other factors considered.
TOUCHSTONE CORE BOND FUND. The Fund's advisory fee and total expense ratio (net
of applicable expense waivers) were above the median of its peer group. The
Board also noted that the Advisor was currently reimbursing a portion of the
Fund's expenses. The Fund's performance for the six-months, twelve-months and
twenty-four months ended September 30, 2005 was in the 2nd quartile of the
Fund's peer group and in the 3rd quartile for the thirty-six month period. Based
upon their review, the Trustees concluded that the Fund's performance was
satisfactory and that the advisory fee was reasonable in light of the high
quality of services received by the Fund and the other factors considered.
TOUCHSTONE EAGLE CAPITAL APPRECIATION FUND. The Fund's advisory fee and total
expense ratio (net of applicable expense waivers) were at the median and above
the median, respectively, of its peer group. The Board also noted that the
Advisor was currently reimbursing a portion of the Fund's expenses. The Fund's
performance for the six-months ended September 30, 2005 was in the 4th quartile
of the Fund's peer group, in the 3rd quartile for the twelve-months ended
September 30, 2005 and in the 1st quartile for the twenty-four and thirty-six
month periods. The Board noted management's discussion regarding the Fund's more
recent performance and its expenses. Based upon their review, the Trustees
concluded that the Fund's performance over time was satisfactory and that the
advisory fee was reasonable in light of the high quality of services received by
the Fund and the other factors considered.
TOUCHSTONE EMERGING GROWTH FUND. The Fund's advisory fee and total expense ratio
(net of applicable expense waivers) were above the median of its peer group. The
Board also noted that the Advisor was currently reimbursing a portion of the
Fund's expenses. The Fund's performance for the six-months, twelve-months and
thirty-six months ended September 30, 2005 was in the 1st quartile of the Fund's
peer group and in the 2nd quartile for the twenty-four month period. Based upon
their review, the Trustees concluded that the Fund's performance was
satisfactory and that the advisory fee was reasonable in light of the high
quality of services received by the Fund and the other factors considered.
TOUCHSTONE ENHANCED DIVIDEND 30 FUND. The Fund's advisory fee and total expense
ratio (net of applicable expense waivers) were below the median of its peer
group. The Board also noted that the Advisor was currently reimbursing a portion
of the Fund's expenses. The Fund's performance for the six-months, twelve-months
and twenty-four months ended September 30, 2005 was in the 4th quartile of the
Fund's peer group and in the 3rd quartile for the thirty-six month period. The
Board noted management's discussion regarding the Fund's performance and its
continued monitoring of the Fund. They noted that the Fund generally will
outperform its peers under certain market conditions. Based upon their review,
the Trustees concluded that the Fund's performance was satisfactory in view of
the Fund's investment strategy and that the advisory fee was reasonable in light
of the high quality of services received by the Fund.
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Other Items continued
TOUCHSTONE GROWTH & INCOME FUND. The Fund's advisory fee and total expense ratio
(net of applicable expense waivers) were below the median of its peer group. The
Board also noted that the Advisor was currently reimbursing a portion of the
Fund's expenses. The Fund's performance for the six-months and twelve-months
ended September 30, 2005 was in the 4th quartile of the Fund's peer group and in
the 2nd quartile for the twenty-four month and thirty-six month periods. The
Board noted management's discussion regarding the Fund's performance. Based upon
their review, the Trustees concluded that the Fund's performance over time was
satisfactory and that the advisory fee was reasonable in light of the high
quality of services received by the Fund.
TOUCHSTONE HIGH YIELD FUND. The Fund's advisory fee and total expense ratio (net
of applicable expense waivers) were below the median of its peer group. The
Board also noted that the Advisor was currently waiving a portion of its
advisory fee. The Fund's performance for the six-months, twenty-four months and
thirty-six months ended September 30, 2005 was in the 1st quartile of the Fund's
peer group and in the 2nd quartile for the twelve-month period. Based upon their
review, the Trustees concluded that the Fund's performance was satisfactory and
that the advisory fee was reasonable in light of the high quality of services
received by the Fund.
TOUCHSTONE MONEY MARKET FUND. The Fund's advisory fee and total expense ratio
(net of applicable expense waivers) were below the median of its peer group. The
Board also noted that the Advisor was currently reimbursing a portion of the
Fund's expenses. The Fund's performance for the six-months, twelve months,
twenty-four months and thirty-six months ended September 30, 2005 was in the 1st
quartile of the Fund's peer group. Based upon their review, the Trustees
concluded that the Fund's performance was satisfactory and that the advisory fee
was reasonable in light of the high quality of services received by the Fund.
TOUCHSTONE THIRD AVENUE VALUE FUND. The Fund's advisory fee and total expense
ratio (net of applicable expense waivers) were above the median of its peer
group. The Board also noted that the Advisor was currently reimbursing a portion
of the Fund's expenses and that the Advisor pays the sub-advisory fee out of its
advisory fee. The Fund's performance for the six-months, , twelve months,
twenty-four months and thirty-six months ended September 30, 2005 was in the 1st
quartile of the Fund's peer group. Based upon their review, the Trustees
concluded that the Fund's performance was satisfactory and that the advisory fee
was reasonable in light of the high quality of services received by the Fund and
the other factors considered.
TOUCHSTONE VALUE PLUS FUND. The Fund's advisory fee and total expense ratio (net
of applicable expense waivers) were above the median of its peer group. The
Board also noted that the Advisor was currently reimbursing a portion of the
Fund's expenses. The Fund's performance for the six-months, twelve-months and
thirty-six months ended September 30, 2005 was in the 3rd quartile of the Fund's
peer group and in the 4th quartile for the twenty-four month period. The Board
noted management's discussion regarding the Fund's performance and its continued
monitoring of the Fund. The Board also took into account management's discussion
of its potential plans for the Fund. Based upon their review, the Trustees
concluded that the Fund's performance was being addressed and that the advisory
fee was reasonable in light of the high quality of services received by the Fund
and the other factors considered.
97
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TOUCHSTONE VARIABLE SERIES TRUST
--------------------------------
TOUCHSTONE AGGRESSIVE ETF FUND. The Fund's advisory fee and total expense ratio
(net of applicable expense waivers) were below the median of its peer group. The
Board also noted that the Advisor was currently waiving its entire advisory fee
and reimbursing Fund expenses. The Fund's performance for the six-months ended
September 30, 2005 was in the 4th quartile of the Fund's peer group and in the
3rd quartile for the twelve-month period. The Board noted the current asset
level of the Fund. Based upon their review, the Trustees concluded that the
Fund's performance was reasonable and that the advisory fee was reasonable in
light of the high quality of services received by the Fund and the other factors
considered.
TOUCHSTONE CONSERVATIVE ETF FUND. The Fund's advisory fee and total expense
ratio (net of applicable expense waivers) were below the median of its peer
group. The Board also noted that the Advisor was currently waiving its entire
advisory fee and reimbursing Fund expenses. The Fund's performance for the
six-months and twelve months ended September 30, 2005 was in the 2nd quartile of
the Fund's peer group. Based upon their review, the Trustees concluded that the
Fund's performance was satisfactory and that the advisory fee was reasonable in
light of the high quality of services received by the Fund and the other factors
considered.
TOUCHSTONE ENHANCED ETF FUND. The Fund's advisory fee and total expense ratio
(net of applicable expense waivers) were below the median of its peer group. The
Board also noted that the Advisor was currently reimbursing a portion of the
Fund's expenses and reimbursing Fund expenses. The Fund's performance for the
six-months and twelve months ended September 30, 2005 was in the 1st quartile of
the Fund's peer group. Based upon their review, the Trustees concluded that the
Fund's performance was satisfactory and that the advisory fee was reasonable in
light of the high quality of services received by the Fund and the other factors
considered.
TOUCHSTONE MODERATE ETF FUND. The Fund's advisory fee and total expense ratio
(net of applicable expense waivers) were below the median of its peer group. The
Board also noted that the Advisor was currently waiving its entire advisory fee
and reimbursing Fund expenses. The Fund's performance for the six-months and
twelve months ended September 30, 2005 was in the 2nd quartile of the Fund's
peer group. Based upon their review, the Trustees concluded that the Fund's
performance was satisfactory and that the advisory fee was reasonable in light
of the high quality of services received by the Fund and the other factors
considered.
ECONOMIES OF SCALE. The Board considered the effect of each Fund's current size
and potential growth on its performance and fees. The Board considered the
effective fees under the Advisory Agreement as a percentage of assets at
different asset levels and possible economies of scale that may be realized if
the assets of each Fund grows. The Board noted that the advisory fee schedule
for most of the Funds contain breakpoints that reduce the fee rate on assets
above specified levels and considered the necessity of breakpoints with respect
to the Funds that do not currently have such breakpoints. The Trustees
determined that adding breakpoints at specified levels to the advisory fees of
the other Funds that currently did not have such a fee structure would not be
appropriate at this time given such Funds' current sizes. The Trustees also
noted that if a Fund's assets increase over time, the Fund may realize other
economies of scale if assets increase proportionally more than certain other
expenses. The Board also considered the fact that, under the Advisory Agreement,
the fees payable to the Advisor by the Funds are reduced by total fees paid to
the Sub-Advisor.
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Other Items continued
CONCLUSION. In considering the renewal of the Funds' Advisory Agreement, the
Board, including the Independent Trustees, did not identify any single factor as
controlling, and each Trustee attributed different weights to the various
factors. The Trustees evaluated all information available to them on a
Fund-by-Fund basis, and their determinations were made separately with respect
to each Fund. The Board reached the following conclusions regarding the Funds'
Advisory Agreement with the Advisor, among others: (a) the Advisor has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (b) the Advisor maintains an
appropriate compliance program; (c) the performance of each Fund is reasonable
or satisfactory in relation to the performance of funds with similar investment
objectives and to relevant indices, or as discussed above, is being addressed;
and (d) each Fund's advisory expenses are reasonable in relation to those of
similar funds and to the services to be provided by the Advisor. Based on their
conclusions, the Board determined that continuation of the Advisory Agreement
for each Fund would be in the interests of the respective Fund and its
shareholders.
In approving the Funds' Sub-Advisory Agreements, the Board considered various
factors with respect to each Fund and its Sub-Advisory Agreement(s), among them:
(1) the nature, extent and quality of services provided to the Funds including
the personnel providing services; (2) the Sub-Advisor's compensation; (3) a
comparison of sub-advisory fees and performance with other advisers; and (4) the
terms of the Sub-Advisory Agreement. The Board's analysis of these factors is
set forth below. The Independent Trustees were advised by independent legal
counsel throughout the process.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED; INVESTMENT PERSONNEL. The Board
considered information provided by the Advisor regarding the services provided
by each Sub-Advisor, including information presented periodically throughout the
previous year. The Board noted the affiliation of the Sub-Advisor of certain of
the Funds with the Advisor, noting any potential conflicts of interest. The
Board noted that, on a periodic basis, the Board meets with various portfolio
managers of the Sub-Advisors to discuss their respective performance and
investment process and strategies. The Board considered each Sub-Advisor's level
of knowledge and investment style. The Board reviewed the experience and
credentials of the investment personnel who are responsible for managing the
investment of portfolio securities with respect to the Funds. The Trustees also
noted each Sub-Advisor's brokerage practices. The Board also considered the
Sub-Advisors' regulatory and compliance history. The Board noted that the
Advisor's compliance monitoring processes include quarterly reviews of
compliance reports and annual compliance visits to the Sub-Advisors and that
compliance issues are reported to the Board.
SUB-ADVISOR'S COMPENSATION. The Board also took into consideration the financial
condition of each Sub-Advisor and any indirect benefits derived by each
Sub-Advisor and its affiliates from the Sub-Advisor's relationship with the
Funds. In considering the profitability to that Sub-Advisor of its relationship
with the Funds, the Trustees noted the undertakings of the Advisor to maintain
expense limitations for the Funds and also noted that the fees under the
Sub-Advisory Agreement were paid by the Advisor out of the advisory fees that it
receives under the Advisory Agreement. As a consequence, the profitability to
the Sub-Advisors of its relationship with each Fund were not substantial factors
in the Trustees' deliberations. For similar reasons, the Trustees did not
consider the potential economies of scale in each Sub-Advisor's management of
the Funds to be substantial factors in their consideration at this time although
it was noted that the sub-advisory fee schedule for most of the Funds contain
breakpoints that reduce the fee rate on assets above specified levels.
99
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TOUCHSTONE VARIABLE SERIES TRUST
--------------------------------
SUB-ADVISORY FEES AND FUND PERFORMANCE. The Board considered that each Fund pays
an advisory fee to the Advisor and that, in turn, the Advisor pays a
sub-advisory fee to the Sub-Advisor. Accordingly, the Board considered the
amount retained by the Advisor and the fee paid to the Sub-Advisor with respect
to the various services provided by the Advisor and the Sub-Advisor. The Board
also noted that the Advisor negotiates the sub-advisory fees with each of the
unaffiliated Sub-Advisors at arms-length. The Board compared the sub-advisory
fees for each Fund with various comparative data, if available, including the
industry median and average sub-advisory fees in each Fund's respective
investment category, and found that each Fund's sub-advisory fee was reasonable
and appropriate under the facts and circumstances.
TOUCHSTONE BALANCED FUND. The Fund's sub-advisory fee was above the median of
its peer group. Based upon their review, the Trustees concluded that the
sub-advisory fee was reasonable in light of the high quality of services
received by the Fund and the other factors considered.
TOUCHSTONE BARON SMALL CAP FUND. The Fund's sub-advisory fee was above the
median of its peer group. Based upon their review, the Trustees concluded that
the sub-advisory fee was reasonable in light of the high quality of services
received by the Fund and the other factors considered.
TOUCHSTONE CORE BOND FUND. The Fund's sub-advisory fee was above the median of
its peer group. Based upon their review, the Trustees concluded that the
sub-advisory fee was reasonable in light of the high quality of services
received by the Fund and the other factors considered.
TOUCHSTONE EAGLE CAPITAL APPRECIATION FUND. The Fund's sub-advisory fee was
below the median of its peer group. Based upon their review, the Trustees
concluded that the sub-advisory fee was reasonable in light of the high quality
of services received by the Fund and the other factors considered.
TOUCHSTONE EMERGING GROWTH FUND. The Fund's sub-advisory fee was above the
median of its peer group. Based upon their review, the Trustees concluded that
the sub-advisory fee was reasonable in light of the high quality of services
received by the Fund and the other factors considered.
TOUCHSTONE ENHANCED DIVIDEND 30 FUND. The Fund's sub-advisory fee was below the
median of its peer group. Based upon their review, the Trustees concluded that
the sub-advisory fee was reasonable in light of the high quality of services
received by the Fund and the other factors considered.
TOUCHSTONE GROWTH & INCOME FUND. The Fund's sub-advisory fee was above the
median of its peer group. Based upon their review, the Trustees concluded that
the sub-advisory fee was reasonable in light of the high quality of services
received by the Fund and the other factors considered.
TOUCHSTONE HIGH YIELD FUND. The Fund's sub-advisory fee was below the median of
its peer group. Based upon their review, the Trustees concluded that the
sub-advisory fee was reasonable in light of the high quality of services
received by the Fund and the other factors considered.
TOUCHSTONE MONEY MARKET FUND. The Fund's sub-advisory fee was below the median
of its peer group. Based upon their review, the Trustees concluded that the
sub-advisory fee was reasonable in light of the high quality of services
received by the Fund and the other factors considered.
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Other Items continued
TOUCHSTONE THIRD AVENUE VALUE FUND. The Fund's sub-advisory fee was above the
median of its peer group. Based upon their review, the Trustees concluded that
the sub-advisory fee was reasonable in light of the high quality of services
received by the Fund and the other factors considered.
TOUCHSTONE VALUE PLUS FUND. The Fund's sub-advisory fee was above the median of
its peer group. Based upon their review, the Trustees concluded that the
sub-advisory fee was reasonable in light of the high quality of services
received by the Fund and the other factors considered.
No such comparative information was available for the Aggressive ETF Fund,
Conservative ETF Fund, Enhanced ETF Fund or the Moderate ETF Fund due to the
relatively small number of peers in each Fund's respective class with
subadvisory arrangements.
As noted above, the Board considered each Fund's performance during the
six-months, twelve-months, twenty-four months and thirty-six months ended
September 30, 2005, as applicable, as compared to each Fund's respective peer
group and noted that the Board reviews on a quarterly basis detailed information
about the Funds' performance results, portfolio composition and investment
strategies. It noted the Advisor's expertise and resources in monitoring the
performance, investment style and risk adjusted performance of the Sub-Advisors.
The Board was mindful of the Advisor's focus on each Sub-Advisor's performance
and its ways of addressing underperformance.
CONCLUSION. In considering the renewal of the Sub-Advisory Agreement with
respect to each Fund, the Board, including the Independent Trustees, did not
identify any single factor as controlling, and each Trustee attributed different
weights to the various factors. The Board reached the following conclusions
regarding the Sub-Advisory Agreement with respect to each Fund, among others:
(a) the Sub-Advisor is qualified to manage the applicable Fund's assets in
accordance with its investment objectives and policies; (b) the Sub-Advisor
maintains an appropriate compliance program; (c) the performance of each Fund is
satisfactory or reasonable in relation to the performance of funds with similar
investment objectives and to relevant indices or performance is being addressed
as discussed above; (d) each Fund's advisory expenses are reasonable in relation
to those of similar funds and to the services to be provided by the Advisor and
the Sub-Advisor; and (e) the Sub-Advisor's investment strategies are appropriate
for pursuing the respective investment objectives of each Fund. Based on their
conclusions, the Board determined that approval of the Sub-Advisory Agreement
with respect to each Fund would be in the interests of the respective Fund and
its shareholders.
101
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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 TRUSTEES:(1)
Number
of Funds
Overseen
Name, Position(s) Term of Office(2) in the
Address Held with and Length Principal Occupation(s) Touchstone Other Directorships
and Age Trust(4) of Time Served During Past Five Years Family(3) Held by Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Jill T. McGruder Trustee and Until retirement at Senior Vice President of The 31 Director of LaRosa's (a
Touchstone Advisors, Inc President age 75 or until she Western and Southern Life restaurant chain).
303 Broadway resigns or is Insurance Company. President
Cincinnati, OH removed and a director of IFS
Age:50 Financial Services, Inc. (a
Trustee since 1999 holding company). She is a
director of Capital Analysts
Incorporated (an investment
advisor and broker-dealer),
Integrated Fund Services, Inc.
(the Trust's administrator,
accounting agent and transfer
agent), IFS Fund Distributors,
Inc. (a broker-dealer),
Touchstone Advisors, Inc. (the
Trust's investment advisor)
and Touchstone Securities,
Inc. (the Trust's
distributor). She is also
President and a director of
IFS Agency Services, Inc. (an
insurance agency), W&S
Financial Group Distributors,
Inc. (an annuity distributor)
and IFS Systems, Inc. She is
Senior Vice President and a
director of Fort Washington
Brokerage Services, Inc. (a
broker-dealer). She is
President of Touchstone Tax-
Free Trust, Touchstone
Investment Trust, Touchstone
Variable Series Trust and
Touchstone Strategic Trust.
She was President of
Touchstone Advisors, Inc. and
Touchstone Securities, Inc.
until 2004.
John F. Barrett Trustee Until retirement at Chairman of the Board, 31 Director of The
The Western and age 75 or until he President and Chief Executive Andersons (an
Southern Life resigns or is Officer of The Western and agribusiness and
Insurance Company removed Southern Life Insurance retailing company);
400 Broadway Company, Western- Southern Convergys Corporation (a
Cincinnati, OH Trustee since 2000 Life Assurance Company and provider of business
Age:56 Western & Southern Financial support systems and
Group, Inc.; Director and customer care
Chairman of Columbus Life operations) and Fifth
Insurance Company; Fort Third Bancorp.
Washington Investment
Advisors, Inc., Integrity Life
Insurance Company and National
Integrity Life Insurance
Company; Director of Eagle
Realty Group, Inc., Eagle
Realty Investments, Inc. and
Integrated Fund Services, Inc;
Director, Chairman and CEO of
WestAd, Inc.; President and
Trustee of Western & Southern
Financial Fund, Inc.
<page>
John R. Lindholm Trustee Until retirement at President, CEO and Director of 15 None
Integrity Life Insurance age 75 or until he Integrity Life Insurance
Company resigns or is Company and National Integrity
400 Broadway removed Life Insurance Company. He was
Cincinnati, OH the President of the Retail
Age:56 Business Division of Arm
Trustee since 2003 Financial Group from 1996
until 2000.
INDEPENDENT TRUSTEES:
Richard L. Brenan Trustee Until retirement at Retired Managing Partner of 31 Director of Wing Eyecare
303 Broadway age 75 or until he KPMG LLP (a certified public Companies.
Cincinnati, OH resigns or is accounting firm). Director of
Age:60 removed The National Underwriter
Trustee Company (a publisher of
since 2005 insurance and financial
service products) until 2004.
Phillip R. Cox Trustee Until retirement at President and Chief Executive 31 Director of the Federal
303 Broadway age 75 or until he Officer of Cox Financial Corp. Reserve Bank of
Cincinnati, OH resigns or is (a financial services Cleveland and Cinergy
Age:57 removed company). Corporation (a utility
company); Chairman of
Trustee since 1994 The Cincinnati Bell
Telephone Company LLC;
Director of The Timken
Company (a manufacturer
of bearings, alloy
steels and related
products and services).
H. Jerome Lerner Trustee Until retirement at Principal of HJL Enterprises 31 None
303 Broadway age 75 or until he (a privately held investment
Cincinnati, OH resigns or is company).
Age:67 removed
Trustee since 1999
102
- --------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
- --------------------------------
- --------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED):
Number
of Funds
Overseen
Name, Position(s) Term of Office(2) in the
Address Held with and Length Principal Occupation(s) Touchstone Other Directorships
and Age Trust(4) of Time Served During Past Five Years Family(3) Held by Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. Siekmann Trustee Until retirement at Executive for Duro Bag 31 None
303 Broadway age 75 or until he Manufacturing Co. (a bag
Cincinnati, OH resigns or is manufacturer); President of
Age:67 removed Shor Foundation for Epilepsy
Research (a charitable
Trustee since 2005 foundation). Trustee of
Riverfront Funds (mutual
funds) from 1999 - 2004.
Robert E. Stautberg Trustee Until retirement at Retired Partner of KPMG LLP (a 31 Trustee of Tri-Health
303 Broadway age 75 or until he certified public accounting Physician Enterprise
Cincinnati, OH resigns or is firm). Vice President of St. Corporation.
Age:71 removed Xavier High School.
Trustee since 1994
John P. Zanotti Trustee Until retirement at CEO, Chairman and Director of 31 Director of QMed (a
303 Broadway age 75 or until he Avaton, Inc. (a wireless health care management
Cincinnati, OH resigns or is entertainment company). company).
Age:57 removed President of Cincinnati
Biomedical (a life science and
Trustee since 2002 economic development company).
CEO, Chairman and Director of
Astrum Digital Information (an
information monitoring
company) from 2000 until 2001;
President of Great American
Life Insurance Company from
1999 until 2000. A Director of
Chiquita Brands International,
Inc. until 2000.
(1) Ms. McGruder, as a director of Touchstone Advisors, Inc., the Trust's
investment advisor, and Touchstone Securities, Inc., the Trust's
distributor and an officer of affiliates of the advisor and 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., Chairman of Fort Washington Investment
Advisors, Inc., the Trust's sub-advisor and an officer of other affiliates
of the advisor and distributor 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 or she sooner resigns or is
removed.
(3) The Touchstone Family of Funds consists of fifteen series of the Trust,
five series of Touchstone Investment Trust, seven series of Touchstone
Strategic Trust and four series of Touchstone Tax-Free Trust.
(4) Each Trustee, except Mr. Lindholm, is also a Trustee of Touchstone
Investment Trust, Touchstone Strategic Trust and Touchstone Tax-Free
Trust.
103
--------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
--------------------------------
PRINCIPAL OFFICERS(1):
Number
of Funds
Overseen
Name, Position(s) Term of Office(1) in the
Address Held with and Length Principal Occupation(s) Touchstone Other Directorships
and Age Trust of Time Served During Past Five Years Family(2) Held by Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Jill T. McGruder President Until resignation, See biography above. 31 Director of LaRosa's (a
Touchstone and Trustee removal or restaurant chain).
Advisors, Inc. disqualification
303 Broadway
Cincinnati, OH President since
Age:50 2004; President
from 2000-2002
Brian E. Hirsch Vice Until resignation, Vice President-Compliance of 31 None
Touchstone Advisors, Inc. President removal or IFS Financial Services, Inc.,
303 Broadway and Chief disqualification Director of Compliance of Fort
Cincinnati, OH Compliance Washington Brokerage Services,
Age:48 Officer Vice President Inc.; Chief Compliance
since 2003 Officer of Puglisi & Co. from
2001 until 2002; Vice
President - Compliance of
Palisade Capital Management
LLC (an investment advisor)
from 1997 until 2000.
James H. Grifo Vice Until resignation, President of Touchstone 31 None
Touchstone Securities, President removal or Securities, Inc. and
Inc. disqualification Touchstone Advisors, Inc.;
303 Broadway Managing Director of Deutsche
Cincinnati, OH Vice President Asset Management until 2001.
Age:54 since 2004
William A. Dent Vice Until resignation, Senior Vice President of 31 None
Touchstone Advisors, Inc. President removal or Touchstone Advisors, Inc.;
303 Broadway disqualification Marketing Director of
Cincinnati, OH Promontory Interfinancial
Age: 42 Vice President Network from 2002-2003; Senior
since 2004 Vice President of McDonald
Investments from 1998 - 2001.
Terrie A. Wiedenheft Controller Until resignation, Senior Vice President, Chief 31 None
Touchstone and removal or Financial Officer and
Advisors, Inc. Treasurer disqualification Treasurer of Integrated Fund
303 Broadway Services, Inc., IFS Fund
Cincinnati, OH Controller since Distributors, Inc. and Fort
Age:43 2000 Washington Brokerage Services,
Treasurer since Inc. She is Chief Financial
2003 Officer of IFS Financial
Services, Inc., Touchstone
Advisors, Inc. and Touchstone
Securities, Inc. and Assistant
Treasurer of Fort Washington
Investment Advisors, Inc.
Tina H. Bloom Secretary Until resignation, Vice President - Managing 31 None
Integrated Fund removal or Attorney of Integrated Fund
Services, Inc. disqualification Services, Inc. and IFS Fund
303 Broadway Distributors, Inc.
Cincinnati, OH Secretary since
Age:37 1999
(1) Each officer also holds the same office with Touchstone Investment Trust,
Touchstone Strategic Trust and Touchstone Tax-Free Trust.
(2) The Touchstone Family of Funds consists of fifteen series of the Trust,
five series of Touchstone Investment Trust, seven series of Touchstone
Strategic Trust and four series of Touchstone Tax-Free Trust.
ITEM 2. CODE OF ETHICS.
At the end of the period covered by this report, the registrant has adopted a
code of ethics that applies to its principal executive officer and principal
financial officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's Board of Trustees has determined that the registrant has at
least one audit committee financial expert serving on its audit committee.
Mr. Robert Stautberg is the registrant's audit committee financial expert and
is an independent trustee within the meaning of the Investment Company Act of
1940, as amended (the "1940 Act").
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES. Audit fees totaled $172,500 for the December 31, 2005 fiscal
year and $121,300 for the December 31, 2004 fiscal year, including fees
associated with the annual audit and filings of the registrant's Form N-1A and
Form N-SAR.
(b) AUDIT-RELATED FEES. Audit-Related fees totaled $113,200 for the December
31, 2005 fiscal year and $102,500 for the December 31, 2004 fiscal year for
SAS 70 internal control reviews of the Trust's fund accountant and transfer
agent. Audit-related fees totaled $14,000 for the December 31, 2004 fiscal
year for due diligence/merger services related to the Enhanced 30/Separate
Account Ten merger.
(c) TAX FEES. Tax fees totaled approximately $37,500 for the December 31,
2005 fiscal year and $45,500 for the December 31, 2004 fiscal year and
consisted of fees for tax compliance services and tax consultation services.
(d) ALL OTHER FEES. There were no other fees for the December 31, 2005 or
December 31, 2004 fiscal years.
(e) (1) AUDIT COMMITTEE PRE-APPROVAL POLICIES. The Audit Committee's
pre-approval policies describe the types of audit, audit-related, tax and other
services that have the general pre-approval of the Audit Committee. The
pre-approval policies provide that annual audit service fees, tax services not
specifically granted pre-approval, services exceeding pre-approved cost levels
and other services that have not received general pre-approval will be subject
to specific pre-approval by the Audit Committee. The pre-approval policies
further provide that the Committee may grant general pre-approval to other audit
services (statutory audits and services associated with SEC registration
statements, periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings), audit-related
services (accounting consultations related to accounting, financial reporting or
disclosure matters not classified as "audit services," assistance with
understanding and implementing new accounting and financial reporting guidance
from rulemaking authorities, agreed-upon or expanded audit procedures related to
accounting and/or billing records required to respond to or comply with
financial, accounting or regulatory reporting matters and assistance with
internal control reporting requirements under Form N-SAR and Form N-CSR), tax
services that have historically been provided by the auditor that the Committee
believes would not impair the independence of the auditor and are consistent
with the SEC's rules on auditor independence and permissible non-audit services
classified as "all other services" that are routine and recurring services.
(e)(2) All services described in paragraphs (b) through (d) of Item 4 were
approved by the Audit Committee.
(f) Not applicable
(g) The aggregate non-audit fees for services to the registrant, its
investment adviser (excluding its sub-advisors) and any entity controlling,
controlled by, or under common control with the adviser that provides ongoing
services to the registrant were $179,150 for the December 31, 2005 fiscal year
and $305,300 for the December 31, 2004 fiscal year.
(h) Not applicable
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable
ITEM 6. SCHEDULE OF INVESTMENTS.
The Schedule of Investments in securities of unaffiliated issuers is included
in the Annual Report.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The registrant does not have procedures by which shareholders may recommend
nominees to its Board of Trustees.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based on an evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the 1940 Act) the registrant's
principal executive officer and principal financial officer have concluded that
the registrant's disclosure controls and procedures are effective as of a date
within 90 days of the filing date of this report.
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during
the registrant's second fiscal half-year that have materially affected, or are
reasonably likely to materially affect, the registrant's internal control over
financial reporting.
ITEM 12. EXHIBITS.
(a)(1) The Code of Ethics for Senior Financial Officers was filed with
registrant's N-CSR for the December 31, 2005 fiscal year and is hereby
incorporated by reference.
(a)(2) Certifications required by Item 12(a)(2) of Form N-CSR are filed
herewith.
(b) Certification required by Item 11(b) of Form N-CSR is filed herewith.
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/ Jill T. McGruder
- --------------------------------------------------------------------------------
Jill T. McGruder
President
Date: March 8, 2006
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/ Jill T. McGruder
- --------------------------------------------------------------------------------
Jill T. McGruder
President
Date: March 8, 2006
/s/ Terrie A. Wiedenheft
- --------------------------------------------------------------------------------
Terrie A. Wiedenheft
Controller & Treasurer
Date: March 8, 2006